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I think it's most likely an attempt to cut down on fraudulent hedge funds. Currently, having "accredited investor" status is sufficient and usually necessary t

I think it's most likely an attempt to cut down on fraudulent hedge funds. Currently, having "accredited investor" status is sufficient and usually necessary to invest in hedge funds, prvate equity funds, and startups. During the dénouement of the financial crisis, many mini-Madoffs were discovered, usually in the $5-200 million range. Most of these were pyramid schemes dressed up as hedge funds, but a few were fraudulent startups as well. I think the main reason they're changing the definition of "accredited investor" is because it also affects who can invest in hedge funds, not because they're trying to affect startups per se. This is probably classic "unintended consequences."

tibbon 17y ago
Too bad laws don't have functional test suites to run against changes to see if there are side effects and if the rest of the 'code' still works. Just so I understand: If I've got 250K in the bank- this would prevent me from doing 10K ycombinator style investments without jumping through massive SEC hoops?
- akeefer 17y ago
  It's not quite that black and white: essentially, the laws around "accredited investors" are there to clearly delineate professional investors from more casual investors so that the person receiving the money can be sure that it will count as a private placement exempt from SEC registration requirements. That, in turn, is to prevent scam artists from inducing people to part with their money by "investing" in a private investment that's totally free of SEC registration and oversight. If you wanted to invest in your friend's startup, you could, but if you wanted to fund other third-party startups with which you had no pre-existing relationship, you'd need to register as an accredited investor. See grellas's excellent summary from a few days ago: http://news.ycombinator.com/item?id=1221387 http://news.ycombinator.com/item?id=1221387 As absurd as it seems, laws like this don't come out of nowhere just to make people's lives complicated and miserable: the SEC registration requirements are there to prevent scam artists (of which the 20th century that saw rise to these laws saw plenty), and the accredited investor regulations are a way to clarify the exemptions to those requirements.
  - startuprules 17y ago
    I think that works well in theory, but as we've seen from Bernie Madoff's case, where the SEC keeps ignoring pleas from whistleblowers to look into the case (because the fox is guarding the henhouse) and the fact that no reform in SEC has been made to this day, that that is not the case. As an aside, I think most people on this board have a 'everybody is decent and nice' goggle on. Probably why we're the ones getting ripped off by everyone else.
- boucher 17y ago
  Well, no. If you've only got $250K in the bank you already can't invest. The current requirements are $1 million in assets or $250K annual income. This will move that bar up by about 2X.
boucher 17y ago
I think the change in the dollar value limits are reasonable. It may not be the greatest thing in the world for startups, but I'm not sure it will have a huge impact on the number of angels making investments. The SEC registration requirements seem like they will cause a lot more trouble.
hga 17y ago
I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up? (One should also be cognizant of Buffet's "when the tide runs out, you see who's been swimming naked". While I don't think he meant it in this way, "genius is a rising market" and when the market goes down a lot of scams are driven out into the open because they can no longer keep their game afloat.) In general, great efforts have been made to paint hedge-funds as eeeeevil, but with little to no evidence that I'm aware of (note Madoff was't running one ... in fact, didn't he make a big deal about his very low management fees?). And I don't see how this is related: The ostensible purpose of this legislation is to decrease systemic risk. Preventing smaller investors from making necessarily small investments in whatever by definition isn't going to have much effect. The issues are big numbers, not small ones. And how does the 120 day delay fit into this??? Devolving the regulation of these investments to the states might in theory help, not that the SEC is a whole lot more useful than a potted plant (cd Madoff). Regulating VCs as hedge-funds makes no sense whatsoever (that's not a point you're making, but I can't help but wonder if they're related).
- spamizbad 17y ago
  > I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up? Off the top of my head: Wextrust. http://www.nytimes.com/2008/08/12/business/12wextrust.html http://www.nytimes.com/2008/08/12/business/12wextrust.html I actually did some contract work for them in 2007, shortly before they were busted. I was never paid beyond my retainer. I found out why it was so hard to collect when the story broke in Crains Chicago. Normally I'd fight to get paid but they're now in receivership and I don't feel like taking scraps from charities and individuals who were wronged for so much more than I was. edit: I understand that's just an anecdote, not real data. Basically media coverage is rare if the scheme is less than $200 million. There are some larger ones that never get attention because very wealthy people get taken and don't want to be made fools of for investing into these companies. I've got friends who work in the real estate business who've told me about several in the Chicago area that have been taken down or are under investigation. It was shockingly widespread, and I'd estimate there's easily thousands active worldwide. Here's an incomplete list of ones that made the press in 2009: http://madofffraud.boomja.com/Ponzi-Schemes-Reported-in-2009-22206.html http://madofffraud.boomja.com/Ponzi-Schemes-Reported-in-2009...

tibbon 17y ago

Too bad laws don't have functional test suites to run against changes to see if there are side effects and if the rest of the 'code' still works. Just so I understand: If I've got 250K in the bank- this would prevent me from doing 10K ycombinator style investments without jumping through massive SEC hoops?

akeefer 17y ago
It's not quite that black and white: essentially, the laws around "accredited investors" are there to clearly delineate professional investors from more casual investors so that the person receiving the money can be sure that it will count as a private placement exempt from SEC registration requirements. That, in turn, is to prevent scam artists from inducing people to part with their money by "investing" in a private investment that's totally free of SEC registration and oversight. If you wanted to invest in your friend's startup, you could, but if you wanted to fund other third-party startups with which you had no pre-existing relationship, you'd need to register as an accredited investor. See grellas's excellent summary from a few days ago: http://news.ycombinator.com/item?id=1221387 http://news.ycombinator.com/item?id=1221387 As absurd as it seems, laws like this don't come out of nowhere just to make people's lives complicated and miserable: the SEC registration requirements are there to prevent scam artists (of which the 20th century that saw rise to these laws saw plenty), and the accredited investor regulations are a way to clarify the exemptions to those requirements.
- startuprules 17y ago
  I think that works well in theory, but as we've seen from Bernie Madoff's case, where the SEC keeps ignoring pleas from whistleblowers to look into the case (because the fox is guarding the henhouse) and the fact that no reform in SEC has been made to this day, that that is not the case. As an aside, I think most people on this board have a 'everybody is decent and nice' goggle on. Probably why we're the ones getting ripped off by everyone else.
boucher 17y ago
Well, no. If you've only got $250K in the bank you already can't invest. The current requirements are $1 million in assets or $250K annual income. This will move that bar up by about 2X.

boucher 17y ago

I think the change in the dollar value limits are reasonable. It may not be the greatest thing in the world for startups, but I'm not sure it will have a huge impact on the number of angels making investments. The SEC registration requirements seem like they will cause a lot more trouble.

hga 17y ago

I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up? (One should also be cognizant of Buffet's "when the tide runs out, you see who's been swimming naked". While I don't think he meant it in this way, "genius is a rising market" and when the market goes down a lot of scams are driven out into the open because they can no longer keep their game afloat.) In general, great efforts have been made to paint hedge-funds as eeeeevil, but with little to no evidence that I'm aware of (note Madoff was't running one ... in fact, didn't he make a big deal about his very low management fees?). And I don't see how this is related: The ostensible purpose of this legislation is to decrease systemic risk. Preventing smaller investors from making necessarily small investments in whatever by definition isn't going to have much effect. The issues are big numbers, not small ones. And how does the 120 day delay fit into this??? Devolving the regulation of these investments to the states might in theory help, not that the SEC is a whole lot more useful than a potted plant (cd Madoff). Regulating VCs as hedge-funds makes no sense whatsoever (that's not a point you're making, but I can't help but wonder if they're related).

spamizbad 17y ago
> I wasn't aware there were many "mini-Madoffs"; I heard about one or two, maybe three. Could you point us at a source to back that assertion up? Off the top of my head: Wextrust. http://www.nytimes.com/2008/08/12/business/12wextrust.html http://www.nytimes.com/2008/08/12/business/12wextrust.html I actually did some contract work for them in 2007, shortly before they were busted. I was never paid beyond my retainer. I found out why it was so hard to collect when the story broke in Crains Chicago. Normally I'd fight to get paid but they're now in receivership and I don't feel like taking scraps from charities and individuals who were wronged for so much more than I was. edit: I understand that's just an anecdote, not real data. Basically media coverage is rare if the scheme is less than $200 million. There are some larger ones that never get attention because very wealthy people get taken and don't want to be made fools of for investing into these companies. I've got friends who work in the real estate business who've told me about several in the Chicago area that have been taken down or are under investigation. It was shockingly widespread, and I'd estimate there's easily thousands active worldwide. Here's an incomplete list of ones that made the press in 2009: http://madofffraud.boomja.com/Ponzi-Schemes-Reported-in-2009-22206.html http://madofffraud.boomja.com/Ponzi-Schemes-Reported-in-2009...