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SEC Modernizes the Accredited Investor Definition

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Re: SEC Modernizes the Accredited Investor Definition

#201

Post by vmception »

CalChris wrote: post #12

So these are 'smart' people who somehow can't meet the relatively low traditional income requirements ($200k/yr) but who are now assumed to be financially sophisticated enough to take on the risk of these securities without the protection provided by normal regulatory disclosure filings. This strikes me as insanely stupid akin to the ownership society nonsense which precipitated the housing crisis. VC follows a power…

Yes, there are plenty of smart people that can't meet the income requirements and that should be the crux of the constitutional challenge: the assumption that people with money are inherently smarter than those without, while other markets also allow for discretionary risk taking.

Even the SEC commissioner's have pointed out this incongruency.

The only thing supporting this difference is that gambling is regulated at the state level, while securities are regulated by the Feds with a few exemptions so that states feel like they have power. Spot commodities and uncategorized property are ignored by both.

Smart people that are not born into a useful amount of money have to earn and hope absolutely nothing goes wrong for decades, while being cut out from many growth opportunities, but they are able to speculate in many other financial games anyway. There are plenty of smart people that were earning where nothing was going wrong, until suddenly the pandemic sent them back to their parent's house where they will stay for the next decade.

This dichotomy in opportunities wasn't an issue when the equities sector was structured differently. Before the 21st century, companies were going public much earlier and much more frequently. There simply are not Microsoft's and Amazons going public at $37 million valuations anymore.

So now it is an issue.

Re: SEC Modernizes the Accredited Investor Definition

#202

Post by gojomo »

RockIslandLine wrote: post #112
gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

"But if you want to put $5-$20K into a friend's business, or a business you know well, the SEC makes it hard unless you're already a millionaire." What do you mean? Individuals are still allowed to sign contracts. So write up a specific contract.

The SEC makes it easy to use standard arrangements if the investors are 'accredited'.

But mixing in any 'unaccredited' investors drives up the legal complexities and costs, through extra liabilities. A generous (or desperate) founder might still go through the extra headaches to take money from a wider circle, but many potential knowledgeable investors are encumbered and essentially frozen out, simply because they are sub-millionaires, due to extra legal hurdles. It's like everyone who's not a millionaire is a minor, not trusted to contract like an adult - but not based on age or competence, just net worth.

Millionaires face no such restrictions – and thus enjoy the state's support in preserving for themselves privileged, first-look access to a class of potentially-lucrative investments.

It'd be like if millionaires were granted their driver's license on request, because hey, they can be trusted. And we'll waive their fees for permit applications, because they surely hired good advice before applying. Car registration, marriage license? Free if you're rich, we know you won't be getting into any trouble.

But you're not a millionaire? Find a rich sponsor willing to be a counterparty, and pay extra fees, because you poor folks are just too risky to [drive, build, marry, etc].

Re: SEC Modernizes the Accredited Investor Definition

#203

Post by m0zg »

gojomo wrote: post #171
m0zg wrote: post #143

Earlier quoted context omitted.

It's not really a "wealth test". It's more of a "is this person likely to have proper legal counsel" test. Or at least that's how I understand its intent.

The 'accredited investor' definition is absolutely & literally a "wealth test". It does not ask if you have legal counsel. Indeed, even being an investment-specialized, bar-licensed lawyer yourself, drafting agreements upon which other 'accredited investors' depend, wouldn't make you 'accredited'! But having $1,000,000 in the bank would. Prior wealth.

Yes, but someone with $1M in investable capital will almost certainly have a lawyer and they will not be easily taken advantage of. I don't think you can require a lawyer per se in this country. I didn't come up with this myself - that's what Robert Shiller (of Case-Shiller index fame) says in his economics course, which I did take.

Re: SEC Modernizes the Accredited Investor Definition

#204

Post by mcny »

mywittyname wrote: post #62
gojomo wrote: post #36

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily w…

There's a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive. Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed b…

> Private markets don't have these regulations because the assumption is that past financial success is indicative of financial sophistication. It doesn't prevent fraud, but at least it helps reduce the likelihood of success.

I don't know how any of this works but my kneejerk reaction is Maybe private markets should have these regulations as well? If a company can't follow these regulations maybe they have no business raising cash in the first place.

Re: SEC Modernizes the Accredited Investor Definition

#205

Post by alasdair_ »

gojomo wrote: post #167
alasdair_ wrote: post #103

Earlier quoted context omitted.

>What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? Pretty much any consumer safety or mandatory licensing law. Even something as simple as buying a beer - we insist that legal adults are not allowed to buy a beer until they are older. We insist that adults must be over 21 to buy a handgun in many states, or that (in other state…

But none of your examples use the reductionist & discriminatory "how big is your bank account" standard as a proxy for a person's responsibility. What if you had to be rich - far beyond the sticker & insurance price - to buy a car? ("You're not a millionaire? We've decided you should only be allowed to take the bus.") Rich to buy a beer? Rich to buy a gun? Rich to buy a bunch of OTC medicines? (Poor people would stil…

A simple example: if you are poor and are on medicaid, it’s not possible to have a vasectomy without a 30 day mandatory waiting period to make sure that you are certain. If you are rich and have health insurance (or pay out of pocket) it’s completely fine to do it the same day.

Re: SEC Modernizes the Accredited Investor Definition

#206

Post by alasdair_ »

colordrops wrote: post #179
alasdair_ wrote: post #103

Earlier quoted context omitted.

>What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? Pretty much any consumer safety or mandatory licensing law. Even something as simple as buying a beer - we insist that legal adults are not allowed to buy a beer until they are older. We insist that adults must be over 21 to buy a handgun in many states, or that (in other state…

Every one of your examples are of the case of protecting the individual from hurting themselves or others. This is quite different from the question, which is to cite a law that restricts someone in order to protect them from others.

It is mandatory to have car insurance (to protect others) unless you are rich (if you can prove you have assets to cover a $250k claim, you don’t need insurance). Obviously varies by state.

Re: SEC Modernizes the Accredited Investor Definition

#207

Post by vageli »

hguant wrote: post #192
elihu wrote: post #145

Earlier quoted context omitted.

The thing about Chesterton's Fence in this case is that the fence might exist for more than one reason. A law that prevents poor people from being scammed can also enable rich people to cherry-pick all the most lucrative investments.

It cuts both ways - the most lucrative investments are also the riskiest ones. We tend to look down our noses (sometimes masking it as sympathy) at those who spend their money on lottery tickets or gambling, taking on large amounts of risk for a chance of an _extremely_ lucrative payoff. What's the difference between the state lottery saying you have a 1 in 650 million chance of winning, and someone pushing a new bio…

> It cuts both ways - the most lucrative investments are also the riskiest ones. We tend to look down our noses (sometimes masking it as sympathy) at those who spend their money on lottery tickets or gambling, taking on large amounts of risk for a chance of an _extremely_ lucrative payoff. What's the difference between the state lottery saying you have a 1 in 650 million chance of winning, and someone pushing a new bio-tech stock, with all the financial disclosures attached?

You don't get disclosures attached as an accredited investor, that's the whole point.

Re: SEC Modernizes the Accredited Investor Definition

#208

Post by zemo »

colordrops wrote: post #80
mywittyname wrote: post #62

Earlier quoted context omitted.

There's a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive. Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed b…

It's a matter of principle though. You don't restrict the freedom of individuals to protect them from other individuals that are bad actors. You go hard and strong after the bad actors. What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? It's absurd and not in the scope of what government should be doing.

let's say you want to permit gambling, because people should be free to gamble. Even in the case of permitting it, there are still legitimate reasons to have regulatory systems. For example, if you go to a casino to play craps, you as a consumer have an expectation that the casino is giving you fair dice. Now we could say that such a thing shouldn't be regulated, let the market decide or whatever, but now every time you go to a craps table you have to test the fairness of the dice yourself. So every time someone new comes to the table, they're testing the dice. It would be ridiculous. Even if you ran an entirely fair organization, everyone would be coming to the table and testing the dice because they don't trust the ecosystem, and your ability to have a fun and care-free gameplay experience becomes hampered by bad actors creating an ecosystem of poisoned consumer expectations; it would not only harm players, but it would also harm proprietors that wish to host games with fair dice. Or you can just say "you know, maybe casinos should not have the freedom to give people unfair dice".

Re: SEC Modernizes the Accredited Investor Definition

#209

Post by beambot »

Ericson2314 wrote: post #178
mywittyname wrote: post #142

Earlier quoted context omitted.

Regulations are written in blood. We didn't have rules, then something extremely bad happened to make people say, "that should be illegal." So it's made illegal. A generation passes and young people look at said regulations, think, "that's a stupid rule," and they revoke it. Goto 10. Investments that require you to be accredited are often pretty bad ones. All the great opportunities get cherry-picked by those with th…

My preferred solution is UBI + no gambling with the UBI rule. Similar effect in this area (ignoring all the other wonderful benefits a UBI has) but without the nastiness of a net worth rule.

Where do you draw the line between gambling & investment...?

Example: Median returns across venture capital are net-negative, even if expected value is net-positive:

https://techcrunch.com/2017/06/01/the-meeting-that-showed-me...

The effect is even more extreme for early-stage startups given the power-law nature of returns.

Re: SEC Modernizes the Accredited Investor Definition

#210

Post by CalChris »

vmception wrote: post #201
CalChris wrote: post #12

So these are 'smart' people who somehow can't meet the relatively low traditional income requirements ($200k/yr) but who are now assumed to be financially sophisticated enough to take on the risk of these securities without the protection provided by normal regulatory disclosure filings. This strikes me as insanely stupid akin to the ownership society nonsense which precipitated the housing crisis. VC follows a power…

Yes, there are plenty of smart people that can't meet the income requirements and that should be the crux of the constitutional challenge: the assumption that people with money are inherently smarter than those without, while other markets also allow for discretionary risk taking. Even the SEC commissioner's have pointed out this incongruency. The only thing supporting this difference is that gambling is regulated at…

Calling these investments securities would probably lose a broker their license.
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