SEC due to review the definition of accredited investor(equityzen.com)
equityzen.com
SEC due to review the definition of accredited investor
http://equityzen.com/blog/accredited-investor-standards-SEC-review
11 comments
Because of literally hundreds of years of investment scams that bilk people out of their life savings. Publicly traded companies are subject to various securities regulations that require disclosure of certain pertinent information and protect investors in various ways. Smaller companies can be exempt from many of these regulations (which is a useful thing, as it costs money to comply), but in exchange, they don't get to ask every random person they encounter on the street for investments. The alternative isn't to lift all the restrictions; rather, it is to impose the same regulations on companies big and small alike, which would be particularly harmful to small businesses.
Call it a nanny state restricting your liberty if you'd like (though realistically, there's little enforcement of the investor accreditation rules), but since it's the same nanny state that is supposed to keep you from being destitute if things don't work out, we're going to impose some restrictions to keep the worst abuses from happening first.
Call it a nanny state restricting your liberty if you'd like (though realistically, there's little enforcement of the investor accreditation rules), but since it's the same nanny state that is supposed to keep you from being destitute if things don't work out, we're going to impose some restrictions to keep the worst abuses from happening first.
Yet it has solved nothing, because we still have investment scams all over the place. Those investment scams are already illegal, so prosecute them. Why do I need another law to "protect" me? This reminds me of taxi regulations. Local governments are trying to prevent your use of Uber and Lyft because of some regulations on the books that are meant to prevent you from unscrupulous drivers. Yet the actions of those unscrupulous drivers were already illegal, so prosecute them.
This is something the market can easily sort out. We don't need to throw out the good with the bad.
This is something the market can easily sort out. We don't need to throw out the good with the bad.
Many "professional investor" level assets would be rightfully considered scams if sold to a less-knowledgeable investor: often times, individual positions within a fund are leveraged dozens of times to where a small move in the underlying asset can wipe out large portions of the capital in a fund.
If you used dozens of stocks as collateral to finance the borrowing of money to purchase other assets, which you then use as collateral to buy more assets, it would be considered a scam -- but not in a hedge fund. This can lead to large swings in volatility and hedge funds should only be used as part of a portfolio investment strategy -- a professional investor will use them to cancel out risk in other areas of their portfolio.
The risk is that a non-professional investor uses these instruments as primary investment vehicles without understanding their purpose. Because many hedge funds do operate very similar to the ways that illegal stock scams run: the difference is that the investors know exactly how and why these funds can implode and are willing to take that risk.
EDIT: That said, the specific qualifications for a "professional investor" definitely need some work.
If you used dozens of stocks as collateral to finance the borrowing of money to purchase other assets, which you then use as collateral to buy more assets, it would be considered a scam -- but not in a hedge fund. This can lead to large swings in volatility and hedge funds should only be used as part of a portfolio investment strategy -- a professional investor will use them to cancel out risk in other areas of their portfolio.
The risk is that a non-professional investor uses these instruments as primary investment vehicles without understanding their purpose. Because many hedge funds do operate very similar to the ways that illegal stock scams run: the difference is that the investors know exactly how and why these funds can implode and are willing to take that risk.
EDIT: That said, the specific qualifications for a "professional investor" definitely need some work.
I'm hoping we'll see some sort of test or exam that ties Investment Acumen with intelligence, not wallet (or estate) size.
Somebody suggested allowing Financial Analysts that have been, in some capacity, verified by FINRA/SEC for their understandings of markets. I would be on board for this.
Somebody suggested allowing Financial Analysts that have been, in some capacity, verified by FINRA/SEC for their understandings of markets. I would be on board for this.
> Those investment scams are already illegal, so prosecute them.
Uber and Lyft are a different case, but here the regulations (as pointed out elsewhere) don't prevent you from investing your money per se; they just require you (well, the company) to register the securities with the SEC and fill out some paperwork detailing the investment.
The reason they do this is specifically so that they can prosecute any illegal actions down the line; it's basically impossible for them to enforce the existing laws without also requiring the filings and registration, because otherwise they don't know the terms of what was offered in the sale (and who offered it, so they can be identified later).
I'm oversimplifying somewhat, but the point is that this isn't "another law to 'protect'" you - it's required to make the exact prosecutions you're referring to.
Uber and Lyft are a different case, but here the regulations (as pointed out elsewhere) don't prevent you from investing your money per se; they just require you (well, the company) to register the securities with the SEC and fill out some paperwork detailing the investment.
The reason they do this is specifically so that they can prosecute any illegal actions down the line; it's basically impossible for them to enforce the existing laws without also requiring the filings and registration, because otherwise they don't know the terms of what was offered in the sale (and who offered it, so they can be identified later).
I'm oversimplifying somewhat, but the point is that this isn't "another law to 'protect'" you - it's required to make the exact prosecutions you're referring to.
But what is the cost of registering the securities with the SEC?
And I think that, with a private placement memorandum, and all the info disclosed, ANYONE not just accredited investors can invest. Is that right? How much does such a thing cost to do, and what is involved?
And I think that, with a private placement memorandum, and all the info disclosed, ANYONE not just accredited investors can invest. Is that right? How much does such a thing cost to do, and what is involved?
It costs society a lot to deal with unsophisticated investors (illegal securities, debt, bankruptcy, family issues, lawsuits, etc), so this regulation, like most laws, are to protect society and driven by historical experience.
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Because in the past, people would dupe grandmas with bad investments and "fly by night" companies. At least with Pebble, Reading Rainbow, etc. you know upfront you're not going to get anything personally beyond, possibly, a product worth 50 bucks.
http://en.wikipedia.org/wiki/Blue_sky_law
http://en.wikipedia.org/wiki/Blue_sky_law
"just because I'm not rich?"
Yes for your own protection.
Because if you don't have money then the rest of society often becomes the "clean up the mess" of last resort if you make a mistake using one of your last dimes to invest in a potentially risky venture.
"but I'm not allowed to benefit from those investments in certain ways"
The chance of "gambling" is much higher if someone perceives a payout. Not to say there aren't many ways that people throw out their money (QVC, Casinos etc.) but those are grandfathered and part of a different discussion. (And the fact that they are allowed whether the same or different doesn't mean something else should also be allowed).
Yes for your own protection.
Because if you don't have money then the rest of society often becomes the "clean up the mess" of last resort if you make a mistake using one of your last dimes to invest in a potentially risky venture.
"but I'm not allowed to benefit from those investments in certain ways"
The chance of "gambling" is much higher if someone perceives a payout. Not to say there aren't many ways that people throw out their money (QVC, Casinos etc.) but those are grandfathered and part of a different discussion. (And the fact that they are allowed whether the same or different doesn't mean something else should also be allowed).
> if you don't have money then the rest of society often becomes the "clean up the mess" of last resort
Case in point[1]. I guess it's fine when Wall Street does it.
[1] http://en.wikipedia.org/wiki/Emergency_Economic_Stabilizatio...
Case in point[1]. I guess it's fine when Wall Street does it.
[1] http://en.wikipedia.org/wiki/Emergency_Economic_Stabilizatio...
Who says I have to invest anything even close to my last dime? What if I just want to invest my first dime? Does the SEC also want to step in and tell me what I can or can't eat for lunch today, because I might overspend?
There are no guarantees of return on publicly traded stocks, either, and that same allure of high payout can still exist. The SEC did a bang-up job protecting everyone when they let Facebook IPO at a grossly overinflated value.
There are no guarantees of return on publicly traded stocks, either, and that same allure of high payout can still exist. The SEC did a bang-up job protecting everyone when they let Facebook IPO at a grossly overinflated value.
How do we let you invest in a business venture without preventing hucksters from getting Grandpa's investment in their sure-fire investment?
Preventing you from investing is the unintended consequence of preventing con-men from stealing retirement savings. In this case, I think the regulation is well-worth the cost.
Preventing you from investing is the unintended consequence of preventing con-men from stealing retirement savings. In this case, I think the regulation is well-worth the cost.
If it's to protect old people why is that not part of the law?
To those downvoting: This is a response to those who use the terms 'grandma' and 'grandpa' in their comments, not an avocation of these laws, or age discrimination.
To those downvoting: This is a response to those who use the terms 'grandma' and 'grandpa' in their comments, not an avocation of these laws, or age discrimination.
Because discrimination based on age is illegal (and looked down upon)?
anyway: It's not only the elderly that can be conned
anyway: It's not only the elderly that can be conned
> I've already "invested" money in Pebble, Reading Rainbow, and a few other business ventures I've seen potential in, but I'm not allowed to benefit from those investments in certain ways because, why, exactly? For my own protection?
Yes. The rationale is that when you "invest" in crowdfunded projects, you're really just purchasing a product in advance or making a donation. The law trusts that you can rationally decide what a product is really worth or how much money you should donate.
What the law doesn't trust you (as an unsophisticated investor) to decide is what the expected return on a speculative venture will be. The concern is that as soon as someone promises you a high rate of return, you're not going to think about this rationally -- i.e. you're going to think of this more as gambling than an investment. In the specific case of crowdfunding, there's not too much worry that someone is going to blow large amounts of money on a Kickstarter if all they're getting out of it is a couple of Oculus Rift headsets. But if that Kickstarter could promise 1000x returns, that might be bad news for someone's college fund.
Yes. The rationale is that when you "invest" in crowdfunded projects, you're really just purchasing a product in advance or making a donation. The law trusts that you can rationally decide what a product is really worth or how much money you should donate.
What the law doesn't trust you (as an unsophisticated investor) to decide is what the expected return on a speculative venture will be. The concern is that as soon as someone promises you a high rate of return, you're not going to think about this rationally -- i.e. you're going to think of this more as gambling than an investment. In the specific case of crowdfunding, there's not too much worry that someone is going to blow large amounts of money on a Kickstarter if all they're getting out of it is a couple of Oculus Rift headsets. But if that Kickstarter could promise 1000x returns, that might be bad news for someone's college fund.
You are avoiding the essence of the parent's question, which is that both the 'crowdfunding' and the (currently illegal) unaccredited investment have similar risk profiles in many cases, with the same lack of reporting requirements, possibility of not returning anything, and likelihood of scams.
I thought I made clear what the distinction is: "In the specific case of crowdfunding, there's not too much worry that someone is going to blow large amounts of money on a Kickstarter if all they're getting out of it is a couple of Oculus Rift headsets. But if that Kickstarter could promise 1000x returns, that might be bad news for someone's college fund."
Put another way, although the risk profiles for crowdfunding and equity may be similar for any given amount of investment, the limited return on crowdfunding keeps any one investor from taking on too much risk.
Put another way, although the risk profiles for crowdfunding and equity may be similar for any given amount of investment, the limited return on crowdfunding keeps any one investor from taking on too much risk.
The SEC has decided to use income and net worth as a proxy for ability to properly evaluate risks/benefits of unregistered offerings. Registered offerings require SEC approval and much more disclosure, which protect investors. Income and net worth are a blunt way of getting to adequate sophistication.
Money raised through Kickstarter and Indiegogo aren't covered by these provisions, so you're good on your "investments" in Pebble and RR if they are via those platforms. Good use of air quotes, since you're not really participating on the equity upside.
From a macro view, one can argue that the current limitations perpetuate prosperity for the wealthy, while denying everyone else access to higher-performing alternative investments.
Money raised through Kickstarter and Indiegogo aren't covered by these provisions, so you're good on your "investments" in Pebble and RR if they are via those platforms. Good use of air quotes, since you're not really participating on the equity upside.
From a macro view, one can argue that the current limitations perpetuate prosperity for the wealthy, while denying everyone else access to higher-performing alternative investments.
I really don't even know what to call the Kickstarter exchanges. You're not allowed to call it a purchase because there may or may not even be a "reward" or "product", especially with projects like Reading Rainbow. It's not a donation, because they can offer rewards and are apparently required to provide them if they are successful.
They do seem to promote the idea that you're making an investment, just without the sort of potential (or scaling) returns you'd see from a conventional investment.
They do seem to promote the idea that you're making an investment, just without the sort of potential (or scaling) returns you'd see from a conventional investment.
I'm not a fan of accredited investor requirements. At the same time, you're misstating the posture of the regulations somewhat. The accredited investor requirements don't directly prevent you from investing your money in particular ventures. Instead, they create an exception to the general rule that any entity selling securities to the public must register those securities with the SEC and abide by disclosure requirements.[1] The accredited investor exception is just one of several exceptions to the SEC's registration rules.
The purpose of the regulations is deeper than just protecting you, the individual investor. Originally, the regulations were created because of the systematic effects resulting from selling investments to the general public. When a whole bunch of people lose their retirement savings to bad investments, it's something the government ends up having to deal with, and "it's your fault" isn't a politically tenable answer. Not to mention, when these sham investments go under, they create a lot of collateral damage.
In modern times, the securities laws have been rationalized as a response to the information asymmetry that exists between sellers of securities and investors.[2] The nature of this asymmetry is that sellers have a lot more information about the investment than buyers do, and can use this advantage to systematically undermine the market.
Now, and this part is editorializing, the problem with the accredited investor exception is that it misunderstands the nature of what the securities laws exist to correct. The focus on "investor sophistication" is totally misplaced. In economic terms, the relevant asymmetry is not the asymmetry is sophistication between sellers and investors. It is the asymmetry in inside information. While accredited investors are likely to be more financially sophisticated, they are not any more likely to have more inside information than members of the general public. Thus, the rationale behind creating exceptions to the disclosure requirements doesn't hold.
[1] http://www.sec.gov/answers/accred.htm
[2] http://en.wikipedia.org/wiki/Market_failure ("Some markets can fail due to the nature of their exchange. Markets may have significant transaction costs, agency problems, or informational asymmetry. Such incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies. From contract theory, decisions in transactions where one party has more or better information than the other is an asymmetry. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most commonly, information asymmetries are studied in the context of principal–agent problems. George Akerlof, Michael Spence, and Joseph E. Stiglitz developed the idea and shared the 2001 Nobel Prize in Economics")
The purpose of the regulations is deeper than just protecting you, the individual investor. Originally, the regulations were created because of the systematic effects resulting from selling investments to the general public. When a whole bunch of people lose their retirement savings to bad investments, it's something the government ends up having to deal with, and "it's your fault" isn't a politically tenable answer. Not to mention, when these sham investments go under, they create a lot of collateral damage.
In modern times, the securities laws have been rationalized as a response to the information asymmetry that exists between sellers of securities and investors.[2] The nature of this asymmetry is that sellers have a lot more information about the investment than buyers do, and can use this advantage to systematically undermine the market.
Now, and this part is editorializing, the problem with the accredited investor exception is that it misunderstands the nature of what the securities laws exist to correct. The focus on "investor sophistication" is totally misplaced. In economic terms, the relevant asymmetry is not the asymmetry is sophistication between sellers and investors. It is the asymmetry in inside information. While accredited investors are likely to be more financially sophisticated, they are not any more likely to have more inside information than members of the general public. Thus, the rationale behind creating exceptions to the disclosure requirements doesn't hold.
[1] http://www.sec.gov/answers/accred.htm
[2] http://en.wikipedia.org/wiki/Market_failure ("Some markets can fail due to the nature of their exchange. Markets may have significant transaction costs, agency problems, or informational asymmetry. Such incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies. From contract theory, decisions in transactions where one party has more or better information than the other is an asymmetry. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most commonly, information asymmetries are studied in the context of principal–agent problems. George Akerlof, Michael Spence, and Joseph E. Stiglitz developed the idea and shared the 2001 Nobel Prize in Economics")
Because rich people can afford to lose their money, but you presumably cannot.
Or more cynically, because only rich people are allowed to be rich.
Or more cynically, because only rich people are allowed to be rich.
Because our laws are increasingly written for the least common denominator. Some citizens might be scammed by these investments; therefore, we all must forgo the ability to spend our own money on them. Its hard not to be cynical and see this as another leg in a race towards mediocrity.
Even programmers and system administrators get taken by well-crafted spear phishing and other security-related goofs. If you really want to invest your hard-earned money in some unproven start-up, go and pull down $200k for a couple of years, or increase your net worth.
Doesn't it disturb you that a freedom is tied to your networth? I hear lots of discussion about indirect ways that the wealthy have too much power, but this is an actual rule that provides different rules for the rich and the poor. To me that is pretty disturbing.
Because 1929.
Because no matter what your age, if you're poor, the SEC treats you like you're five.
If you are not already rich, the SEC feels it must protect you from yourself, as if you were a child reaching for a hot stove. No matter how many degrees or professional-certifications you have, nor how much domain-expertise you have, nor how wisely your wealth is portfolio-balanced, nor how excellent your credit-score, when you don't pass a firm wealth-test, the SEC is still allowed to discriminate against you as a poor person.
On the other hand, if you've inherited a million dollars, you're obviously brilliant and self-reliant! Here, run through Demo Day with these diamond-plated scissors and your checkbook!
Remember, if you're poor, you're still allowed to buy no-money-down houses at cyclical peaks, or public stocks on deep margins, or derivatives that expire worthless. You may donate all your money to projects you like, with no expectation of monetary reward other than a t-shirt or other symbolic trinkets. You may also max your credit cards and buy state lottery tickets! In fact, you've probably already enjoyed our emotional, misleading ad campaigns encouraging you to do that.
Just no private equity with any chance of recouping any value for you. That's for the Lords, not you poor peons.
If you are not already rich, the SEC feels it must protect you from yourself, as if you were a child reaching for a hot stove. No matter how many degrees or professional-certifications you have, nor how much domain-expertise you have, nor how wisely your wealth is portfolio-balanced, nor how excellent your credit-score, when you don't pass a firm wealth-test, the SEC is still allowed to discriminate against you as a poor person.
On the other hand, if you've inherited a million dollars, you're obviously brilliant and self-reliant! Here, run through Demo Day with these diamond-plated scissors and your checkbook!
Remember, if you're poor, you're still allowed to buy no-money-down houses at cyclical peaks, or public stocks on deep margins, or derivatives that expire worthless. You may donate all your money to projects you like, with no expectation of monetary reward other than a t-shirt or other symbolic trinkets. You may also max your credit cards and buy state lottery tickets! In fact, you've probably already enjoyed our emotional, misleading ad campaigns encouraging you to do that.
Just no private equity with any chance of recouping any value for you. That's for the Lords, not you poor peons.
The Government seems to have completely forgotten about the JOBS Act[1], which was designed to create a regulatory exemption for crowdfunded investment, democratizing investment allowing everyone an opportunity. Yet instead it appears they want to raise the barrier to entry for investors and limit limit opportunities for start-ups. I mean regulation is needed, we don't want fly by night operations scamming would be investors, but if true this is disgusting.
[1]http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
[1]http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
Given that there's been...
• …an immense explosion in available knowledge; and…
• …many new ways for non-accredited investors to invest and lose all their money in highly-leveraged public equities, real-estate, foreign-exchange, and other vehicles; and…
• …no appreciable complaints from existing accredited investors that they wish they'd been prevented from investing their own money in private equities;
...thus the SEC must be looking into reducing the thresholds, in the spirit of the JOBS Act, to let more Americans invest in innovative upstarts? Right? Right?
• …an immense explosion in available knowledge; and…
• …many new ways for non-accredited investors to invest and lose all their money in highly-leveraged public equities, real-estate, foreign-exchange, and other vehicles; and…
• …no appreciable complaints from existing accredited investors that they wish they'd been prevented from investing their own money in private equities;
...thus the SEC must be looking into reducing the thresholds, in the spirit of the JOBS Act, to let more Americans invest in innovative upstarts? Right? Right?
I was hoping this meant that they would lower the bar, but instead they think it's going to be being raised even higher, meaning that existing VCs could close their accreditation.
Wow, this is the definition of nanny-state. This rule should be removed, not tightened!
What's next? I don't make enough to trade stocks? To gamble? To spend above my means?
What's next? I don't make enough to trade stocks? To gamble? To spend above my means?
Use of net wealth, rather than a wealth-oblivious measure like skills/certifications, to disqualify people from an important part of the economy should be rejected on economic-rights grounds.
Currently you could be professionally certified to advise and manage a millionaire's money, and put it into private ventures, but not be allowed to invest even token amounts into those same ventures yourself, 'cuz you're poor.
Currently you could be professionally certified to advise and manage a millionaire's money, and put it into private ventures, but not be allowed to invest even token amounts into those same ventures yourself, 'cuz you're poor.
Over here in the UK we don't seem to have this restriction.
There are lots of other laws about it, but you don't have to be rich to sink some cash in private equity schemes. We even seem to have sprouted a kickstarter for equity in the form of Crowdcube. Which I rather like because kickstarter always felt a bit wrong. If I'm micro-investing, surely I ought to be micro-profiting too, if the company takes off?
There are lots of other laws about it, but you don't have to be rich to sink some cash in private equity schemes. We even seem to have sprouted a kickstarter for equity in the form of Crowdcube. Which I rather like because kickstarter always felt a bit wrong. If I'm micro-investing, surely I ought to be micro-profiting too, if the company takes off?
It's comical that the $ amount requirements to invest haven't been adjusted for 30 years, but the real issue stems from the consequence of a rule created in the 80s. Tell me the last time you checked a stock price in a newspaper?!
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Wow, thanks for the update. Enjoyed reading this. Looking forward to seeing more from you guys.
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I've already "invested" money in Pebble, Reading Rainbow, and a few other business ventures I've seen potential in, but I'm not allowed to benefit from those investments in certain ways because, why, exactly? For my own protection?