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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 t

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.
    - dragonwriter 7y ago
      > They do though; they have incredibly wide discretion and things like insider trading effectively exist only via SEC regulation. No, insider trading is the subject of laws passed by Congress; at a minimum, the Insider Trading Sanctions Act of 1984 and Insider Trading and Securities Exchange Act of 1988. And those laws are where the SEC enforcement powers over insider trading come from.
      - kyrieeschaton 7y ago
        That's true to a point, but neither of those pieces of legislation actually define "insider trading" (although they do establish penalties for it). The power is more or less delegated to the SEC. There have been recent attempts to codify their present interpretation in statutory law. https://www.natlawreview.com/article/house-passes-proposed-legislation-defining-insider-trading https://www.natlawreview.com/article/house-passes-proposed-l... Congress in general gives extremely wide power to particular administrative bodies that does result in conduct being treated as legal or illegal purely as a result of shifting regulations. You can argue that it "derives from" legislation at some level of removal so they're not "making law"; that's a distinction without a difference.
        dragonwriter 7y ago
        > That's true to a point, but neither of those pieces of legislation actually define "insider trading" That's true in the narrow sense that they don't have a definitions section with the term “insider trading” and a definition. They both use “insider trading” in their titles and internal headings of the code sections they add, and specify the covered behavior (which differs slightly between the two) in the body, “purchasing or selling a security while in possession of material, nonpublic information” (15 USC 78t-1) and “purchasing or selling a security or security-based swap agreement while in possession of material, nonpublic information, or...communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products” (15 USC 78u-1.) While Congress did give the SEC the ability to set the rules around insider trading, it didn't give the SEC a blank check which the SEC used to pull the idea of insider trading and regulating it out of thin air.
- Ididntdothis 7y ago
  I think a lot of weirdness in US regulation is because of Congress having lost the ability to make clear headed laws. There is so much friction in the partisan fights that they don’t have time and energy to write clear laws that make sense.
  - dragonwriter 7y ago
    > ...Congress having lost the ability to make clear headed laws. When do you imagine they had such ability, and does much of th Byzantine nature of the securities laws really post-date that period? > There is so much friction in the partisan fights. No more than usual, except in the sense that because of the partisan realignment (or two overlapping realignments, one stemming from the New Deal itself, the other from Johnson's signing on to civil rights) from the New Deal until the 1990s the bitter ideological fights were somewhat less often aligned with party boundaries.
    - Ididntdothis 7y ago
      “bitter ideological fights were somewhat less often aligned with party boundaries.” This is what has made things worse in my view. The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do.
      - dragonwriter 7y ago
        > The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do. They don't vote any less for what they think is right, either. Political expediency has always been a major factor, even during the realignment when the national party may not have been as big of a factor (though it was always a big factor) in the expediency calculation.
        DaiPlusPlus 7y ago
        > They don't vote any less for what they think is right, either I’d like to avoid the use of the all-encompassing “they” when referring to US politics. It’s demonstrable that one, specific, major political party lost all semblance of a moral compass (or even an ideological compass) in the past couple of decades and it would be an error of judgement to presume they vote for and support what they actually believe is morally right - even by their own definition of what is right and good.
- empath75 7y ago
  It also has the most successful stock markets.
- AdamN 7y ago
  Which countries have less bizarre and byzantine securities laws?
  - alasdair_ 7y ago
    Somalia and Sealand.
gist 7y ago
> Would love to see them go even further and let just anyone invest Very broad statement. 'Anyone' in 'any' amount? Surely you are not advocating that. Are you? In what way do you think the average person 'anyone' knows enough to essentially bet on a typical startup (called it 'gambling')? So you have a typical person living paycheck to paycheck but yes let them put whatever savings they might have into a startup?
- kenneth 7y ago
  Actually, I am. I don't believe that restrictions on private investments make sense. If anything, they perpetuate the "rich get richer, poor get poorer" problem. Unaccredited investors are kept out of great potential wealth creation. The problem is not bad investments, it's fraudulent ones. Fraud is still illegal even if you kill the accredited investors restrictions.
  - kelnos 7y ago
    I do generally agree with you that the accredited investor definition should just be scrapped entirely, but the problem with fraud is that you usually don't find out about it until your investment is gone, and prosecutions often aren't able to recover anywhere near enough to make the investors whole again. And even when they do, it can take months or years. Someone with a $20M net worth can deal with losing $1M. It sucks, but it's not going to put them on the streets. Someone who puts all of their savings into a fraudulent investment then becomes one car break-down away from not paying their bills. Consider also if that person is retired and is living on a fixed income. The kind of people in the latter group are probably more likely to fall for a scam or fraud. I would love to lift investment restrictions -- I absolutely agree that this is a "richer get richer, poor get poorer" issue -- but not without a way to better protect more vulnerable investors. The first thing that comes to mind is some sort of government-provided investment fraud insurance. But then I worry about perverse incentives: every time someone's investment tanks, they're incentivized to try to prove that the investment was a fraud.
    - ativzzz 7y ago
bsder 7y ago
> The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." The problem with small investors is that it is really damn hard to bring a CEO doing obviously fraudulent things to heel. It takes a significant fraction of a million dollars to bring a successful lawsuit--and what you get in the end isn't worth much. The SEC needs to be much more vigilant on this front if they want to increase the investor pool significantly.
- kenneth 7y ago
  The lawsuit isn't worth it for large investors either. It's much easier to write off your investment than to try to spend a ton of money and energy fighting for scraps, nuking your reputation as a founder-friendly investor in the process. That's why VCs suing portfolio companies is so rare. Only major case of recent memory is Benchmark and Uber, when a $10B+ position was at stake.
- briandear 7y ago
  > it is really damn hard to bring a CEO doing obviously fraudulent things to heel. If it’s “obviously” fraudulent, why isn’t law enforcement involved? No lawsuit required since fraud is a crime.
  - bsder 7y ago
    They could. But the FBI, SEC and IRS probably won't move unless you present them with an absolute slam dunk worth $5 million or more in direct penalties. If you're below that range, you're probably going to have to file a civil lawsuit. And, after your win that, one of the TLA's might pay attention. This is a problem if you genuinely want more small companies funded by more small investors. If the SEC doesn't figure out how to police the $1-$5 million range of companies, all they are doing is creating a nice fertile ground for conmen.
  - qtplatypus 7y ago
    Because "obvious" might not rise to the level of "beyond reasonable doubt".
Nuzzerino 7y ago
Congress did pass a bill unanimously, actually, but the Senate was too busy bickering about Trump to take it up on their end: https://www.congress.gov/bill/115th-congress/house-bill/1585/all-info https://www.congress.gov/bill/115th-congress/house-bill/1585...
gumby 7y ago
> Of course, would love to see them go even further and let just anyone invest Are you aware of the history of the accredited investor rules? When just anyone could invest there was too much opportunity for swindlers .. a problem that goes back the Mississippi company back in 1719. Televangelists defrauding poor people is bad enough; we don’t need wall atreet bucket shops doing the same.
- jrs95 7y ago
  If anyone in power actually gave a shit about that why do we still have lotteries and casinos?
  - alasdair_ 7y ago
    Because a lot of the money from lotteries and casinos goes to the people (or at least controlled by the people) in power? Contrast that with small angel investments from “widows and orphans” - that money generally doesn’t end up controlled by the government.
- ibeckermayer 7y ago
  Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them. The fact that some people might get swindled is not an argument for why I shouldn't be allowed to invest my money how I see fit. Just like the the fact that somebody might sell a defective toothbrush doesn't justify forcing me to get the approval of some bureaucrat in order to buy one.
  - octodog 7y ago
    That's a nice idea. But here in the real world financial fraud happens and it is frequently not resolved by the courts and the justice system.
  - alasdair_ 7y ago
    > Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them. Non-accredited investors, by definition, don’t have a lot of money. If that money is stolen from them via fraud, where does the money to fund the lawsuit come from? What if the total potential judgement is less than the cost of the court case? Regulations exist, in part, because legal remedies are incredibly inefficient.
nradov 7y ago
Anyone already can invest through the simple expedient of lying about their assets and income. I know people who did this in order to invest in pre-IPO stock. Some financial services companies do minimal verification, and even if an unaccredited investor gets caught there's no real punishment. (I am not recommending breaking the law.)
- alasdair_ 7y ago
  Exactly. And if you lie, you (righly) don’t get the default protections available to small investors.
alasdair_ 7y ago
As someone who has raised angel and VC money in the past, I find the accredited investor rules useful for the company as well as for protecting individuals. Having a clear standard that I can point to to say “these investors are grown-ups that knew what they were investing in” helps minimize things like superfluous lawsuits from people that really shouldn’t have been risking their only savings in an angel investment. I don’t want to dig deep into an angel’s personal finances to determine if they can really afford to invest or not based on savings and risk profile and having a legal bar an investor has to meet makes the process of raising money slightly less onerous.

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.
  - dragonwriter 7y ago
    > They do though; they have incredibly wide discretion and things like insider trading effectively exist only via SEC regulation. No, insider trading is the subject of laws passed by Congress; at a minimum, the Insider Trading Sanctions Act of 1984 and Insider Trading and Securities Exchange Act of 1988. And those laws are where the SEC enforcement powers over insider trading come from.
    - kyrieeschaton 7y ago
      That's true to a point, but neither of those pieces of legislation actually define "insider trading" (although they do establish penalties for it). The power is more or less delegated to the SEC. There have been recent attempts to codify their present interpretation in statutory law. https://www.natlawreview.com/article/house-passes-proposed-legislation-defining-insider-trading https://www.natlawreview.com/article/house-passes-proposed-l... Congress in general gives extremely wide power to particular administrative bodies that does result in conduct being treated as legal or illegal purely as a result of shifting regulations. You can argue that it "derives from" legislation at some level of removal so they're not "making law"; that's a distinction without a difference.
      - dragonwriter 7y ago
        > That's true to a point, but neither of those pieces of legislation actually define "insider trading" That's true in the narrow sense that they don't have a definitions section with the term “insider trading” and a definition. They both use “insider trading” in their titles and internal headings of the code sections they add, and specify the covered behavior (which differs slightly between the two) in the body, “purchasing or selling a security while in possession of material, nonpublic information” (15 USC 78t-1) and “purchasing or selling a security or security-based swap agreement while in possession of material, nonpublic information, or...communicating such information in connection with, a transaction on or through the facilities of a national securities exchange or from or through a broker or dealer, and which is not part of a public offering by an issuer of securities other than standardized options or security futures products” (15 USC 78u-1.) While Congress did give the SEC the ability to set the rules around insider trading, it didn't give the SEC a blank check which the SEC used to pull the idea of insider trading and regulating it out of thin air.
Ididntdothis 7y ago
I think a lot of weirdness in US regulation is because of Congress having lost the ability to make clear headed laws. There is so much friction in the partisan fights that they don’t have time and energy to write clear laws that make sense.
- dragonwriter 7y ago
  > ...Congress having lost the ability to make clear headed laws. When do you imagine they had such ability, and does much of th Byzantine nature of the securities laws really post-date that period? > There is so much friction in the partisan fights. No more than usual, except in the sense that because of the partisan realignment (or two overlapping realignments, one stemming from the New Deal itself, the other from Johnson's signing on to civil rights) from the New Deal until the 1990s the bitter ideological fights were somewhat less often aligned with party boundaries.
  - Ididntdothis 7y ago
    “bitter ideological fights were somewhat less often aligned with party boundaries.” This is what has made things worse in my view. The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do.
    - dragonwriter 7y ago
      > The people in Congress don’t vote anymore for what they personally think is right but what the party tells them to do. They don't vote any less for what they think is right, either. Political expediency has always been a major factor, even during the realignment when the national party may not have been as big of a factor (though it was always a big factor) in the expediency calculation.
      - DaiPlusPlus 7y ago
        > They don't vote any less for what they think is right, either I’d like to avoid the use of the all-encompassing “they” when referring to US politics. It’s demonstrable that one, specific, major political party lost all semblance of a moral compass (or even an ideological compass) in the past couple of decades and it would be an error of judgement to presume they vote for and support what they actually believe is morally right - even by their own definition of what is right and good.
empath75 7y ago
It also has the most successful stock markets.
AdamN 7y ago
Which countries have less bizarre and byzantine securities laws?
- alasdair_ 7y ago
  Somalia and Sealand.

gist 7y ago

> Would love to see them go even further and let just anyone invest Very broad statement. 'Anyone' in 'any' amount? Surely you are not advocating that. Are you? In what way do you think the average person 'anyone' knows enough to essentially bet on a typical startup (called it 'gambling')? So you have a typical person living paycheck to paycheck but yes let them put whatever savings they might have into a startup?

kenneth 7y ago
Actually, I am. I don't believe that restrictions on private investments make sense. If anything, they perpetuate the "rich get richer, poor get poorer" problem. Unaccredited investors are kept out of great potential wealth creation. The problem is not bad investments, it's fraudulent ones. Fraud is still illegal even if you kill the accredited investors restrictions.
- kelnos 7y ago
  I do generally agree with you that the accredited investor definition should just be scrapped entirely, but the problem with fraud is that you usually don't find out about it until your investment is gone, and prosecutions often aren't able to recover anywhere near enough to make the investors whole again. And even when they do, it can take months or years. Someone with a $20M net worth can deal with losing $1M. It sucks, but it's not going to put them on the streets. Someone who puts all of their savings into a fraudulent investment then becomes one car break-down away from not paying their bills. Consider also if that person is retired and is living on a fixed income. The kind of people in the latter group are probably more likely to fall for a scam or fraud. I would love to lift investment restrictions -- I absolutely agree that this is a "richer get richer, poor get poorer" issue -- but not without a way to better protect more vulnerable investors. The first thing that comes to mind is some sort of government-provided investment fraud insurance. But then I worry about perverse incentives: every time someone's investment tanks, they're incentivized to try to prove that the investment was a fraud.
  - ativzzz 7y ago

bsder 7y ago

> The stated mission of the SEC is "to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation." The problem with small investors is that it is really damn hard to bring a CEO doing obviously fraudulent things to heel. It takes a significant fraction of a million dollars to bring a successful lawsuit--and what you get in the end isn't worth much. The SEC needs to be much more vigilant on this front if they want to increase the investor pool significantly.

kenneth 7y ago
The lawsuit isn't worth it for large investors either. It's much easier to write off your investment than to try to spend a ton of money and energy fighting for scraps, nuking your reputation as a founder-friendly investor in the process. That's why VCs suing portfolio companies is so rare. Only major case of recent memory is Benchmark and Uber, when a $10B+ position was at stake.
briandear 7y ago
> it is really damn hard to bring a CEO doing obviously fraudulent things to heel. If it’s “obviously” fraudulent, why isn’t law enforcement involved? No lawsuit required since fraud is a crime.
- bsder 7y ago
  They could. But the FBI, SEC and IRS probably won't move unless you present them with an absolute slam dunk worth $5 million or more in direct penalties. If you're below that range, you're probably going to have to file a civil lawsuit. And, after your win that, one of the TLA's might pay attention. This is a problem if you genuinely want more small companies funded by more small investors. If the SEC doesn't figure out how to police the $1-$5 million range of companies, all they are doing is creating a nice fertile ground for conmen.
- qtplatypus 7y ago
  Because "obvious" might not rise to the level of "beyond reasonable doubt".

Nuzzerino 7y ago

Congress did pass a bill unanimously, actually, but the Senate was too busy bickering about Trump to take it up on their end: https://www.congress.gov/bill/115th-congress/house-bill/1585/all-info https://www.congress.gov/bill/115th-congress/house-bill/1585...

gumby 7y ago

> Of course, would love to see them go even further and let just anyone invest Are you aware of the history of the accredited investor rules? When just anyone could invest there was too much opportunity for swindlers .. a problem that goes back the Mississippi company back in 1719. Televangelists defrauding poor people is bad enough; we don’t need wall atreet bucket shops doing the same.

jrs95 7y ago
If anyone in power actually gave a shit about that why do we still have lotteries and casinos?
- alasdair_ 7y ago
  Because a lot of the money from lotteries and casinos goes to the people (or at least controlled by the people) in power? Contrast that with small angel investments from “widows and orphans” - that money generally doesn’t end up controlled by the government.
ibeckermayer 7y ago
Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them. The fact that some people might get swindled is not an argument for why I shouldn't be allowed to invest my money how I see fit. Just like the the fact that somebody might sell a defective toothbrush doesn't justify forcing me to get the approval of some bureaucrat in order to buy one.
- octodog 7y ago
  That's a nice idea. But here in the real world financial fraud happens and it is frequently not resolved by the courts and the justice system.
- alasdair_ 7y ago
  > Fraud is already illegal, and if it's happening then the defrauded parties should take the swindlers to court and prove it, and the justice system should punish them. Non-accredited investors, by definition, don’t have a lot of money. If that money is stolen from them via fraud, where does the money to fund the lawsuit come from? What if the total potential judgement is less than the cost of the court case? Regulations exist, in part, because legal remedies are incredibly inefficient.

nradov 7y ago

Anyone already can invest through the simple expedient of lying about their assets and income. I know people who did this in order to invest in pre-IPO stock. Some financial services companies do minimal verification, and even if an unaccredited investor gets caught there's no real punishment. (I am not recommending breaking the law.)

alasdair_ 7y ago
Exactly. And if you lie, you (righly) don’t get the default protections available to small investors.

alasdair_ 7y ago

As someone who has raised angel and VC money in the past, I find the accredited investor rules useful for the company as well as for protecting individuals. Having a clear standard that I can point to to say “these investors are grown-ups that knew what they were investing in” helps minimize things like superfluous lawsuits from people that really shouldn’t have been risking their only savings in an angel investment. I don’t want to dig deep into an angel’s personal finances to determine if they can really afford to invest or not based on savings and risk profile and having a legal bar an investor has to meet makes the process of raising money slightly less onerous.