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Comment by tboyd47 | Hacker News Reader

The accredited investor restriction on private equity seems like the most anti-free-market law I've ever heard of. You're not allowed to put your own money into a business unless the government deems you Smart Enough (c) (tm) to do so. If the vast majority of citizens here are not smart enough to invest our own money, then what is all the higher education for?

This change sounds like a good one but there's not enough information to know if it will really open up any opportunities for regular people.

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This is a pretty clear Chesterton's Fence [1] example. The scams that occurred prior to enacting these standards were massive.

If you want to look at a modern example of such things, consider the cryptocurrency ecosystem and the many scams that occurred [2]

1 - https://en.wikipedia.org/wiki/Wikipedia:Chesterton%27s_fence

2 - https://twitter.com/patio11/status/1032024732214812673

Modern scams don't show the 'accredited investor' rules are helpful.

These "are you rich enough?" limits, on just a few classes of potential investments, did not and can not provide any protection against rampant risks like:

* Enron (an audited public company approved for widow-and-orphan investing)

* Madoff

* Fake-documentation or risk-oblivious home lending

* At-home Forex or securities trading in arbitrarily exotic or leveraged ways (Robinhood! Futures! Expiring options!)

* State lotteries with awful odds & deceptive advertising preying on the decision-biases of the poorly-educated

* Prosperity gospel solicitations

So rather than proving the value of Accredited Investor restrictions, your example scams (some crypto), and others, just show them to be an ineffectual symbolic Maginot Line, not a wise Chesterton's Fence.

the accredited investor rules are not meant to reduce all risks - just risks associated with non-disclosures.

Things like enron cooking the books, or madoff ponzi schemes are going to happen regardless of the accredited investor certification.

But what you can't know is whether having early stage startup and other investments require accredited investor certification means fewer people get trapped into investments they don't fully understand. I think it does.

What makes you "think" that? A hunch? Blind trust in ~90-year-old regulatory structures?

How many people reviewed the Enron disclosures? How many amateur daytraders & Robinhood investors read all the disclosures of the "public" securities they hop into and out of?

Aren't all levels of investors leveraging the greater attention of a smaller group of experts? Couldn't some non-millionaires – there are a lot of them, with many diverse skills! – be the kind of highly-attentive 'leads' who help vet firms for larger networks?

Is an inherited-funds millionaire, no matter how dumb or lazy, more immune from the risks of non-disclosure than a young & ambitious non-millionaire? How about a non-millionaire with graduate degrees in business, finance, law? Why not test competence, not net worth?

Would you also only allow the high-net-worth to do other risky activities, like drive private cars, play contact sports, camp on public lands, visit the beaches?

How about raise children? There, a life is at stake. Do we dare let these gullible, barely-adult non-millionaires, the kind of rubes who would throw all their money away on unwise private investments if the SEC didn't save them, have children?

And if slick founders can easily fleece these childlike non-millionaires through deceptive promises, what chance do these wisdom-constrained individuals have against slick politicians? Is it really prudent to let non-millionaires vote?

Right, but it's not the 1920s any more. We live in this highly connected, information rich, rapidly changing world, that is fundamentally different than the 1920s in many ways. The general public is far more savvy about investments, risks, and bubbles in general than they were in the past. Today, private equity tends to capture almost all of the value before a company goes public. The crazy thing is that a foreign citizen can invest in an American start up without any of these credentials, yet a US citizen cannot.

The 90's heralded a lot of optimism about the Internet's role in making information ever easier to access. What we've discovered in the 21st century is that it also makes disinformation easier to access. And perhaps more so, since democratization of content generation means there's fewer chances for curators to pull disinformation.

I don't think it's easier for an average person in the 2020's to differentiate between investments, risky investments, and outright scams than the 1920's, were all the regulations to be waived away.

I think a person in 2020 is far more savvy about the risks than someone in 1920. For one, they're aware of crashes, bubbles, etc. and have probably even lived through at least one of them. They also don't have to trust the advice of a single broker over the telephone. The 2008 real estate bubble was driven by the same kind of speculation that drove the 1920s stock bubble. We are probably already deep into a stock bubble today, in 2020. And yet retail investors can plop down tens of thousands of dollars on stocks through Robinhood or a myriad of other apps, paying no attention to underlying fundamentals in the business.

> For one, they're aware of crashes, bubbles, etc. and have probably even lived through at least one of them.

The Panic of 1929 was far from the first crash of the 1900s, let alone the only large crash in history. The Panic of 1893 would have been the big crash that everyone was afraid of before 1929, but there were more minor crashes in 1901 and 1907. Railway manias and land speculation-driven crashes litter pretty much every decade of the 19th century. The 21st century is unusual because it's pretty much the first time in modern financial history you make it an entire decade without some sort of recession.

Not much more than a decade, it seems.

> The general public is far more savvy about investments, risks, and bubbles in general than they were in the past.

I'd argue the crypto currency and ico hysteria of late proves otherwise.

> The crazy thing is that a foreign citizen can invest in an American start up without any of these credentials, yet a US citizen cannot.

These rules are generally based on the residence of the investor, not their citizenship. I'm an American in Quebec currently, and it's the Quebec/Canadian rules which determine my eligibility to invest while I'm living here, not the SEC's. And in Canada's case, the accredited investor rules are broadly similar to what the US rules were before this announcement, with the same dollar amounts but in Canadian dollars and with a lot of other differences in the details.

The cryptocurrency ecosystem broadly demonstrates otherwise: its full of outright scams operating a billion dollar scale.

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-tech stock, with all the financial disclosures attached?

> 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.

like the most anti-free-market law I've ever heard of

Do you know why the SEC created these rules? If you understand the history it makes a lot of sense.

The world is quite a different place in 2020 than in 1933. We have access to unlimited digital forms of risk to speculate on as it is. It used to be seen as necessary to have taxi licenses in order to have trusted drivers who wouldn't scam out-of-towners. It turns out you can replace all that regulation with an online review system plus mobile GPS and payment app (Uber / Lyft). Similar innovations are being held back in securities because of red tape.

The existence of other risks isn't a strong argument for introducing more risks.

It's easy for HN to say "this makes no sense", but I guarantee you if the rules changed we'd see some article in the NYTimes where some retiree lost their entire life savings in a private investment including quotes like "no one told me it was that risky".

No it doesn't really. People should be allowed to fail. The response when someone loses all their money due to a business failing should be to have a social safety net, not to prevent them from ever having been able to invest their money in the first place.

Wait what?

You're arguing we should have a social safety net so when some blue collar worker loses 100% of their retirement savings because they invested in a scam start-up, they're covered?

Yes. That's right. Part of living in a free market state is allowing the market to choose. Part of living in a civilized country is ensuring that there are safety nets available to those who the market fails to support.

The market operates efficiently when every entity involved can have net worth of any amount, including negative. Unfortunately, human life requires a particular amount of wealth to survive. You cannot have a pure free market system without there being some left out. The purpose of government is to protect rights to life, liberty, and property. That means providing some support when someone's wealth is so low that they cannot sustain their life.

This should be implemented in such a way as to affect the market least. Milton Friedman's negative income tax would be one possibility, but there are others as well.

In any case, the market should be free to operate as if the person could reasonably be expected to have nothing.

I guess i would refer you to the brief period of time where cryptocurrencies were skirting these regulations. I'm sympathetic to the argument that there was some value created there, but hoo boy, a lot of people lost a considerable portion of their life savings there.

A lot of people have gotten life-changingly rich from crypto investments. Bitcoin is already the best performing asset class of all time, and has minted plenty of millionaires.

How many people lost money in cryptocurrency scams compared to the entirely legal and rule-following housing market crash of 2008?

Much of the losses in 2008 were caused by illegal and non-rule-following activity.

Importantly we also implemented several new schemes to ensure that we were better able to evaluate illegal and non-rule-following activities after 2008 as well.

Right, this is the sort of regulation that people are now complaining about in the securities market because a long time has passed since it was originally enacted.

Since there was so much illegal activity, who went to jail?

Here's the list: https://ig.ft.com/jailed-bankers/

Here's a good analysis of why more people didn't go to jail: https://www.theatlantic.com/magazine/archive/2015/09/how-wal...

Lack of successful prosecution doesn't mean that illegal activity didn't occur. Are you ticketed every time you drive over the speed limit? I'm not.

No the real injustice is $25,000 for FINRA day trading / margin accounts.

Recent insane volatility could allow you trade from a couple thousand up to 25k in a few weeks - BUT you will most likely run out of day trades before that happens.

It's highly annoying.

What would you trade on in this environment?

> then what is all the higher education for?

How exactly does a PhD in Biology help you understand investments?

Perhaps it doesn't, but that's the point. Education should prepare you to engage with society gainfully. If one makes it through 20 years of rigorous school but at no point acquired the necessary cognitive skills to discern scams from legitimate opportunities, then the education itself is the scam.

Yeah, financial education should be considered a standard subject and taught all years of high school and all degrees, in my opinion. Far more important and practical than almost any other basic subject. Even more important than trying to teach everyone to code. Teach everyone how the financial systems work and principles of personal finance.

The most obvious scams should be easy to identify, but if you think about how easy it is for even "accredited investors" to lose a lot of money. Just look at the list of people affected in Madoff's Ponzi Scheme⁰

Based on this evidence and many similar cases, I'm entirely in favor very stringent rules on who gets to place big bets on financial securities.

__________

0. https://en.wikipedia.org/wiki/Madoff_investment_scandal#Affe...

Because intelligence is general and correlates well across fields, and intelligence has a loose causal link with a PhD in biology. So I wouldn’t say it "helps" with investment per se but there is a connection there.

A very small connection. Investments aren't exactly just intuitive knowledge one can grasp just by being "smart". It takes specialized training to know what you're doing – and even among those who study finance, you won't find consensus on any single investment.

To be fair, a PhD in biology likely makes the individual more savvy when it comes to certain classes of investments (e.g. BioTech startups) than most full-time investors... so the criticism cuts both ways. Case in point: Theranos.

Ben Carson.

One counterexample doesn’t make a point. I could list many people who are simultaneous experts in multiple fields and it wouldn’t help my argument either.

Maybe not biology, but maybe biotech or biochemistry.

A fundamental understanding of the primary scientific literature and patents necessary for a technology to be viable, can all be used to determine if a new technology will be profitable for a company, beyond the scope of overall risk and investment numbers. Both of which are used extensively in graduate research.

Every SEC regulation and every financial law is anti-free-market, but that doesn't mean it isn't necessary.

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