The SEC “Modernizes” the Accredited Investor Definition
sec.gov
sec.gov
* The SEC can designate professional certifications from accredited institutions as a surrogate for wealth --- to begin with, FINRA Series 7, 65, and 82.
* Employees of investment funds can be accredited for purpose of investing in their employers fund.
* Firms that are SEC-registered investment advisors may now be accredited.
* To meet the individual standards of accreditation, households can pool wealth between spouses, regardless of whether both spouses are acquiring a security.
* LLCs with 5MM in assets are accredited, as are family offices with 5MM in assets.
> Employees of investment funds can be accredited for purpose of investing in their employers fund
This is a bad precedent. The biggest danger with investment is lack of diversity. Investing in your employer severely increases your risks (albeit increases rewards if you win). A great gamble when you win (startup unicorn) but a terrible gamble when you lose (company bankruptcy => lose job and lose retirement fund. Game over: play again?)
Someone writing a $20,000 cheque cannot spend $2,000 to $5,000 on lawyers every deal. This self selects for getting screwed. I would go so far as to say it is not possible to invest in private markets responsibly, outside one’s employer’s stock, with solely $5 to $25k cheques.
This is different in the public markets where the burden for disclosure is on the issuer. There is still risk. But you can’t buy Apple stock that loses money when Apple goes up. Options are complicated. But the complexity is standardised. It is totally possible, on the other hand, to buy common stock in a company that gets restructured to zero, or invest in an SPV that loses its shares to third-party repurchase rights. No amount of Googling will save you because the terms on each deal are bespoke.
I'd argue that if your employer is still private, investing in their stock is often quite unresponsible as well. Often you don't even get real stock but options, there can be arbitrary dilution, and there is no contractual right for you to get your money back (unlike if you invested money).
Often, but not always. You work there. And you are surrounded by others evaluating the same, or a similar, investment. That creates the possibility of an edge.
That possibility doesn’t exist for non-insiders. Without those advantages you’re relying on “knowing the right guy”. Nothing more.
Wouldn't it be a better, more free, system to just make it law to issue strong warnings suggesting up to $20,000 in legal fees for the inexperienced noobies upon any share issuance.
These clauses are already commonplace. People don’t read them. They then turn their losses into a political problem that breeds feel-good laws mandating red tape for everyone. Best case. Worst case: a crisis of confidence in our markets and an ensuing depression.
Better law might be a cap on this asset class as a percent of one’s investable assets?
I have seen many very wealthy investors lose a lot of money on private investments because they haven't understood their share rights relative to other investors. These companies often need to raise further capital at pretty low valuations so they end up being significantly diluted.
However the most important thing is that wealthy investors can afford these losses, other investors much less so. Only after building up significant pension savings and owning a home would I ever advise someone to invest in a higher risk opportunity.
Some requirements for diversification (instead of accreditation) would help mitigate such risky behaviour, and allow small investors to invest too.
Do “director-level management and those employees that are actually responsible for the investment activities of the fund” make sensibly diversified investment decisions? I don’t have a wide enough experience to answer that, but my very limited experience says no, they are just as likely to concentrate everything into one risk.
The SEC doesn’t care whether accredited investors are more or less likely to go all-in or to make terribly risky and concentrated investment decisions. They only care about whether or not accredited investors are in a position to get (and to a lesser extent, understand) the information they need to make the investment.
The psychology of this occupies a chunk of Thinking Fast and Slow. People discount the probabilities when taking a bigger risk to avoid a loss.
The simple example is anyone who has ever started a business, no matter what field. At some point, many had to pony up more cash (either as investment into the company or as drawn out living expenses).
So what’s the difference? And why allow one but not the other?
The goal of the SEC isn’t to prevent people from making stupid decisions - it’s to have a fair an honest paying field without bad actors.
You can get a diversified (fractional share) portfolio today with a minimum deposit on the order of $10. That seems more than adequate.
I can dream up any number of scenarios where allowing someone with $10k to invest in a certain private business is good for everyone (something local or specialized, for instance), but these are outweighed by the risks of opening the door to all sorts of exploitation of investors without even the little bit of protection the public market standards supply.
A brief review of the shenanigans surrounding the shit-coin boom gives you a taste of what happens when you grant the uninitiated unfettered access high risk assets.
I don't think you can adequately regulate that volume of market participation.
Depends on the investment firm in question. There are many prop trading and HFT firms that essentially never lose money and consistently return 100%+ on invested capital. Junior employees often can't invest in the strategy because they don't meet the accredited threshold. It'd be pretty to hard to argue that this is doing them a favor.
For guys at mega funds, it's going to be really easy. For people in prop shops? Not that much.
Just like Long Term Capital Management. Can't lose!
That they've chosen to work for that employer vs others implies they already think it's a good bet and worthy of investment, but not necessarily that they're going to put all of their funds into it.
If they treat it as just another diversification option, shouldn't be a major problem.
I thought they updated the law recently (or at least considered doing so) to allow non-accredited investors to invest in such enterprises, so long as it was a small amount, thus satisfying that (better) desideratum?
Though I can't seem to find it easily from googling.
No way. They are there to make for a level playing field with honest players and weed out the bad actors.
Your or my stupid decisions are outside of that mandate (and should remain outside of it).
$VT/$VTWAX let them invest in 8800+ different companies across the globe.
It seems like an oddly American thing to me that investors can actually use wealth as a surrogate for professional certifications.
Bad investing decisions have always and will always be allowed.
Not sure if giving them all accreditation is wise for them personally. On the other hand, they’re also professionally giving investment and trading advice, so shrug at least it’s consistent?
The SEC release notes that most family offices already qualify, but the law was somewhat ambiguous. The problem isn't that family offices can't legally invest, but rather that companies are reluctant to sell to them --- that's where the real risk is in running afoul of these rules, to the securities issuer, not the investor. Clarifying the rule mitigates that reluctance on the part of issuers.
When does it make sense to have a family office? I would guess, when you want to employ at least one financial professional full time? Is that right?
For both sentimental and other reasons the family business is not sold (i.e. may have never had audited financials since it had a single owner and no outside investors so it would be near impossible to sell it for a price the family believes is fair).
These type of "family offices" don't have any full-time investment management staff. They work with the same type of advisors an individual who had $5M of investment assets would.
Also, it’s possible to determine a value for any company.. not sure why you think it isn’t? Net profit/compensation to owner multiplied by a multiple determined by what industry/sector it is in is how small business valuation is done, plus/minus assets/liabilities.
Second issue on valuation, logically you're totally correct. In a jointly owned family business logic and Excel aren't the only way the business gets evaluated. Depending on the structure a sale may even be blocked by a minority owner member so all parties have to agree it is a fair sale price to sell.
If this "family business" has built up $5-10M in investment assets and the operating business runs at a break even while the investments generate $1-3M a year in gains is it a small "family office" or a struggling family business with an excellent treasury team managing the investment assets?
https://en.wikipedia.org/wiki/Family_office
But I think you're right as well.
When your networth is high enough such that paying for a professional money management means you get to recoup back the time you otherwise would have to spend to do so.
Family offices often deals with more than just finances, but also things like butler/chauffeur and other utilities (like gardening etc), and if they are truly rich, they would provide a fixer type service (e.g., somebody to get you what you want - like if you wanted a yacht/mansion/luxury goods, they'd be the one doing the looking and present to you the good options without you having to sweat).
The tl;dr seems to be "when it saves you time/effort," vs. "here is a financial threshold where a family office is more financially efficient than a traditional wealth manager." Right?
Click here for your once in a lifetime chance of a accredited investor certificate!!
Now the household needs to just earn $200K?
To meet the individual standards of accreditation, households can pool wealth between spouses, regardless of whether both spouses are acquiring a security.
Anything about CFAs? In official or un-official sources.
Outright fraud probably isn't the main risk - it's deceptive salespersonship and naivete on the part of investors about what they're entering. I don't know how we'd get a judiciary with the expertise to judge the cases.
It's not like the US makes it hard to start a laundromat with your friend, or something like that. It's about whether vulnerable people will make predictably wrong decisions about "investment opportunities".
As for naivete of investors, should we also regulate away matches, because consumers might cause an unwanted fire? More warnings if necessary sure, but not more nannying.
Did it? I haven't see anyone prosecuted for the 2008 crash, unless I missed it.
> Commonwealth Advisors - SEC charged Walter A. Morales and his Baton Rouge-based firm with defrauding investors by hiding millions of dollars in losses suffered during the financial crisis from investments tied to residential mortgage-backed securities. (11/9/12)
> Deutsche Bank AG - SEC charged the firm with filing misstated financial reports during the financial crisis. Deutsche Bank agreed to pay a $55 million penalty. (5/26/15)
> Goldman Sachs - SEC charged the firm with defrauding investors by misstating and omitting key facts about a financial product tied to subprime mortgages as the U.S. housing market was beginning to falter. (4/16/10) Goldman Settled Charges - Firm agreed to pay record penalty in $550 million settlement and reform its business practices. (7/15/10) Fabrice Tourre Found Liable - A jury found former Goldman Sachs Vice President Fabrice Tourre liable for fraud relating to his role in a synthetic collateralized debt obligation tied to subprime residential mortgages. (8/1/13)
> Harding Advisory LLC - SEC charged a Morristown, N.J.-based firm and its CEO for misleading investors in a CDO about the asset selection process. (10/18/13) ICP Asset Management - SEC charged ICP and its president with fraudulently managing investment products tied to the mortgage markets as they came under pressure. (6/21/10)
> ICP and President Settled Charges - ICP and its president Thomas Priore agreed to pay penalties and settle the SEC's charges (9/6/12)
And many many more at https://www.sec.gov/spotlight/enf-actions-fc.shtml
People generally understand the risks of matches. They can evaluate what happens when they use them, they can tell when it's went wrong, and they are prepared to contain the harm.
If you make a match that's a bit more impressive, it becomes a firework and we regulate the hell out of it.
A match can be combined with gasoline to become a lot more dangerous, and we regulate the hell out of gasoline. Want to keep around 20,000 gallons of gasoline? No problem, you just need the appropriate permits, insurance, and equipment.
[1]: https://www.nbcbayarea.com/news/local/biden-to-visits-bay-ar...
People expect other people to just be basically honest because in most of our interactions -- at least in the developed world-- they are.
Those drive me nuts. If it isn't heinous enough for victims to be allowed to pursue justice in the courts at their own expense, it isn't heinous enough to outlaw.
The reason for accredited investor requirements is that it's not realistic to do the same with small businesses. It is perfectly legal, and not totally uncommon, for startups to have very unfavorable terms for investors. If the LLC paperwork says the majority partner can choose to buy back your shares against your will for a dollar any time they like, then they can, and it's your fault for not reading it more carefully.
I've heard of many cases, and personally witnessed one case, in which an accredited investor put a lot of money in to a startup, and lost it even though the startup did well. The requirements may not be perfect, but I don't think it's fair to suggest they don't serve a purpose.
The poorest households in the US spend something like 11% of their income on lotteries. There isn't any way lotteries could rip them off any more.
In a hypothetically free market world, they would be dumping their disposable income in stocks sold over the counter in convenience stores, or directly through their phones, and perhaps traded without intermediaries on the blockchain, and would be developing some skills in investment analysis, along with an asset base, over time, instead of developing new lottery number picking techniques based on mathematical quackery and superstitions.
I would not be so sure about that. The poor (who buy lottery tickets) have a lot less ability to delay gratification. And if you compare the chance to double your $10 in the next year (e.g. invest in $QQQ) to having the chance of being a millionaire next week, the bet to gain $10 is not an appealing option. Firstly it takes a year and secondly it's not enough to escape their current life.
There are many offerings in the DeFi/token market that offer the prospect of massive payouts on those time frames.
Penny stocks can have a similar appeal.
These markets are replete with 'scammish' offerings and outright scams too, but over time, I strongly suspect you'd see retail investors become more discerning, as they learn through a process of trial and error what works and what doesn't.
the odds of winning a powerball lottery is about 1 in 290 million to win about $130million. The expected value is therefore $130 x 1/290m = $0.44 , for an investment of about $10 - very small indeed.
The small chance at escaping poverty is great, but the money is not well spent. if that's how they really think, then they will find that escaping is even harder.
Investing is not gambling - investing generates equity/capital growth. You only "lost" in investing if the asset crumbles. By investing in QQQ, it's concentrated, but it's unlikely everything in the ETF crumbles at the same time. So the chance of loss is much lower than lottery.
Mortgages were pushed to sketchy credit risks for years, wiping out the the poor's earnings & equity with unsustainable housing costs in (temporarily) pubic-policy-inflated home values - and even now, there's minimal protection against over-concentrating in unwise housing markets.
Plenty of public securities go to zero, often in fraud. But with easy-to-get investing leverage, any amount of initial capital can go to zero with only small moves in public prices. You can lose any amount of money after a small move of AAPL up - if you purchase enough (or leveraged) securities which bet on it going down, which are available to anyone without an accredited-investor-like wealth test.
(Have you seen the promotions, and easy on-ramps, for daytrading & foreign-exchange trading & Robinhood? Or how easy it is to channel any amount of money into crypto trading?)
The real question to me is, what is a "private" investment if everyone can invest in it? Why isn't it subject to the same reporting requirements as a "public" investment?
You're right, the 'public'/'private' distinction is confusing and outdated. It should just be 'high-reporting' (certified by accountants/lawyers/exchanges to meet certain standards) and 'low-reporting'.
Perhaps tax-advantaged retirement accounts shouldn't be allowed into 'low-reporting' situations.
But with a person's own excess money, they shouldn't face a wealth test to invest it anywhere their judgement guides them - if they're allowed to gamble, donate, burn, over-leverage, etc that money a thousand other ways to zero as well.
This of course means that any investor into such a company needs to have a more intimate relationship and understanding of the company despite the lack of detailed reporting, which is at least one reason to have accredited investor rules.
> Anyone can also invest in any other dumb investment; you just have to go to the local office of the SEC and get a Certificate of Dumb Investment. (Anyone who sells dumb non-approved investments without requiring this certificate from buyers goes to prison.) > To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.” > Then you take the form to an SEC employee, who slaps you hard across the face and says “really???” And if you reply “yes really” then she gives you the certificate. Then you bring the certificate to the seller and you can buy whatever dumb thing he is selling.
[1] https://www.bloomberg.com/opinion/articles/2018-09-24/earnin...
I feel like someone well funded and clever could find the right combination of judges to correct this reality. Make it a real free for all.
The part that is hard is that it's really very hard to do prevent outright scams without a lot of collateral damage. In general, scam artists are better at understanding and applying any rules than the regulators or the police. Successful ones are also better at marketing their scams to ordinary people than non-scam-artists are at marketing their real business proposals. (After all, a successful scam artist only needs to have skills about marketing their proposal, but a team that is building something real has to have those skills and skills that are useful for building something real.)
Much like we know from history that bad money drives out the good, we also have overwhelming historical evidence that in a completely unregulated market, the scams and the amount of money they attract will massively overwhelm actual business. The regulations around the financial markets are "scam-driven", in the same way that FAA regulations are "funeral-driven". Every line of text exists because someone somewhere managed to steal so much money from so many people, that the victims managed to complain enough about how this shouldn't be possible that it became law. The natural progression of rules in both cases is towards less regulation, as everyone is perfectly aware that the regulation that exists is stifling and damaging, so over time the regulations are reduced and enforcement becomes more lax, until something like 737MAX or Madoff happens and regulations need to be tightened again.
There is no chance that anyone will ever strike all these regulations down with enough funding and "the right judges", simply because anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse.
> anyone who understands the space understands that while the regulation we have is bad, the alternative is so, so much worse.
The current regulations around capital formation, and secondary markets are completely classist and need much greater reform. The regulators passionately believe in their paternal approach, there isn't a shady cabal plotting to keep not-rich people out of the markets, they should still be stopped nonetheless.
VCs compete for dealflow because dealflow is limited due to many currently unnecessary and expensive regulations.
Trillion dollar companies got their “growth capital” in an IPO one year after their $8mm Series A.
This doesn't happen anymore and generations of people have extremely limited exposure to “deal flow” and liquidity. Thats changing and if VCs want to keeping playing hot potato with Stanford dropout shares they are completely free to keep doing that.
This is way off. At the growth capital level, terms for QPs ($5+ million) and QIBs ($100+ million) are night and day. (Accredited investors aren’t on the field. To say nothing of smaller fish.)
This partly stems from liability. Small investors have an easier time convincing regulators, judges and juries they got screwed and deserve compensation. It also deals with sophistication. A complex win-win structure might not market well, but they regularly happen with hedge funds.
But it is mostly about efficiency. A single institutional investor setting deal terms will fill the rest of the deal on their brand. That lets you negotiate once and be certain of closing. You get a tight list of LPs or investors and know no cheques will bounce. If someone misbehaves, you can complain to the lead who will tell them to knock it off or risk losing future deal flow.
Capital markets have economies of scale. Just looking at venture secondary markets, pricing on SharesPost and EquityZen is regularly 20% to 50% worse than what even a moderate cheque writer could get. And that’s before considering the preferences on better classes of stock.
Have at it! :)
That would serve the goal of keeping the clueless from getting scammed, while also eliminating the kind of legalized classism (and I'd argue, unconstitutional on its face by way of the equal protection clause) that accreditation status represents.
I still feel like the "classism" argument here is extremely weak. Not because investment opportunities aren't classist --- they are --- but changing 501(a) isn't going to fix that. They're structurally classist. Good bets don't want retail money, because retail investors are, as a cohort, a bunch of loons. It might never occur to you to sue over some random, mundane options allocation event, but I promise you, it would occur to someone in the cohort of retail investors.
I really believe that retail investors do not have a functioning mental model of how startup investing works. It's hard enough to get people to diversify at all. To invest in startups, you have to place 10 bets, hoping that 1-2 winners pay for all the losers. Ordinary investors freak the fuck out when one of their positions goes to zero, which is the expected outcome in private company investment.
Another detail retail investors don't have: startup investors re-invest to keep pro-rate shares in future rounds. You have to keep feeding companies money to keep your share. Explain that to my Aunt Rita.
Another thing is, the LPs in VC funds aren't putting money in just because they think it'll be a super-successful investment that they want access to; some of them have portfolio allocation rules, and requirements to invest funds in things decorrelated from public markets. Which is just to say, a pension fund goes into these things with eyes wide open, unlike a skittish retail investor and his Lionel Hutzian legal advisors.
"Do you know what an option is?", "Do you trade regular stocks now?", "Do you understand you may lose all your money with options?".
I suspect my brokerage doesn't even actually review the form, they just want to avoid people complaining that they YOLO'd on a Tesla call and lost everything. Given how easy it was, I am kind of in favor of it - it seems important to have a very obvious and plain disclaimer on high risk strategies like this.
- Buying contact lenses without a 1+ year old or foreign prescription.
- Taking drugs.
- Online poker.
- Buying a Kinder Surprise chocolate.
- etc.
Besides protecting individuals, regulations protect society from negative externalities generated by these risky activities. I think there's a huge opportunity to decriminalize sex work and drug-related crimes, but we should recognize that risky behavior puts more than just the immediate individuals involved at risk.
For example, consider the SEC.
The primary goal of the SEC upon its founding shortly after the great depression was to restore investor confidence in the securities market. Its goal was to improve trust in the financial system, and it achieved that goal in part by introducing regulations that help protect individual investors.
The fire analogy is actually a good one, since those policies also have historical roots in the razing of big portions of several large US cities (eg Chicago).
In a dense city, your purported distinction between fire codes that protect inhabitants and fire codes that protect cities/blocks is a false dichotomy. The way you prevent the block from burning is by preventing individual buildings from burning. Because in a dense city blocks are comprised of... well... densely packed buildings.
More laissez faire strategies might work in much less dense areas like rural Kansas (not even suburbs -- have you seen a bad gas explosion?). And even then, only as long as you you're willing to really go it on your own -- if your attitude is "don't tell me what to do" rugged individualism then don't expect the time of day from insurance companies, banks offering mortgages, or fire departments. Buy in cash, no insurance, and put out your own fires.
Similarly, public and secondary financial markets are not your brother's laundromat or neighborhood bar. The best way to protect a large inter-connected financial system from collapses in investor confidence is to prevent obviously fraudulent bubbles from forming in the first place. Expecting individual investors to have confidence in valuations within completely unregulated marketplaces is like expecting the block be fine without thinking about how to prevent fires in any of the individual buildings.
This even extends to the "maybe something else might work in rural Kansas" example, where you replace actuaries and fire fighters with welfare/social security and medicaid.
Let people be free to make their own dumb mistakes and punish the bad actors.
Or companies like Enron. Pick a random crypto from coinmarketcap and their creators likely had better financials...
So, yes, it can be all about the timing.
"[...] Private companies are not just where a lot of the fraud is, they’re also where a lot of the growth is. "
I believe his point was that money/wealth is not a good differentiator of sophistication, AND it puts an unnecessary bar to anybody investing in today's opportunities (to your point).
Instead, open up the investment but ensure people are aware and reminded of the risks. Hence the tongue-and-cheek "Dumb Investment Certificate" :)
that doesn't mean it's an unreasonable bar. it's sort of like the opposite of "if you owe the bank a million dollars, it's your problem; if you owe the bank a billion dollars, it's their problem". if someone with a million dollars loses a large chunk of it to a bad investment, it's mostly just their problem. if someone with $10k loses a large chunk of it, it may become the (welfare) state's problem. if the state is going to guarantee that basic needs are met at some level, it's not unreasonable to prohibit people from doing risky things that are likely to lead to them drawing on the system. this is the essential tradeoff between freedom and security.
With a public company, your investment might lose value, but you are probably not going to get completely ripped off. That's not the case if you invest in a private company without doing due diligence.
In particular, Series 65 carries no requirement to be sponsored by a FINRA member firm, and many states don't require an investment adviser firm to register if there are fewer than 6 clients in that state. And New York, uniquely, does not require investment adviser representatives to register at all, though they do require that they either pass the exam or qualify for a waiver.
So, if I move to NY (as I'm likely to do in 2021 or 2022 for unrelated reasons) and pass the Series 65 exam but don't practice as an investment adviser, do I automatically qualify as an accredited investor, either for a certain number of years since last passing the exam or indefinitely? If not, would it work to create and voluntarily register self-owned investment adviser firm (with as few as zero clients) and deal with the annual registration and financial statement paperwork? My guess is no and yes, respectively, possibly with a requirement to pass the exam every 2 years if my firm doesn't actually have any clients as would be required to truly count as practicing as an investment adviser.
I see why they used the general securities representative example (Series 7) to illustrate their "you don't have to practice" requirement, since those lapse two years after leaving a qualifying firm, and the same therefore applies to accredited investor status on that basis. For Series 65, it is a lot murkier.
Its not monopolizing diligence, its setting a floor for diligence for investments by people outside of (expanded by this action) pool of investors.
> The absence of these regulations will create room for businesses who would vet investments for you at different risk levels.
Are you talking about a hypothetical scenario where the SEC removed accredited investor rules rather than expanding it to included basically people with licenses or currently-active professional roles related to investing rather than merely people with lots of money?
Also, such businesses exist already in the financial space.
The floor just happens to be very close to the ceiling excluding many people with varying risk tolerances.
Those already exist and are called managed funds. The problem is, there is often a conflict of interest and the fund managers profit off the ignorance of their own costumers.
This is actually a very big problem in the financial space: the incentives of the B2C entity and the costumer are almost never aligned. The costumer lacks information and the B2C is supposed to help them attain that information, but the B2C entity can also profit off the ignorance of their customer and this is often more profitable than getting paid a fixed fee for honest advice.
Which means managed funds are not what the GP is talking about. The GP is talking about a third party that does not have any conflict of interest.
Verb Of The Month award has been conferred.
So in addition to all the fraud problems, you also have a huge adverse selection problem: the private investments that are available to retail investors are going to be of starkly lower quality than what's available to Bessemer and Index.
Assuming the adult population to be like children, with all-powerful regulatory agencies as surrogate guardians is a double assault on liberty, affecting:
1. The population at large, who have their freedom restricted if they do not meet the guardian's conditions that demonstrate competence
2. Everyone who would want to interact with members of the public to sell certain classes of products or services, who now have to conduct due diligence to ensure they are not dealing with something akin to an adult child in the law's eyes, because rather than the surrogate guardian supervising their ward, the guardian attempts to make the entire world a safe space, by imposing some of the obligations of guardianship onto society at large.
But I also see two big opportunities for abuse: One risk would be combining this with 506c offerings (allowing general solicitation) to create a proliferation of very low quality syndications (I've already seen many ads on Facebook for this sort of thing) that are effectively glamorous but money losing opportunities. A second risk is that a lot of investors won't be over the 'legal help' threshold -- basically they won't be investing an amount where it makes sense to hire a lawyer to actually review the contract. This could potentially lead to abuse as well.
Someone making less than $200k/y could still be considered precarious, and suddenly having one of their litigious creditors on your cap table could expose other investors to risk. I'm really against the accredited investor limitation, as it creates the conditions for shady loans, reduces small entrepreneurs access to capital, and causes bubbles in things like real estate and garbage stocks, but the altruistic rationale of the regulation for "protecting small investors," seems insincere and it seems more plausible that it protects an establishment of investors instead.
No, they didn't. It remains objective, it just now tests expertise by objective standards, not merely wealth or income. (Which are, at best, more distant proxies for expertise than the new ones.)
> Expect many more regular people to be scammed out of their life savings.
The new added standards are less "regular people" than the the old, continued standards, so I don't think that's the case. If licensed professional investment advisors and the like are getting scammed out of their life savings because they are able to invest directly in unlicensed securities, than there is a real problem with the licensing systems or the process allowing the investments to be offered at all, regardless of investor qualifications.
I generally agree with your comment, but this doesn't make much sense. The old "$200K/300K or $1MM outside primary residence" standards are continued, right? So by definition, in raw numbers, there could only ever be at least as many "regular people"...
The reason why having money was the objective definition was because defining expertise objectively is difficult. (What are you going to do? Have a standardized test?) This problem still remains.
Like you said, having money doesn’t make you a savvy investor. However, you can typically absorb the losses with comparatively less pain. Also, since you have more money, you can make more investments, which means you gain experience, and thus hopefully better at avoiding bad investments.
The other non-financial individual qualification is also objective. Are you a certain type of employee of an investment firm? If so you can invest in that firm. None of this is subjective.
If this were about whether you can absorb losses, then it would limit the investment amount based on your financial capacity, like the JOBS Act does. There's nothing stopping a millionaire from throwing too much of their savings into questionable investments, and plenty of millionaires have gone broke doing exactly that. They probably would have been better off if they had to pass those standardized tests first, like us po' folks are able to do now.
Um, under what part of the new standard would a "poor dentist" that would not qualify under the old standard qualify?
However, it is not possible to say since this class of professional certifications is not delineated. Dentistry may qualify. It may not.
Yes, it is quite specifically. The new rule also sets out standards (which would very much not seem to be likely to ever admit certification in dentistry) and a process for subsequent rulemaking to update the set of certifications, but any problem with certifications later adopted would be an issue with those actions, not the immediate action.
The initial set is "the General Securities Representative license (Series 7), the Private Securities Offerings Representative license (Series 82), and the Licensed Investment Adviser Representative (Series 65)". [https://www.sec.gov/rules/final/2020/33-10824.pdf, bottom of p. 28]
You cut off the critical second half of that statement, which significantly changes the meaning:
> natural persons holding in good standing one or more professional certifications or designations or other credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status
If you think the SEC would add DDS to that list, I'm not sure why you would trust them to regulate investing at all.
It was always just a certification that you had an excessive amount wealth.
Sounds like you believe someone with a net worth of $900k or a salary of $190k is objectively incompetent become they're barely under the threshold.
"Objective definition." What a joke.
To me, the previous SEC rule is just an acknowledgment of the real aristocratic underpinnings of an advanced capitalist economy.
So, this won't cause any more people to lose money, but it may change the mix of things they lose it on.
And because this will also open to non-wealthy people many good deals in above-board companies, that have been scrupulously following the law & attracting rich sophisticated investors, it will also benefit those well-behaved companies and their less-rich friends, family, supporters, & customers – a win for society.
People get scammed all the time in a million different ways.
So maybe letting non-wealthy people invest into the exact same well-documented, scrupulously-legal above-board deals in which wealthier people have always been allowed to invest could be better than the traditional-but-totally-failing paternalism?
As compared to the complexity of available investment schemes, no, they probably aren't.
On the other hand, "licensed investment advisors and people currently working in investment-related roles in financial firms" are probably more savvy about investing, as a class, than "people who happen to have more than $1M in assets or $200K in personal or 300K in personal+spouse income".
I also expect to see a lot of poorly constructed startup deals where uncle jimmy ends up owning 65% of a startup because of some shoddy setup. Not sure if this is going to be a good thing or not given the greater access to capital that will be afforded to young companies. Interesting times abound
I'd expect anyone at a hedge fund who would want to go solo to easily qualify based on that. Maybe it'd pull in the timeline a bit since you wouldn't have to wait 2 years but that's about it.
Whoever invites others to invest should not be allowed to knowingly make blatantly false claims.
Any regulations beyond this are communism.