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Why do investors need to be accredited at all? If I, someone with savings and income far below those thresholds, want to invest a large portion of my net worth

Why do investors need to be accredited at all? If I, someone with savings and income far below those thresholds, want to invest a large portion of my net worth into a startup I really believe in, why should the government stop me? It's so risky that it's a horrible idea, but don't I have a right to be stupid?

hristov 17y ago
Because of scams. Of course you are going to say that you should have the right to fall for scams if you want to, but some scams become so prevalent they actually have an effect on the economy, or can crash the stockmarket. I also have to say that the accredited investor rules do not exactly prohibit you from investing in startups. Or from owning stock. They are part of a complex securities regulation framework and it is difficult to explain in a quick message board post exactly where they fit in.
- gojomo 17y ago
  But the result of the rule is that submillionaires can't invest in YC-like companies, but they can still lose all their money (and whatever additional amount banks will loan them) on... - day-trading - real-estate-speculation - investing in 'safe' public stocks like Enron, Fannie Mae, Lehman, and GM - trading forex following rules they learned from late-night-informercials - gambling in licensed casinos offering rigged games - buying state lottery tickets All these often-negative-expectation activities are allowed. So what, exactly, do the 'accredited investor' limits prevent a gullible person from doing? A fool will be parted from his money; these rules just change the form of the transactions that will be used. Meanwhile, the limits prevent wise-but-poor people from being shareholders in small businesses that they actually have some expertise about, and which are more likely to be positive-expectation than the above activities.
  - hristov 17y ago
    The laws obviously cannot prevent all fraud. But the least they can do is make fraud relatively difficult. Some of the examples you provided were fraud, but they were relatively difficult to pull off, as opposed to what would happen if there were no securities laws. (Some of your examples, were not fraud but just stupid decisions.) For example Enron had to work hard to fool all those accountants, and as a result one of the largest accounting companies in the world went under and many of its partners are still mired in lawsuits. The banks created a very convoluted system to mislead investors as to the value of their securities, which involved a lot of new legislation, somehow tricking or corrupting the ratings agencies, controlling markets, etc. So scams happen, but they are not as easy. Of course I think securities laws could stand improvement. But we do not have the case where there are so many scams on the stock market that everybody assumes that everything is a scam and nobody invests, so the stock market is essentially useless. This is the case for many (actually most) countries.
  - anigbrowl 17y ago
    First, wise-but-poor people will be able to invest in small businesses as you describe, but will have to satisfy other non-financial criteria in order to do so. (these criteria already exist, and apply if you don't meet the current accreditation thresholds.) Second, to turn your argument on its head, why not get rid of the limits altogether? Let anyone invest in anything, whether or not the investment vehicle is registered with or reports to the SEC. Sounds great, right? Unfortunately, historical experience with this approach is that people get ripped off left, right and center, and taxpayers end up holding the bag. True, taxpayers end up holding the bag for a lot of things anyway. I'm not sure how to fix this, but I'm pretty sure that removing all limits on the size of bags ain't it.
    - Daniel_Newby 17y ago
      Oh Great Ghu. We float in a sea of fraud. The investment laws are not about stopping it, they are about giving Goldman Sachs a percentage of every fraud. Goldman would implode tomorrow if random assholes could just cheat each other directly. Take the fucking red pill, Neo. The historical evidence is that complete fraud control produces water empires that are destroyed by the first barbarian to ride into town. The destruction is generally so complete that a dark age follows. Forget taxpayers holding the bag, you need archeologists to figure out what happened from the bits of that society that would not burn. Conversely, the Western Enlightenment showed that you can get growth and prosperity undreamed by the kings of old even in the face of pervasive investment fraud. What counts is a culture of liberty, optimism, and a commitment to basic policing. Or to put it another way, it's worth the life savings of a lot of senile grandmothers if the wild-eyed schemer sometimes actually delivers a goose that lays gold eggs.
    - gojomo 17y ago
      wise-but-poor people... have to satisfy other non-financial criteria ...which limits them to a tiny fraction of the private investment opportunities available to millionaires. Why make things harder on the wise-but-poor? Or those who have wise-but-poor friends-and-family? ...to turn your argument on its head, why not get rid of the limits altogether... That's not the argument on its head -- that's the argument itself! Net-worth-based discrimination has no place in securities regulation. If an unwise or gullible person can throw their entire net worth -- and then some, via leverage -- into a single risky real-estate transaction, or risky options trade, or risky loan to an unreliable acquaintance, or risky superbowl wager -- then there's no rational basis for preventing them from buying private securities. Some will be burned, and learn (and teach others via their example). They'll do better the next time -- as with all the other expensive failures we let people experience with their own money. Fraud can be prosecuted under existing fraud laws. And the majority of honest entrepreneurs and wise-but-poor investors will have many, many more opportunities to explore the small-business solution-space with angel capital.
  - bd_at_rivenhill 17y ago
    I couldn't agree more. The fact that non-accredited investors are permitted to open an options trading account and only receive a statement disclosing that options trading is risky is an indication that these rules represent more of an exercise in regulatory capture that protects incumbents than a real mechanism that protects investors. An inexperienced investor would be much more likely to lose money trading options than to fall prey to hedge fund scams.
    - anigbrowl 17y ago
      True...but do we want to burden startups with the compliance requirements of public securities trading? While grellas and I disagree upthread about the intent and ramifications of this proposed change, we concur that the alternative (of an unspecific regulatory environment) is messy, unpredictable, and expensive. Libertarians often point out that disputes are inevitable are best resolved on their individual merits in a court rather than via pre-emptive regulation. This is a fine ideal, but my limited experience as a party to a few legal disputes is that going to court erodes commercial productivity like nothing else.
anigbrowl 17y ago
It reduces the burden on entrepreneurs by freeing them from the complex and expensive filing requirements of the SEC for making a public offering similar to an IPO. Basically the accredited investor can say 'I am sufficiently wealthy and well-informed that if I lose all my money I will not run to the authorities crying that you encouraged me to take financial risks that were beyond my ability to understand'. If you wish to solicit funds from the general public for a profit-seeking enterprise, you have to include a huge number of disclaimers and warnings with your offering and pay a very expensive securities lawyer to evaluate and sign off on your compliance with SEC regulations, or you face a very high likelihood of getting prosecuted for mail fraud and multiple other offences. You may be a smart individual or an ethical entrepreneur, but the empirical evidence is that the general public is rather naive, poorly informed about risk assessment and financial engineering, and there are a lot of people out there eager to exploit this fact. It would be nice if we could do without police and fire departments and pay less tax as a result, but crime and outbreaks of fire are annoying realities whose costs typically exceed those of professional emergency responders.

hristov 17y ago

Because of scams. Of course you are going to say that you should have the right to fall for scams if you want to, but some scams become so prevalent they actually have an effect on the economy, or can crash the stockmarket. I also have to say that the accredited investor rules do not exactly prohibit you from investing in startups. Or from owning stock. They are part of a complex securities regulation framework and it is difficult to explain in a quick message board post exactly where they fit in.

gojomo 17y ago
But the result of the rule is that submillionaires can't invest in YC-like companies, but they can still lose all their money (and whatever additional amount banks will loan them) on... - day-trading - real-estate-speculation - investing in 'safe' public stocks like Enron, Fannie Mae, Lehman, and GM - trading forex following rules they learned from late-night-informercials - gambling in licensed casinos offering rigged games - buying state lottery tickets All these often-negative-expectation activities are allowed. So what, exactly, do the 'accredited investor' limits prevent a gullible person from doing? A fool will be parted from his money; these rules just change the form of the transactions that will be used. Meanwhile, the limits prevent wise-but-poor people from being shareholders in small businesses that they actually have some expertise about, and which are more likely to be positive-expectation than the above activities.
- hristov 17y ago
  The laws obviously cannot prevent all fraud. But the least they can do is make fraud relatively difficult. Some of the examples you provided were fraud, but they were relatively difficult to pull off, as opposed to what would happen if there were no securities laws. (Some of your examples, were not fraud but just stupid decisions.) For example Enron had to work hard to fool all those accountants, and as a result one of the largest accounting companies in the world went under and many of its partners are still mired in lawsuits. The banks created a very convoluted system to mislead investors as to the value of their securities, which involved a lot of new legislation, somehow tricking or corrupting the ratings agencies, controlling markets, etc. So scams happen, but they are not as easy. Of course I think securities laws could stand improvement. But we do not have the case where there are so many scams on the stock market that everybody assumes that everything is a scam and nobody invests, so the stock market is essentially useless. This is the case for many (actually most) countries.
- anigbrowl 17y ago
  First, wise-but-poor people will be able to invest in small businesses as you describe, but will have to satisfy other non-financial criteria in order to do so. (these criteria already exist, and apply if you don't meet the current accreditation thresholds.) Second, to turn your argument on its head, why not get rid of the limits altogether? Let anyone invest in anything, whether or not the investment vehicle is registered with or reports to the SEC. Sounds great, right? Unfortunately, historical experience with this approach is that people get ripped off left, right and center, and taxpayers end up holding the bag. True, taxpayers end up holding the bag for a lot of things anyway. I'm not sure how to fix this, but I'm pretty sure that removing all limits on the size of bags ain't it.
  - Daniel_Newby 17y ago
    Oh Great Ghu. We float in a sea of fraud. The investment laws are not about stopping it, they are about giving Goldman Sachs a percentage of every fraud. Goldman would implode tomorrow if random assholes could just cheat each other directly. Take the fucking red pill, Neo. The historical evidence is that complete fraud control produces water empires that are destroyed by the first barbarian to ride into town. The destruction is generally so complete that a dark age follows. Forget taxpayers holding the bag, you need archeologists to figure out what happened from the bits of that society that would not burn. Conversely, the Western Enlightenment showed that you can get growth and prosperity undreamed by the kings of old even in the face of pervasive investment fraud. What counts is a culture of liberty, optimism, and a commitment to basic policing. Or to put it another way, it's worth the life savings of a lot of senile grandmothers if the wild-eyed schemer sometimes actually delivers a goose that lays gold eggs.
  - gojomo 17y ago
    wise-but-poor people... have to satisfy other non-financial criteria ...which limits them to a tiny fraction of the private investment opportunities available to millionaires. Why make things harder on the wise-but-poor? Or those who have wise-but-poor friends-and-family? ...to turn your argument on its head, why not get rid of the limits altogether... That's not the argument on its head -- that's the argument itself! Net-worth-based discrimination has no place in securities regulation. If an unwise or gullible person can throw their entire net worth -- and then some, via leverage -- into a single risky real-estate transaction, or risky options trade, or risky loan to an unreliable acquaintance, or risky superbowl wager -- then there's no rational basis for preventing them from buying private securities. Some will be burned, and learn (and teach others via their example). They'll do better the next time -- as with all the other expensive failures we let people experience with their own money. Fraud can be prosecuted under existing fraud laws. And the majority of honest entrepreneurs and wise-but-poor investors will have many, many more opportunities to explore the small-business solution-space with angel capital.
- bd_at_rivenhill 17y ago
  I couldn't agree more. The fact that non-accredited investors are permitted to open an options trading account and only receive a statement disclosing that options trading is risky is an indication that these rules represent more of an exercise in regulatory capture that protects incumbents than a real mechanism that protects investors. An inexperienced investor would be much more likely to lose money trading options than to fall prey to hedge fund scams.
  - anigbrowl 17y ago
    True...but do we want to burden startups with the compliance requirements of public securities trading? While grellas and I disagree upthread about the intent and ramifications of this proposed change, we concur that the alternative (of an unspecific regulatory environment) is messy, unpredictable, and expensive. Libertarians often point out that disputes are inevitable are best resolved on their individual merits in a court rather than via pre-emptive regulation. This is a fine ideal, but my limited experience as a party to a few legal disputes is that going to court erodes commercial productivity like nothing else.

anigbrowl 17y ago

It reduces the burden on entrepreneurs by freeing them from the complex and expensive filing requirements of the SEC for making a public offering similar to an IPO. Basically the accredited investor can say 'I am sufficiently wealthy and well-informed that if I lose all my money I will not run to the authorities crying that you encouraged me to take financial risks that were beyond my ability to understand'. If you wish to solicit funds from the general public for a profit-seeking enterprise, you have to include a huge number of disclaimers and warnings with your offering and pay a very expensive securities lawyer to evaluate and sign off on your compliance with SEC regulations, or you face a very high likelihood of getting prosecuted for mail fraud and multiple other offences. You may be a smart individual or an ethical entrepreneur, but the empirical evidence is that the general public is rather naive, poorly informed about risk assessment and financial engineering, and there are a lot of people out there eager to exploit this fact. It would be nice if we could do without police and fire departments and pay less tax as a result, but crime and outbreaks of fire are annoying realities whose costs typically exceed those of professional emergency responders.