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SEC proposes changes to “accredited investor” definition

127 points by s_r_n 7y ago

aguyfromnb 7y ago
We are entering the Euphoria stage of the business cycle: Microsoft, Apple, Google and Amazon worth over $5 trillion, while the White House is considering tax benefits so more people can buy stocks and the SEC is ditching investment regulation. Hang on to your hats!
dswalter 7y ago
I may be in the minority here, but I don't think the changes we needed were to make it easier for higher-ups to cash out of a company before rank-and-file get a chance to.
- kenneth 7y ago
  Guess you don't understand the changes at all then because this has nothing to do with cashing out of companies. There is nothing here that makes that easier (not that it wasn't easy before).
travisoneill1 7y ago
The whole thing should be scrapped. This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling.
- conanbatt 7y ago
  A walk down r/WallStreetBets shows you that if there is an argument about a gov agency protecting unsophisticated investors, its failing spectacularly.
  - caro_douglos 7y ago
    Still loving that RH glitch which allowed a sophisticated investor to “utilize” more margins than they were entitled to. [1] There really should be another crack at trading places. I hope those accredited producers out there in Holywoot can make it happen. [1] https://www.cnbc.com/2019/11/05/some-robinhood-users-were-able-to-trade-with-unlimited-borrowed-money.html https://www.cnbc.com/2019/11/05/some-robinhood-users-were-ab...
  - gruez 7y ago
    I think you're misunderstanding the threat model. It's designed to protect unsophisticated investors from fraudsters, not from the investors themselves.
    - johnbrodie 7y ago
      If that's the case, why do Pattern Day Trader rules exist? They seem to generally cover "protecting you from yourself", not from some third-party.
    - conanbatt 7y ago
      I don't think this is true. A clear example is startup stock-options. It is legal for the company to give you that as compensation, you historically get taxed for that compensation, it is legally mandated to get appraisal by a third-party company, but it is generally illegal to offer them for sale in the public.
- ve55 7y ago
  There have been considerations to up the requirements of purchasing leveraged ETFs, which go up to 3x. But also keep in mind most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours.
  - throw17ebfruary 7y ago
    > ...most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours. How do you lose more than the purchase price of the options when buying options?
    - MR4D 7y ago
      I'm not the OP, but I think they meant "trading options" instead of "buying options."
  - kenneth 7y ago
    Most people who take unlimited-downside positions (like selling option contracts or short selling) on a broker will be limited to losing however much cash on hand they have in liquid markets. Their broker will issue a margin call (ask for further capital to be deposited to cover any further losses), and if no further deposit is made, will automatically liquidate their position if necessary. So you're unlikely to see your net worth wiped out, you'll simply lose the amount you put in to the account to trade with.
    - throw17ebfruary 7y ago
      I wouldn't count on that. The market might move so fast that the broker can't liquidate the account before the balance goes negative. In that case the broker has an incentive to try to extract the amount from the customer (if they can), instead of eating the loss on the negative balance.
- Mvandenbergh 7y ago
  Agreed. While I think it is sensible to have rules that prevent gullible members of the public from being bamboozled, I also think that a more sensible policy is what the UK has. Here you can self-certify as a "sophisticated investor" which is basically the same thing except that there is no obligation on anyone to check your self-certification i.e. there is no penalty to claiming to be one when you're not nor is there any penalty for allowing someone to invest who self-certifies but doesn't actually meet the criteria. That seems fair. If you're willing to confirm that then you should be able to invest in whatever damn fool thing you want. (Note that in the UK private individuals can trade things like contracts for difference and spread bets which I actually think is slightly mad)
  - asciimike 7y ago
    This is basically Matt Levine's argument [1], though he calls it a Certificate of Dumb Investment: 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.” [1]: https://www.bloomberg.com/opinion/articles/2018-09-24/earning-the-right-to-get-swindled https://www.bloomberg.com/opinion/articles/2018-09-24/earnin... [2]: https://www.bloomberg.com/opinion/articles/2019-06-19/private-markets-could-be-more-public https://www.bloomberg.com/opinion/articles/2019-06-19/privat...
    - nullc 7y ago
      I was okay right up to the never complain part. There is a lot of fraud that goes unpunished because the victims feel hopeless and embarrassed. As a result, it's a lot more attractive to defraud people. A dumb investment might be dumb, it might be likely to be fraud. But if it turns out to actually be fraud, the victims should still be able to seek restitution or otherwise you are giving a free pass to commit fraud and creating a huge economic advantage for people willing to do it over people who aren't.
- imeron 7y ago
  Or any of the weird coin offerings. Which - if you believe in the thing not being a scam - is essentially a way of financing a company. Just like buying an investment in a small business.
  - kenneth 7y ago
    These coin offerings are generally violating securities law.
    - sillysaurusx 7y ago
      Which raises the question of whether securities laws are beneficial in this regard.
      - gruez 7y ago
        The SEC has shut down/suspended numerous ICOs. That sounds like they're working to me.
        sillysaurusx 7y ago
        Or the value is being transferred out of the US and toward other countries, because you can't even start an ICO in the US unless you have the right connections.
        nullc 7y ago
        It has shut down some but it mostly seems to issue nominal penalties. For example, the EOS ICO unlawfully raised over $4 billion dollars. The SEC settled with them where they paid the SEC $24 million and the SEC agreed to take no further action. The only lesson here is that if you're going to ignore the law and sell sketchy assets with over-hyped claims to unsophisticated investors in the US... make sure you raise enough that the cost for good attorneys few million to the SEC is just a rounding error.
  - nullc 7y ago
    Woah watch out there. I have never seen a 'coin offering' that was remotely like buying an investment in a business, certainly not "just like". Instead, they have mountains of fine print that with extraordinary care make sure the recipient has absolutely no property right in the business, no claim to any title, no voting rights, usually no rights to share in profits, etc. If you wanted to liken them to something offline, they're structured more like making a donation and getting a limited edition t-shirt in return. Maybe with some vague suggestion, but no guarantee, that the t-shirt may entitle you to discounted services in the future should the business actually begin operations. And this is before getting into the fact that a great many of them are essentially outright scams. The fact that many people are thinking that ICOs are "just like buying an investment in a small business"-- is a great example of how the SEC is pretty much flat out failing at this part of their job.
- Areading314 7y ago
  Totally agree. If we want to protect people there should be some kind of test like a drivers license, and rich people should have to take it too. As it is now people can get into options trading on small caps but are barred from buying things like commercial real estate.
- notahacker 7y ago
  TVIX isn't soliciting unsophisticated investors for large percentages of their net worth, and if you want to sell TVIX because it's performing terribly, you can.
- vpmpaul 7y ago
  The only reason accredited investor exists is to reduce free market competition. If everyone could invest in UBER when it was $1 a share it would not make billions for the "accredited investors" when it went public.
- tptacek 7y ago
  Doesn't accreditation largely influence how securities are marketed? Isn't the liability issue with accreditation on the security seller, and not on the buyer? Why would we want more shady investments marketed to people, even if some what's marketed today turns out to be shady?
  - aguyfromnb 7y ago
    Bingo. Look at the fallout from the mortgage crisis/scandals. Buying a house is a straight forward investment. People were getting into mortgages without even understanding basic borrowing rates. In the end we (rightfully in most cases) blamed the brokers for pushing crap on people unknowingly. How is this going to work?
  - travisoneill1 7y ago
    This makes a lot of sense, but I don't support it because in this case the price of having less shady investment marketed to people is cutting off access to a large number of legit (though risky) investments.
    - tptacek 7y ago
      Lots of investments that have no business being marketed to retail investors are both (1) not reasonable or safe enough to be marketed and (2) believed in good faith by their marketers to be "legit". So, two responses here: First, when you think about the products that could be marketed without accreditation, you can't just think about the marginal cases where there is some plausible value; you have to think about all of them, bearing in mind that there is virtually no correspondence between how well something is marketed and how plausible it is an investment. See, for instance, the unregulated nutritional supplement market, which is is a hive of scum and villainy that kind of perfectly encapsulates this problem while being self-limited (in the non-pyramid-scheme case) to the amount of colloidal silver solution any person could reasonably purchase --- unlike an investment, which begs its purchaser to plow their life's savings into. Second, contrary to the perspective you get on this issue by just looking at tiny startups, you have to consider that the entire securities industry is in a sense gated on accreditation, because the difference between a security that requires accreditation and one that doesn't is "keeping timely audited findings with the SEC". So for example: if you did away with accreditation, why would companies need to produce audited financials? If your belief is that the edifice of securities regulation is entirely pointless and people should be able to buy any investment product they want and companies should be able to sell any investment product they want, that's a coherent take, but not one ("let's do away with companies having to file official statements") that most mainstream people would find persuasive.
- gruez 7y ago
  >This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling. My understanding is that it's supposed to protect investor from fraud (eg. along the lines of ICOs), not necessarily from risky/volatile investments.
  - rolltiide 7y ago
    I too think it should be scrapped and I look at how other places do it. Often in other countries I see lower wealth requirements and copy the general US SEC framework but sometimes over countries just have no registration exemptions for a private market, which is even worse. The wealth requirements in US are so aggravating because they pass muster by putting the consequence on the issuer, not actually barring the person from investing. Almost impossible to challenge! But how we got here is that this is a successor to a test, which had horrible guidance and resulted in rampant discrimination - a sign of the times. This proposal reintroduces the test but inherits a more established FINRA testing infrastructure. FINRA tests are still barriers of entry that will hardly make the world more egalitarian as almost all of them require sponsorship from a financial institution - even the test prep materials aren't supposed to be shared. There are ways around it like a bucketshop cant you on payroll and offer you the test but its still an unnecessary and pretentiously exclusionary hurdle, built on purpose.
  - SomewhatLikely 7y ago
    Having more money doesn't make you less susceptible to fraud, but does make you less susceptible to ruin from big losses.
    - mbesto 7y ago
      Source for that? I think the general idea is not whether someone is susceptible to fraud, but rather higher likelihood that you have experience with making investments. How much you wanna bet a white collar worker making $200k/year has made more investment-based decisions in their life than a a blue collar worker making $20/hr? I don't necessarily agree with the tenants of the idea of an accredited investor, but it's definitely a way to parse out a large chunk of the population unexperienced with investing.
- nullc 7y ago
  At least the risk profile of a leveraged ETF is fairly unambiguous and easily discovered. Its very real potential for downside is also matched by a real potential for upside and the available pricing is fair-- even if its risk profile not necessarily matched to your (or anyone elses) financial needs. I think a bigger risk to investors is dishonest/deceptive marketing and extremely risky and often illiquid investments being peddled as sure deals, including ones where the chance of upside is essentially nil and you're lucky if you break even.
  - MR4D 7y ago
    > Its very real potential for downside is also matched by a real potential for upside This actually isn't true (and that's a big problem). Leveraged ETFs (such as TVIX) typically are very leaky. [0] [0] - https://seekingalpha.com/article/1864191-what-you-need-to-know-about-the-decay-of-leveraged-etfs https://seekingalpha.com/article/1864191-what-you-need-to-kn...
    - nullc 7y ago
      I originally wrote very real potential for upside and weakened it by dropping the "very", specifically thinking about the drag on leveraged ETFs... :) Guess I didn't go far enough. I feel like this is in the weeds though: some bad investments people get suckered into have extremely high and diversified risk of total loss, but at _best_ can only return a few percent in a year. Not only are they negative EV, but even if you get lucky and it pays off you only end up with money market fund like income. Deals that no one who was informed and knew how to do the relevant math would ever take.
- deleted 7y ago
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- icedchai 7y ago
  One major difference is liquidity. Small business investments have almost none. You're going to be tied up for years, and may actually never be able to get out. If I screw up with TVIX, it's a couple of clicks.
- cortesoft 7y ago
  I think Matt Levine has a good explanation about accredited investing and what private markets really mean: > But in fact the main thing that distinguishes public and private markets is not their legal status—private markets are mostly open to accredited investors, while public markets are open to everyone—but the fact that private companies get to choose their investors, and public companies don’t. Hedge funds, for instance, are mostly open only to accredited investors, but not all hedge funds are open to all accredited investors. The very best hedge funds mostly aren’t open to anyone: They are at capacity, won’t take new money, and mostly manage money for their own very rich employees. Other hedge funds with long track records of good performance are open to big institutional allocators who can write very large checks. If you are a dentist making $205,000 a year, and you want to invest in hedge funds … someone will definitely sell you a hedge fund! It will not be Renaissance. Just because we legally allow people to invest in whatever they want doesn't mean it will make equal footing between investors. The investments that will accept the people who are currently 'non-accreddited investors' are going to be the worst of the private investments; it will do nothing to help the little guy compete with the rich guys.
  - wave_function 7y ago
    Side question: does anyone know the origin of “dentist” being shorthand for “someone who is fairly educated/wealthy and thinks they’re sophisticated, but is actually just dumb money”? I’ve heard it quite a bit, curious about where it comes from.
    - kenneth 7y ago
      A self-reinforcing meme, I'd imagine. The more you hear it, the more you're likely to use it as an example. I've certainly used the phrase "dentist from Ohio" a few times myself — no offense meant to dentists and Ohioans.
  - deleted 7y ago
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- gist 7y ago
  > While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling. Nobody is hyping that and most 'anybodies' don't even know that exists. (I never heard of it but everyday I read about all the wins with startups but typically almost none of the losses).
- gnopgnip 7y ago
  In many cases small businesses can take on non accredited investors. Like a rule 504 offering if less than $1m is being raised. And if you are raising more than $1m, a 506 offering allows for up to 35 non accredited investors. If you are raising more than $1m and have more than 35 non accredited investors a public offering is compelling.
- say_it_as_it_is 7y ago
  Accredited investors are not better informed, more intelligent, nor disciplined. They just have more income. People make mistakes by assuming that one's status implies superior capabilities.
deleted 7y ago
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oh_sigh 7y ago
It's an interesting name they gave this concept. According to Wikipedia, "accreditation is the process in which certification of competency, authority, or credibility is presented" But to be an accredited investor, all you need to do is have some money. There is no logical way that you can certify that a person's "competency, authority, or credibility" by merely knowing how much money is in their bank account.
- chiph 7y ago
  I think the assumption is that even in the case of "trust fund babies" who inherited their wealth, they will have been exposed to enough info about finance to potentially understand the risks. Neither the existing nor the upcoming changes will protect someone like a lottery winner. Unless they seek qualified advice in setting something like a family office up, in which case their intentions are good at least.
- cortesoft 7y ago
  They let people with enough money be accredited investors on the idea that if you have enough money you won't be devastated if you are a victim of fraud.
  - oh_sigh 7y ago
    I understand the reason - I'm saying the name is a joke.
- CyanLite2 7y ago
  No but they would have the financial ability to withstanding speculative investment losses and (theoretically) have the financial means to hire lawyers and advisers to review investments before making them. Otherwise you'd have grade school teachers and firefighters individually risking their entire retirement on a Series A for their brother-in-law's "next sure thing" rather than their pension plan manager doing the due diligence.
KoftaBob 7y ago
That's because its less about that and more about allowing a certain income class to have exclusive access to certain kinds of investments. A VC firm that offers nothing more than money (larger % of them than you'd think) doesn't want to compete with tons of syndicates consisting of average retail investors. The "accredited investor" gatekeeping allows them to provide very little value and say "doesn't matter, you need us because we're the very few that are allowed to invest in your company".
- superflit 7y ago
  Working for the finance industry. This is the right answer Gatekeeping
- TheRealSteel 7y ago
  Precisely. If the government cared about protecting people from poor investments, they would ban gambling.
- icedchai 7y ago
  If you work in tech, especially FAANG, you are likely surrounded by "accredited investors." There are a lot more of them you think.
- SpicyLemonZest 7y ago
  If retail investor syndicates can successfully compete with VCs, why aren't squads of senior FAANG engineers doing it today? They're comfortably over the accredited investor threshold.
  - icedchai 7y ago
    Probably because they make enough extra money investing in public markets with less hassle and much more liquidity. Why even bother with private investments? 90% of them are going to zero.
miguelmota 7y ago
Official document describing the amendments: https://www.sec.gov/rules/proposed/2019/33-10734.pdf https://www.sec.gov/rules/proposed/2019/33-10734.pdf
kenneth 7y ago
Welcome changes to the accredited investor rules. Of course, would love to see them go even further and let just anyone invest — but this is already a step in the right direction. In all my dealings with the SEC (from working at multiple regulated investment platforms, AngelList and Republic, and now as a VC), it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone. They have great intentions, but are obviously quite careful and conservative about their approach. I think it's important to note two things: 1/ The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." — the last part is important, and these changes go towards furthering that goal. 2/ The SEC is a civilian enforcement agency. They do not write the rules, they are here to interpret them and enforce them. They issue guidance, monitor, and sue entities that break the rules. The rules are written by congress. Even if the SEC wanted to change a rule, they could not do it without following the laws written by congress. At best, they can slightly tweak their interpretations of the rules (as we're seeing here).
- baybal2 7y ago
  > it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone USA has by far world's most byzantine and bizarre securities laws. To me, this doesn't seem to be going well along that statement.
  - carbocation 7y ago
    The SEC doesn't make the laws, though. I tend to agree with both of you and I don't think that's a contradiction.
    - kyrieeschaton 7y ago
      They do though; they have incredibly wide discretion and things like insider trading effectively exist only via SEC regulation.
      - 7y ago
Keverw 7y ago
Kinda interesting they limit who can invest in things, yet you can go to the casino or blow all your money on lottery tickets. Seems like just another way for the rich to keep getting richer. Also always found it odd, the age for lottery and casino were different too, at least in the US. 18 for lotto, 21 for casino.
- thephyber 7y ago
  This regulation isn’t designed to protect you from yourself (eg addictive behaviors) or “investments” that are obviously bad for even those without a high school education. It’s designed to provide some minimal protection against sophisticated fraudsters (eg Bernie Madoff). SEC doesn’t govern lotto/gambling within states; that happens at a state level, just like alcohol and tobacco. I agree that the USA tends to have an incoherent stance on age of responsibility versus freedoms, but that’s largely because the federated government system and different states have different ideas about how much freedom/responsibilities their people should have.
  - rolltiide 7y ago
    This outcome is ridiculous and has no place in American society. It was more tolerable when high growth companies IPO’d at $30mm market caps but that world doesn't exist, serving to put a spotlight on these regulations separating the primary economic growth engine’s opportunities to just the already wealthy.
astura 7y ago
Does anyone here know if entities are required to actually verify their customers are accredited investors (eg with brokerage statements, bank statements, paystubs, etc.) or can they just take the person's word on it?
- icedchai 7y ago
  They can take a person's word. I signed up for a few sites, to check out various opportunities, before I was actually an accredited investor. It's all "self certified." I am actually one now, FYI.
- asciimike 7y ago
  When you do the investment deal, you have to certify that you are an accredited investor (e.g. you'll get a SAFE and an "Accredited Investor Questionnaire" or similar document). They won't require proof beyond that (e.g. bank account statements, W-2), but if you lied about it you'll likely have zero recourse if shit hits the fan (which is the only time you would need it). I would also say that most of the time the parties involved know each other trust each other enough to where in practice this shouldn't be a big deal (if you have questions about the money or if someone shouldn't be able to do this, don't take their money). It's the same logic used when cashiers ask you what your age is when purchasing alcohol: if you give them a fake ID and they accept it, that's on them, but if they ask you and you lie, that's on you.
- kenneth 7y ago
  It depends on whether they're doing a 506(b) or a 506(c) offering. The difference being that the latter can be publicly advertised, whereas the former doesn't allow any public solicitation of investments. In the former case, you can take people at their words (they just declare that they are, and how they are an accredited investor in a statement). In the latter case, you must verify via a statement from a licensed professional (e.g. their CPA) or via their bank.
relaunched 7y ago
I have a hard time understanding who this helps. Clearly there are exceptions for family offices and the spousal exception is strangely broadened in a way that includes same sex, non married couples (and I believe that's a win) - though arguably is much broader. But, an exception for people that pass some relatively basic SEC certifications (who also don't meet some reasonable financial thresholds) or folks that are non-significant wage earners, that work for a VC and want to invest. It's really strange considering now, investment brokers / managers who don't make enough to participate under the old rules can participate AND convince their clients / the market to participate...that seems odd. If there is a reasonable reason to create an income threshold, presumably to protect investors from risky investments who can't withstand the loss, then why create exceptions for people who don't meet the income / asset requirement? If you believe that investment in startups should be regulated, to save us from ourselves, it's hard to imagine this helps the average potential investor.
- jonas21 7y ago
  The point of the accredited investor regulation is to protect unsophisticated investors who don't understand the risk of investing in startups and other unregistered offerings. These exceptions will let people without a high income or net worth qualify as accredited investors by proving that they have the financial knowledge to understand these risks. For example, anyone can take the Series 65 exam. It sounds like this could be very helpful in allowing people who are not rich to invest in startups while still protecting people who have no idea what they're doing.
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Nuzzerino 7y ago
A similar bill was passed unanimously in the house in 2017, which seems to have a more broad definition of a professional expert. I am thinking out loud here but what if this is a scenario where the SEC is trying to pass a more restrictive version, so that the more relaxed house bill never gets passed into law? https://www.congress.gov/bill/115th-congress/house-bill/1585/all-info https://www.congress.gov/bill/115th-congress/house-bill/1585...
say_it_as_it_is 7y ago
The people who invested in Bernie Madoff funds were accredited. They believed they ought not ask questions and rock the boat. Trump University also had accredited investors. Softbank has accredited investors. It seems that being an accredited investor isn't protecting anyone from fraud.
- chillacy 7y ago
  Careful not to equate the presence of false negatives with the absence of true positives. Just because there are accredited investors who were tricked doesn’t mean that there wouldn’t be even more unaccredited investors who could have been tricked.
  - say_it_as_it_is 7y ago
    Of course there will be more tricked unaccredited investors because there will be more of them and government can't guide the hand. My point is that the accreditation rule is moot, regardless of income level.
alexmingoia 7y ago
The SEC has no way of knowing whether someone understands the risks of investing or not. If the reasoning is to protect ignorant investors and prevent fraud, it would be more effective and equatable to have a test/certification to be a qualified/investor, rather than banning large swaths of the population from investing. The current SEC rules are inherently discriminatory whereas the law should treat people equally.
- crooked-v 7y ago
  From my experience working for a company in the real estate investment industry, the biggest gap in investor understanding is in risk vs projected return rate. Almost everyone including accredited investors gravitate towards anything with the highest potential return rate, even when there's great big up-front warnings about a given investment having X, Y, and Z risk factors. With that in mind, even just forcing investors to pass a simple test about risk in different areas of investment (bonds, index funds, major real estate types, etc) would go a long way.
rolltiide 7y ago
Proposal comments to post: all current and former FINRA and NASD license holders should be eligible as accredited. A new unsponsored FINRA test for this specific purpose should be created as well (doesnt need to be in a federal proposal, just what can happen) Finance and econ degree holders eligible too I think this still sets the bar too high. There needs to be some way to opt out of the paternalism and take a chance in the securities market. People are going to lose their shirts, just add a little disclaimer just like in public markets and on gambling posters. Sometimes this will be an efficient allocation of capital for issuers that VCs dont share affinity for.
scarejunba 7y ago
This is because of Obama's JOBS act, right?
ponsin 7y ago
One thing I didn't understand about hedge funds is why they limit themselves to only accepting large sums of money from individuals. That concept appeared a lot in the movie about Bernie Madoff. Is it harder to manage a hedge fund with more investors? Once you get the money from them shouldn't the hedge fund be able to use the money just the same as if it came from few rich people?
- deleted 7y ago
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say_it_as_it_is 7y ago
I'm convinced that hedge funds and venture capitalists are against this because it will require their own investors to have a certain level of knowledge about their investments that makes the managers uneasy.

127 points by s_r_n 7y ago

We are entering the Euphoria stage of the business cycle: Microsoft, Apple, Google and Amazon worth over $5 trillion, while the White House is considering tax benefits so more people can buy stocks and the SEC is ditching investment regulation. Hang on to your hats!

dswalter 7y ago

I may be in the minority here, but I don't think the changes we needed were to make it easier for higher-ups to cash out of a company before rank-and-file get a chance to.

kenneth 7y ago
Guess you don't understand the changes at all then because this has nothing to do with cashing out of companies. There is nothing here that makes that easier (not that it wasn't easy before).

travisoneill1 7y ago

The whole thing should be scrapped. This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling.

conanbatt 7y ago
A walk down r/WallStreetBets shows you that if there is an argument about a gov agency protecting unsophisticated investors, its failing spectacularly.
- caro_douglos 7y ago
  Still loving that RH glitch which allowed a sophisticated investor to “utilize” more margins than they were entitled to. [1] There really should be another crack at trading places. I hope those accredited producers out there in Holywoot can make it happen. [1] https://www.cnbc.com/2019/11/05/some-robinhood-users-were-able-to-trade-with-unlimited-borrowed-money.html https://www.cnbc.com/2019/11/05/some-robinhood-users-were-ab...
- gruez 7y ago
  I think you're misunderstanding the threat model. It's designed to protect unsophisticated investors from fraudsters, not from the investors themselves.
  - johnbrodie 7y ago
    If that's the case, why do Pattern Day Trader rules exist? They seem to generally cover "protecting you from yourself", not from some third-party.
  - conanbatt 7y ago
    I don't think this is true. A clear example is startup stock-options. It is legal for the company to give you that as compensation, you historically get taxed for that compensation, it is legally mandated to get appraisal by a third-party company, but it is generally illegal to offer them for sale in the public.
ve55 7y ago
There have been considerations to up the requirements of purchasing leveraged ETFs, which go up to 3x. But also keep in mind most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours.
- throw17ebfruary 7y ago
  > ...most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours. How do you lose more than the purchase price of the options when buying options?
  - MR4D 7y ago
    I'm not the OP, but I think they meant "trading options" instead of "buying options."
- kenneth 7y ago
  Most people who take unlimited-downside positions (like selling option contracts or short selling) on a broker will be limited to losing however much cash on hand they have in liquid markets. Their broker will issue a margin call (ask for further capital to be deposited to cover any further losses), and if no further deposit is made, will automatically liquidate their position if necessary. So you're unlikely to see your net worth wiped out, you'll simply lose the amount you put in to the account to trade with.
  - throw17ebfruary 7y ago
    I wouldn't count on that. The market might move so fast that the broker can't liquidate the account before the balance goes negative. In that case the broker has an incentive to try to extract the amount from the customer (if they can), instead of eating the loss on the negative balance.
Mvandenbergh 7y ago
Agreed. While I think it is sensible to have rules that prevent gullible members of the public from being bamboozled, I also think that a more sensible policy is what the UK has. Here you can self-certify as a "sophisticated investor" which is basically the same thing except that there is no obligation on anyone to check your self-certification i.e. there is no penalty to claiming to be one when you're not nor is there any penalty for allowing someone to invest who self-certifies but doesn't actually meet the criteria. That seems fair. If you're willing to confirm that then you should be able to invest in whatever damn fool thing you want. (Note that in the UK private individuals can trade things like contracts for difference and spread bets which I actually think is slightly mad)
- asciimike 7y ago
  This is basically Matt Levine's argument [1], though he calls it a Certificate of Dumb Investment: 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.” [1]: https://www.bloomberg.com/opinion/articles/2018-09-24/earning-the-right-to-get-swindled https://www.bloomberg.com/opinion/articles/2018-09-24/earnin... [2]: https://www.bloomberg.com/opinion/articles/2019-06-19/private-markets-could-be-more-public https://www.bloomberg.com/opinion/articles/2019-06-19/privat...
  - nullc 7y ago
    I was okay right up to the never complain part. There is a lot of fraud that goes unpunished because the victims feel hopeless and embarrassed. As a result, it's a lot more attractive to defraud people. A dumb investment might be dumb, it might be likely to be fraud. But if it turns out to actually be fraud, the victims should still be able to seek restitution or otherwise you are giving a free pass to commit fraud and creating a huge economic advantage for people willing to do it over people who aren't.
imeron 7y ago
Or any of the weird coin offerings. Which - if you believe in the thing not being a scam - is essentially a way of financing a company. Just like buying an investment in a small business.
- kenneth 7y ago
  These coin offerings are generally violating securities law.
  - sillysaurusx 7y ago
    Which raises the question of whether securities laws are beneficial in this regard.
    - gruez 7y ago
      The SEC has shut down/suspended numerous ICOs. That sounds like they're working to me.
      - sillysaurusx 7y ago
        Or the value is being transferred out of the US and toward other countries, because you can't even start an ICO in the US unless you have the right connections.
      - nullc 7y ago
        It has shut down some but it mostly seems to issue nominal penalties. For example, the EOS ICO unlawfully raised over $4 billion dollars. The SEC settled with them where they paid the SEC $24 million and the SEC agreed to take no further action. The only lesson here is that if you're going to ignore the law and sell sketchy assets with over-hyped claims to unsophisticated investors in the US... make sure you raise enough that the cost for good attorneys few million to the SEC is just a rounding error.
- nullc 7y ago
  Woah watch out there. I have never seen a 'coin offering' that was remotely like buying an investment in a business, certainly not "just like". Instead, they have mountains of fine print that with extraordinary care make sure the recipient has absolutely no property right in the business, no claim to any title, no voting rights, usually no rights to share in profits, etc. If you wanted to liken them to something offline, they're structured more like making a donation and getting a limited edition t-shirt in return. Maybe with some vague suggestion, but no guarantee, that the t-shirt may entitle you to discounted services in the future should the business actually begin operations. And this is before getting into the fact that a great many of them are essentially outright scams. The fact that many people are thinking that ICOs are "just like buying an investment in a small business"-- is a great example of how the SEC is pretty much flat out failing at this part of their job.
Areading314 7y ago
Totally agree. If we want to protect people there should be some kind of test like a drivers license, and rich people should have to take it too. As it is now people can get into options trading on small caps but are barred from buying things like commercial real estate.
notahacker 7y ago
TVIX isn't soliciting unsophisticated investors for large percentages of their net worth, and if you want to sell TVIX because it's performing terribly, you can.
vpmpaul 7y ago
The only reason accredited investor exists is to reduce free market competition. If everyone could invest in UBER when it was $1 a share it would not make billions for the "accredited investors" when it went public.
tptacek 7y ago
Doesn't accreditation largely influence how securities are marketed? Isn't the liability issue with accreditation on the security seller, and not on the buyer? Why would we want more shady investments marketed to people, even if some what's marketed today turns out to be shady?
- aguyfromnb 7y ago
  Bingo. Look at the fallout from the mortgage crisis/scandals. Buying a house is a straight forward investment. People were getting into mortgages without even understanding basic borrowing rates. In the end we (rightfully in most cases) blamed the brokers for pushing crap on people unknowingly. How is this going to work?
- travisoneill1 7y ago
  This makes a lot of sense, but I don't support it because in this case the price of having less shady investment marketed to people is cutting off access to a large number of legit (though risky) investments.
  - tptacek 7y ago
    Lots of investments that have no business being marketed to retail investors are both (1) not reasonable or safe enough to be marketed and (2) believed in good faith by their marketers to be "legit". So, two responses here: First, when you think about the products that could be marketed without accreditation, you can't just think about the marginal cases where there is some plausible value; you have to think about all of them, bearing in mind that there is virtually no correspondence between how well something is marketed and how plausible it is an investment. See, for instance, the unregulated nutritional supplement market, which is is a hive of scum and villainy that kind of perfectly encapsulates this problem while being self-limited (in the non-pyramid-scheme case) to the amount of colloidal silver solution any person could reasonably purchase --- unlike an investment, which begs its purchaser to plow their life's savings into. Second, contrary to the perspective you get on this issue by just looking at tiny startups, you have to consider that the entire securities industry is in a sense gated on accreditation, because the difference between a security that requires accreditation and one that doesn't is "keeping timely audited findings with the SEC". So for example: if you did away with accreditation, why would companies need to produce audited financials? If your belief is that the edifice of securities regulation is entirely pointless and people should be able to buy any investment product they want and companies should be able to sell any investment product they want, that's a coherent take, but not one ("let's do away with companies having to file official statements") that most mainstream people would find persuasive.
gruez 7y ago
>This is supposed to be protecting unsophisticated investors, but most of the investments prevented here are equity investments in small businesses. While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling. My understanding is that it's supposed to protect investor from fraud (eg. along the lines of ICOs), not necessarily from risky/volatile investments.
- rolltiide 7y ago
  I too think it should be scrapped and I look at how other places do it. Often in other countries I see lower wealth requirements and copy the general US SEC framework but sometimes over countries just have no registration exemptions for a private market, which is even worse. The wealth requirements in US are so aggravating because they pass muster by putting the consequence on the issuer, not actually barring the person from investing. Almost impossible to challenge! But how we got here is that this is a successor to a test, which had horrible guidance and resulted in rampant discrimination - a sign of the times. This proposal reintroduces the test but inherits a more established FINRA testing infrastructure. FINRA tests are still barriers of entry that will hardly make the world more egalitarian as almost all of them require sponsorship from a financial institution - even the test prep materials aren't supposed to be shared. There are ways around it like a bucketshop cant you on payroll and offer you the test but its still an unnecessary and pretentiously exclusionary hurdle, built on purpose.
- SomewhatLikely 7y ago
  Having more money doesn't make you less susceptible to fraud, but does make you less susceptible to ruin from big losses.
  - mbesto 7y ago
    Source for that? I think the general idea is not whether someone is susceptible to fraud, but rather higher likelihood that you have experience with making investments. How much you wanna bet a white collar worker making $200k/year has made more investment-based decisions in their life than a a blue collar worker making $20/hr? I don't necessarily agree with the tenants of the idea of an accredited investor, but it's definitely a way to parse out a large chunk of the population unexperienced with investing.
nullc 7y ago
At least the risk profile of a leveraged ETF is fairly unambiguous and easily discovered. Its very real potential for downside is also matched by a real potential for upside and the available pricing is fair-- even if its risk profile not necessarily matched to your (or anyone elses) financial needs. I think a bigger risk to investors is dishonest/deceptive marketing and extremely risky and often illiquid investments being peddled as sure deals, including ones where the chance of upside is essentially nil and you're lucky if you break even.
- MR4D 7y ago
  > Its very real potential for downside is also matched by a real potential for upside This actually isn't true (and that's a big problem). Leveraged ETFs (such as TVIX) typically are very leaky. [0] [0] - https://seekingalpha.com/article/1864191-what-you-need-to-know-about-the-decay-of-leveraged-etfs https://seekingalpha.com/article/1864191-what-you-need-to-kn...
  - nullc 7y ago
    I originally wrote very real potential for upside and weakened it by dropping the "very", specifically thinking about the drag on leveraged ETFs... :) Guess I didn't go far enough. I feel like this is in the weeds though: some bad investments people get suckered into have extremely high and diversified risk of total loss, but at _best_ can only return a few percent in a year. Not only are they negative EV, but even if you get lucky and it pays off you only end up with money market fund like income. Deals that no one who was informed and knew how to do the relevant math would ever take.
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icedchai 7y ago
One major difference is liquidity. Small business investments have almost none. You're going to be tied up for years, and may actually never be able to get out. If I screw up with TVIX, it's a couple of clicks.
cortesoft 7y ago
I think Matt Levine has a good explanation about accredited investing and what private markets really mean: > But in fact the main thing that distinguishes public and private markets is not their legal status—private markets are mostly open to accredited investors, while public markets are open to everyone—but the fact that private companies get to choose their investors, and public companies don’t. Hedge funds, for instance, are mostly open only to accredited investors, but not all hedge funds are open to all accredited investors. The very best hedge funds mostly aren’t open to anyone: They are at capacity, won’t take new money, and mostly manage money for their own very rich employees. Other hedge funds with long track records of good performance are open to big institutional allocators who can write very large checks. If you are a dentist making $205,000 a year, and you want to invest in hedge funds … someone will definitely sell you a hedge fund! It will not be Renaissance. Just because we legally allow people to invest in whatever they want doesn't mean it will make equal footing between investors. The investments that will accept the people who are currently 'non-accreddited investors' are going to be the worst of the private investments; it will do nothing to help the little guy compete with the rich guys.
- wave_function 7y ago
  Side question: does anyone know the origin of “dentist” being shorthand for “someone who is fairly educated/wealthy and thinks they’re sophisticated, but is actually just dumb money”? I’ve heard it quite a bit, curious about where it comes from.
  - kenneth 7y ago
    A self-reinforcing meme, I'd imagine. The more you hear it, the more you're likely to use it as an example. I've certainly used the phrase "dentist from Ohio" a few times myself — no offense meant to dentists and Ohioans.
- deleted 7y ago
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gist 7y ago
> While at the same time anybody is allowed to buy TVIX, a 2x leveraged VIX ETF, which is basically gambling. Nobody is hyping that and most 'anybodies' don't even know that exists. (I never heard of it but everyday I read about all the wins with startups but typically almost none of the losses).
gnopgnip 7y ago
In many cases small businesses can take on non accredited investors. Like a rule 504 offering if less than $1m is being raised. And if you are raising more than $1m, a 506 offering allows for up to 35 non accredited investors. If you are raising more than $1m and have more than 35 non accredited investors a public offering is compelling.
say_it_as_it_is 7y ago
Accredited investors are not better informed, more intelligent, nor disciplined. They just have more income. People make mistakes by assuming that one's status implies superior capabilities.

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oh_sigh 7y ago

It's an interesting name they gave this concept. According to Wikipedia, "accreditation is the process in which certification of competency, authority, or credibility is presented" But to be an accredited investor, all you need to do is have some money. There is no logical way that you can certify that a person's "competency, authority, or credibility" by merely knowing how much money is in their bank account.

chiph 7y ago
I think the assumption is that even in the case of "trust fund babies" who inherited their wealth, they will have been exposed to enough info about finance to potentially understand the risks. Neither the existing nor the upcoming changes will protect someone like a lottery winner. Unless they seek qualified advice in setting something like a family office up, in which case their intentions are good at least.
cortesoft 7y ago
They let people with enough money be accredited investors on the idea that if you have enough money you won't be devastated if you are a victim of fraud.
- oh_sigh 7y ago
  I understand the reason - I'm saying the name is a joke.
CyanLite2 7y ago
No but they would have the financial ability to withstanding speculative investment losses and (theoretically) have the financial means to hire lawyers and advisers to review investments before making them. Otherwise you'd have grade school teachers and firefighters individually risking their entire retirement on a Series A for their brother-in-law's "next sure thing" rather than their pension plan manager doing the due diligence.

KoftaBob 7y ago

That's because its less about that and more about allowing a certain income class to have exclusive access to certain kinds of investments. A VC firm that offers nothing more than money (larger % of them than you'd think) doesn't want to compete with tons of syndicates consisting of average retail investors. The "accredited investor" gatekeeping allows them to provide very little value and say "doesn't matter, you need us because we're the very few that are allowed to invest in your company".

superflit 7y ago
Working for the finance industry. This is the right answer Gatekeeping
TheRealSteel 7y ago
Precisely. If the government cared about protecting people from poor investments, they would ban gambling.
icedchai 7y ago
If you work in tech, especially FAANG, you are likely surrounded by "accredited investors." There are a lot more of them you think.
SpicyLemonZest 7y ago
If retail investor syndicates can successfully compete with VCs, why aren't squads of senior FAANG engineers doing it today? They're comfortably over the accredited investor threshold.
- icedchai 7y ago
  Probably because they make enough extra money investing in public markets with less hassle and much more liquidity. Why even bother with private investments? 90% of them are going to zero.

miguelmota 7y ago

Official document describing the amendments: https://www.sec.gov/rules/proposed/2019/33-10734.pdf https://www.sec.gov/rules/proposed/2019/33-10734.pdf

kenneth 7y ago

Welcome changes to the accredited investor rules. Of course, would love to see them go even further and let just anyone invest — but this is already a step in the right direction. In all my dealings with the SEC (from working at multiple regulated investment platforms, AngelList and Republic, and now as a VC), it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone. They have great intentions, but are obviously quite careful and conservative about their approach. I think it's important to note two things: 1/ The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." — the last part is important, and these changes go towards furthering that goal. 2/ The SEC is a civilian enforcement agency. They do not write the rules, they are here to interpret them and enforce them. They issue guidance, monitor, and sue entities that break the rules. The rules are written by congress. Even if the SEC wanted to change a rule, they could not do it without following the laws written by congress. At best, they can slightly tweak their interpretations of the rules (as we're seeing here).

baybal2 7y ago
> it's become clear to me that they're extremely pragmatic and want to support innovation and create a level playing field for everyone USA has by far world's most byzantine and bizarre securities laws. To me, this doesn't seem to be going well along that statement.
- carbocation 7y ago
  The SEC doesn't make the laws, though. I tend to agree with both of you and I don't think that's a contradiction.
  - kyrieeschaton 7y ago
    They do though; they have incredibly wide discretion and things like insider trading effectively exist only via SEC regulation.
    - 7y ago

Keverw 7y ago

Kinda interesting they limit who can invest in things, yet you can go to the casino or blow all your money on lottery tickets. Seems like just another way for the rich to keep getting richer. Also always found it odd, the age for lottery and casino were different too, at least in the US. 18 for lotto, 21 for casino.

thephyber 7y ago
This regulation isn’t designed to protect you from yourself (eg addictive behaviors) or “investments” that are obviously bad for even those without a high school education. It’s designed to provide some minimal protection against sophisticated fraudsters (eg Bernie Madoff). SEC doesn’t govern lotto/gambling within states; that happens at a state level, just like alcohol and tobacco. I agree that the USA tends to have an incoherent stance on age of responsibility versus freedoms, but that’s largely because the federated government system and different states have different ideas about how much freedom/responsibilities their people should have.
- rolltiide 7y ago
  This outcome is ridiculous and has no place in American society. It was more tolerable when high growth companies IPO’d at $30mm market caps but that world doesn't exist, serving to put a spotlight on these regulations separating the primary economic growth engine’s opportunities to just the already wealthy.

astura 7y ago

Does anyone here know if entities are required to actually verify their customers are accredited investors (eg with brokerage statements, bank statements, paystubs, etc.) or can they just take the person's word on it?

icedchai 7y ago
They can take a person's word. I signed up for a few sites, to check out various opportunities, before I was actually an accredited investor. It's all "self certified." I am actually one now, FYI.
asciimike 7y ago
When you do the investment deal, you have to certify that you are an accredited investor (e.g. you'll get a SAFE and an "Accredited Investor Questionnaire" or similar document). They won't require proof beyond that (e.g. bank account statements, W-2), but if you lied about it you'll likely have zero recourse if shit hits the fan (which is the only time you would need it). I would also say that most of the time the parties involved know each other trust each other enough to where in practice this shouldn't be a big deal (if you have questions about the money or if someone shouldn't be able to do this, don't take their money). It's the same logic used when cashiers ask you what your age is when purchasing alcohol: if you give them a fake ID and they accept it, that's on them, but if they ask you and you lie, that's on you.
kenneth 7y ago
It depends on whether they're doing a 506(b) or a 506(c) offering. The difference being that the latter can be publicly advertised, whereas the former doesn't allow any public solicitation of investments. In the former case, you can take people at their words (they just declare that they are, and how they are an accredited investor in a statement). In the latter case, you must verify via a statement from a licensed professional (e.g. their CPA) or via their bank.

relaunched 7y ago

I have a hard time understanding who this helps. Clearly there are exceptions for family offices and the spousal exception is strangely broadened in a way that includes same sex, non married couples (and I believe that's a win) - though arguably is much broader. But, an exception for people that pass some relatively basic SEC certifications (who also don't meet some reasonable financial thresholds) or folks that are non-significant wage earners, that work for a VC and want to invest. It's really strange considering now, investment brokers / managers who don't make enough to participate under the old rules can participate AND convince their clients / the market to participate...that seems odd. If there is a reasonable reason to create an income threshold, presumably to protect investors from risky investments who can't withstand the loss, then why create exceptions for people who don't meet the income / asset requirement? If you believe that investment in startups should be regulated, to save us from ourselves, it's hard to imagine this helps the average potential investor.

jonas21 7y ago
The point of the accredited investor regulation is to protect unsophisticated investors who don't understand the risk of investing in startups and other unregistered offerings. These exceptions will let people without a high income or net worth qualify as accredited investors by proving that they have the financial knowledge to understand these risks. For example, anyone can take the Series 65 exam. It sounds like this could be very helpful in allowing people who are not rich to invest in startups while still protecting people who have no idea what they're doing.
- deleted 7y ago
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Nuzzerino 7y ago

A similar bill was passed unanimously in the house in 2017, which seems to have a more broad definition of a professional expert. I am thinking out loud here but what if this is a scenario where the SEC is trying to pass a more restrictive version, so that the more relaxed house bill never gets passed into law? https://www.congress.gov/bill/115th-congress/house-bill/1585/all-info https://www.congress.gov/bill/115th-congress/house-bill/1585...

say_it_as_it_is 7y ago

The people who invested in Bernie Madoff funds were accredited. They believed they ought not ask questions and rock the boat. Trump University also had accredited investors. Softbank has accredited investors. It seems that being an accredited investor isn't protecting anyone from fraud.

chillacy 7y ago
Careful not to equate the presence of false negatives with the absence of true positives. Just because there are accredited investors who were tricked doesn’t mean that there wouldn’t be even more unaccredited investors who could have been tricked.
- say_it_as_it_is 7y ago
  Of course there will be more tricked unaccredited investors because there will be more of them and government can't guide the hand. My point is that the accreditation rule is moot, regardless of income level.

alexmingoia 7y ago

The SEC has no way of knowing whether someone understands the risks of investing or not. If the reasoning is to protect ignorant investors and prevent fraud, it would be more effective and equatable to have a test/certification to be a qualified/investor, rather than banning large swaths of the population from investing. The current SEC rules are inherently discriminatory whereas the law should treat people equally.

crooked-v 7y ago
From my experience working for a company in the real estate investment industry, the biggest gap in investor understanding is in risk vs projected return rate. Almost everyone including accredited investors gravitate towards anything with the highest potential return rate, even when there's great big up-front warnings about a given investment having X, Y, and Z risk factors. With that in mind, even just forcing investors to pass a simple test about risk in different areas of investment (bonds, index funds, major real estate types, etc) would go a long way.

rolltiide 7y ago

Proposal comments to post: all current and former FINRA and NASD license holders should be eligible as accredited. A new unsponsored FINRA test for this specific purpose should be created as well (doesnt need to be in a federal proposal, just what can happen) Finance and econ degree holders eligible too I think this still sets the bar too high. There needs to be some way to opt out of the paternalism and take a chance in the securities market. People are going to lose their shirts, just add a little disclaimer just like in public markets and on gambling posters. Sometimes this will be an efficient allocation of capital for issuers that VCs dont share affinity for.

scarejunba 7y ago

This is because of Obama's JOBS act, right?

ponsin 7y ago

One thing I didn't understand about hedge funds is why they limit themselves to only accepting large sums of money from individuals. That concept appeared a lot in the movie about Bernie Madoff. Is it harder to manage a hedge fund with more investors? Once you get the money from them shouldn't the hedge fund be able to use the money just the same as if it came from few rich people?

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say_it_as_it_is 7y ago

I'm convinced that hedge funds and venture capitalists are against this because it will require their own investors to have a certain level of knowledge about their investments that makes the managers uneasy.