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I would not be too sanguine about what politicians beholden to the trial lawyers might or might not do in this sort of area. When you shrink the pool of accredi

by grellas 17y ago

I would not be too sanguine about what politicians beholden to the trial lawyers might or might not do in this sort of area. When you shrink the pool of accredited investors, you remove many of the avenues by which startups can raise capital in a manner by which they can be assured they are not violating securities laws. If the safe avenues are no longer there, the risks of lawsuits increase dramatically. It will all be done in the name of protecting investor rights, but the real beneficiaries here will be the trial lawyers and the losers will indeed be all early-stage companies that seek to raise capital. Maybe it will happen quickly or maybe it will be gradual but the underlying motives here are pretty clear and have nothing to do with promoting the health of startups. I express no opinion about the quality of the article posted here but it is a mistake to assume this legislation is benign for startups. It is not.

hristov 17y ago
Really? That is a bit far-fetched to say the least. And don't you think one should actually check out what the inflation adjustment is going to be before crying foul? If it is the version that I suggested is most likely, I don't think it will have much of an effect at all.
- grellas 17y ago
  The bill gives the SEC an open ticket to make the form of inflation adjustment it deems reasonable. In other words, if the SEC uses the statutory grant of authority to take this in a direction of radically scaling back the numbers of investors who qualify as "accredited," there is nothing anybody can do about it. In effect, we are at the mercy of the regulators. This takes an area that has been defined by certainty and by a liberal view of what it takes to be "accredited" - no small benefit for the rise of startups over the past 30 years - and, in my view, gratuitously places a big question mark over it. You can take a sanguine view of what this means. I choose not to. Only time will tell which of us has the right instincts about it. For the benefit of the startups I represent, I sincerely hope that you are right and I am wrong.
  - hristov 17y ago
    Well it is not surprising the SEC are getting that order, as they created the whole accredited investor stuff from whole cloth to begin with. But I do not think you are correct that this is a grant of authority. The SEC have always had the authority to change those numbers; as I mentioned, they created them to begin with. This proposed law actually orders the SEC to raise the numbers to account for inflation, but it gives the SEC broad discretion on how to do it. But it is worth noting that the SEC have not changed the numbers from 1982, although they had the power to. Also from various SEC papers I have read it seems very unlikely they will suddenly double the requirements. Most likely, they will start accounting for inflation in the future.
anigbrowl 17y ago
George, I am disappointed by the superficial assumptions which you make here, which I feel serve to obscure rather than clarify the issue. (Before going on, grellas is a lawyer and one I respect due to his extensive experience, while I am not only not a lawyer, I have no qualifications of any kind on such matters and the following is nothing but my personal opinion. If you need guidance in this area then you should be consulting someone qualified to practice securities law instead of wasting your valuable time reading my upstart ideas.) First, the relevant material we're talking about. The text of the bill is to be found here: http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf http://banking.senate.gov/public/_files/ChairmansMark31510AY... The relevant sections are #412 and #413, as follows: SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD FOR INFLATION. The Commission shall, by rule— (1) increase the financial threshold for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, by calculating an amount that is greater than the amount in effect on the date of enactment of this Act of $200,000 income for a natural person (or $300,000 for a couple) and $1,000,000 in assets, as the Commission determines is appropriate and in the public interest, in light of price inflation since those figures were determined; and (2) adjust that threshold not less frequently than once every 5 years, to reflect the percentage increase in the cost of living. SEC. 413. GAO STUDY AND REPORT ON ACCREDITED INVESTORS. The Comptroller General of the United States shall conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act. 'Commission' here refers to the Securities and Exchange Commission. Accreditation criteria as they currently stand are set out in rule 501 of Regulation D of the SEC's rules, under the authority of the Securities Act 1933. You can read those criteria here: http://www.law.uc.edu/CCL/33ActRls/rule501.html http://www.law.uc.edu/CCL/33ActRls/rule501.html Now, to my argument. First of all, the proposed bill lets the SEC itself recalculate the financial threshold for a natural person to be an accredited investor. As I am sure you are aware, the SEC proposed raising that threshold to $2.5 million in investment assets back in December 2006 (primarily as a prophylactic against fraud by hedge fund managers) but abandoned the idea following the feedback they received during the public consultation period. I fail to see how requiring the accreditation threshold to keep pace with inflation and tasking the GAO with a review of current practices - to which both attorneys and entrepreneurs will presumably contribute - is a bad thing. Perhaps your specific objection is to the suggestion that the SEC consider CPI in its reassessment of thresholds from the limits established in 1982. I would respond that pointing out that requiring consideration of the changes in CPI is very different from mandating their use as a metric, and only uses inflation as a rationale for future long-term maintenance of threshold amounts. Incidentally, even if such thresholds were imposed by fiat tomorrow, are we really to believe that the risk of any given to investors is only 43% of that which it was in 1982? Is it logical to maintain a fixed dollar amount as the threshold for individual participation in offerings? Surely a period of inflation which further eroded the real value of that threshold would not in any way improve investors' collective security. I cannot fathom that investment risk declines in direct proportion to the purchasing power of the currency. In any case, Regulation D also provides that becoming a director, partner, or executive offer in a business venture confers accreditation status, as does certification of an entity as a business development company in accordance with the Investment Company Act of 1940. So as a purely practical matter, someone of middling means who might not qualify as an accredited investor under future revisions of the income or asset thresholds could still invest in a startup by the fairly simple expedient of joining the startup in one of the capacities mentioned above. Your allusions to predatory trial lawyers and obscure motives trouble me; rather than discussing the likely outcome of changes in the law (but rather assuming the shrinkage of the investor pool as a fact), you engage in a kind of ad-hominem by proxy, casting aspersions on the proponents of change without addressing the substantive issues in their proposal. I know you are not giving legal or political advice here, just expressing a brief reaction to these proposals. I do not think you are a conspiracy theorist or someone who seeks to mislead, and that your concerns on behalf of current and future clients are real. Nor am I a proponent of reform at all costs, or oblivious to the potential headaches for those seeking to raise capital - as an independent filmmaker of extremely modest means, these proposals could affect my ability to raise capital too. But I fundamentally disagree with your suggestion that this bill represents a covert attempt to enrich trial lawyers at the expense of honest entrepreneurs.

by grellas 17y ago

hristov 17y ago

Really? That is a bit far-fetched to say the least. And don't you think one should actually check out what the inflation adjustment is going to be before crying foul? If it is the version that I suggested is most likely, I don't think it will have much of an effect at all.

grellas 17y ago
The bill gives the SEC an open ticket to make the form of inflation adjustment it deems reasonable. In other words, if the SEC uses the statutory grant of authority to take this in a direction of radically scaling back the numbers of investors who qualify as "accredited," there is nothing anybody can do about it. In effect, we are at the mercy of the regulators. This takes an area that has been defined by certainty and by a liberal view of what it takes to be "accredited" - no small benefit for the rise of startups over the past 30 years - and, in my view, gratuitously places a big question mark over it. You can take a sanguine view of what this means. I choose not to. Only time will tell which of us has the right instincts about it. For the benefit of the startups I represent, I sincerely hope that you are right and I am wrong.
- hristov 17y ago
  Well it is not surprising the SEC are getting that order, as they created the whole accredited investor stuff from whole cloth to begin with. But I do not think you are correct that this is a grant of authority. The SEC have always had the authority to change those numbers; as I mentioned, they created them to begin with. This proposed law actually orders the SEC to raise the numbers to account for inflation, but it gives the SEC broad discretion on how to do it. But it is worth noting that the SEC have not changed the numbers from 1982, although they had the power to. Also from various SEC papers I have read it seems very unlikely they will suddenly double the requirements. Most likely, they will start accounting for inflation in the future.

anigbrowl 17y ago

George, I am disappointed by the superficial assumptions which you make here, which I feel serve to obscure rather than clarify the issue. (Before going on, grellas is a lawyer and one I respect due to his extensive experience, while I am not only not a lawyer, I have no qualifications of any kind on such matters and the following is nothing but my personal opinion. If you need guidance in this area then you should be consulting someone qualified to practice securities law instead of wasting your valuable time reading my upstart ideas.) First, the relevant material we're talking about. The text of the bill is to be found here: http://banking.senate.gov/public/_files/ChairmansMark31510AYO10306_xmlFinancialReformLegislationBill.pdf http://banking.senate.gov/public/_files/ChairmansMark31510AY... The relevant sections are #412 and #413, as follows: SEC. 412. ADJUSTING THE ACCREDITED INVESTOR STANDARD FOR INFLATION. The Commission shall, by rule— (1) increase the financial threshold for an accredited investor, as set forth in the rules of the Commission under the Securities Act of 1933, by calculating an amount that is greater than the amount in effect on the date of enactment of this Act of $200,000 income for a natural person (or $300,000 for a couple) and $1,000,000 in assets, as the Commission determines is appropriate and in the public interest, in light of price inflation since those figures were determined; and (2) adjust that threshold not less frequently than once every 5 years, to reflect the percentage increase in the cost of living. SEC. 413. GAO STUDY AND REPORT ON ACCREDITED INVESTORS. The Comptroller General of the United States shall conduct a study on the appropriate criteria for determining the financial thresholds or other criteria needed to qualify for accredited investor status and eligibility to invest in private funds, and shall submit a report to the Committee on Banking, Housing, and Urban Affairs of the Senate and the Committee on Financial Services of the House of Representatives on the results of such study not later than 1 year after the date of enactment of this Act. 'Commission' here refers to the Securities and Exchange Commission. Accreditation criteria as they currently stand are set out in rule 501 of Regulation D of the SEC's rules, under the authority of the Securities Act 1933. You can read those criteria here: http://www.law.uc.edu/CCL/33ActRls/rule501.html http://www.law.uc.edu/CCL/33ActRls/rule501.html Now, to my argument. First of all, the proposed bill lets the SEC itself recalculate the financial threshold for a natural person to be an accredited investor. As I am sure you are aware, the SEC proposed raising that threshold to $2.5 million in investment assets back in December 2006 (primarily as a prophylactic against fraud by hedge fund managers) but abandoned the idea following the feedback they received during the public consultation period. I fail to see how requiring the accreditation threshold to keep pace with inflation and tasking the GAO with a review of current practices - to which both attorneys and entrepreneurs will presumably contribute - is a bad thing. Perhaps your specific objection is to the suggestion that the SEC consider CPI in its reassessment of thresholds from the limits established in 1982. I would respond that pointing out that requiring consideration of the changes in CPI is very different from mandating their use as a metric, and only uses inflation as a rationale for future long-term maintenance of threshold amounts. Incidentally, even if such thresholds were imposed by fiat tomorrow, are we really to believe that the risk of any given to investors is only 43% of that which it was in 1982? Is it logical to maintain a fixed dollar amount as the threshold for individual participation in offerings? Surely a period of inflation which further eroded the real value of that threshold would not in any way improve investors' collective security. I cannot fathom that investment risk declines in direct proportion to the purchasing power of the currency. In any case, Regulation D also provides that becoming a director, partner, or executive offer in a business venture confers accreditation status, as does certification of an entity as a business development company in accordance with the Investment Company Act of 1940. So as a purely practical matter, someone of middling means who might not qualify as an accredited investor under future revisions of the income or asset thresholds could still invest in a startup by the fairly simple expedient of joining the startup in one of the capacities mentioned above. Your allusions to predatory trial lawyers and obscure motives trouble me; rather than discussing the likely outcome of changes in the law (but rather assuming the shrinkage of the investor pool as a fact), you engage in a kind of ad-hominem by proxy, casting aspersions on the proponents of change without addressing the substantive issues in their proposal. I know you are not giving legal or political advice here, just expressing a brief reaction to these proposals. I do not think you are a conspiracy theorist or someone who seeks to mislead, and that your concerns on behalf of current and future clients are real. Nor am I a proponent of reform at all costs, or oblivious to the potential headaches for those seeking to raise capital - as an independent filmmaker of extremely modest means, these proposals could affect my ability to raise capital too. But I fundamentally disagree with your suggestion that this bill represents a covert attempt to enrich trial lawyers at the expense of honest entrepreneurs.