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These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money

by gojomo 6y ago

These are good steps, but abolishing all wealth-tests entirely would still be better. There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. (Over-leveraging into real estate is practically encouraged by public policy.) There's no wealth test against putting all one's cash into gambling, which can be arbitrarily worse than even the riskiest non-fraudulent startup investment, depending on your choice of wagers. (Official state lotteries are among the worst games, with the most manipulative marketing - to a level of deception that would generate lawsuits & legislation if attempted by private actors.) There's no wealth test before purchasing legal but addictive & judgement-impairing substances like alcohol & marijuana. But if you want to put $5-$20K into a friend's business, or a business you know well, the SEC makes it hard unless you're already a millionaire. It's insanely paternalistic & economically destructive - a ghostly holdout from some bad experiences in another era, the 1930s, when the ranges of available information, experience, and alternative temptations were all tiny & quaint compared to the 2020s.

incompatible 6y ago
In any case, we aren't supposed to have "one law for the rich and another for the poor".
throwaway_kufu 6y ago
These law weren’t enacted to keep people with less wealth out, but because people with less wealth were fraudulently victimized in mass. The masses now are most certainly just as, if not more, susceptible to fraud now then they ever were. Then people were literally selling stock certificates on the street, now people line up like sheep to be lead to the slaughter and fight their way to the front. This may be celebrated like a much needed deregulation, but this was pushed by some deep pocketed special interests that can’t wait to give the unemployed masses the ability to day trade right from their phones.
lootsauce 6y ago
Agree it's paternalistic, but you really want to educate yourself whatever the requirements. https://www.macrovoices.com/aia/218-accredited-investor-academy https://www.macrovoices.com/aia/218-accredited-investor-acad...
bobthepanda 6y ago
How many of those are capable of creating systemic financial risk, though? People in the '20s were literally mortgaging their house and car to buy stocks on margin en masse because they took in advertising and word of mouth that told them it was a good idea. You could theoretically also do that at a casino, but practically speaking that's not a big problem. Look at the crypto hype-train that got latched onto by people who didn't do their homework on crypto, or the craziness of WSB on reddit. We are still capable of letting that happen today.
- asdff 6y ago
  People in the 90s were doing the same to buy beanie babies. People will do dumb things with their money. That being said, I don't think things like pattern day trading bans have ever been beneficial to the retail investor. It just keeps poorfolk from engaging in strategies used by wealthier people regularly.
  - bobthepanda 6y ago
    People will do dumb things with their money, but the point of the regulation is to increase frictions on lots of people doing dumb things with their money at the same time. "Beneficial to the retail investor" has nothing to do with it. If one person can't pay their home loan for the month that's the borrower's problem. If millions of people can't pay their home loan for the month that's the bank's problem, and generally speaking that's enough to start bank runs.
- vmception 6y ago
  Which is why there shouldn't be any prohibition exclusively in the securities market. There are even higher wealth tests in some aspects of the commodities market. These things just haven't been challenged in the courts because those wealthy enough don't know or consider this is an issue, and people less wealthy aren't even exposed to these kinds of opportunities and probably also can't afford the court challenge. I think there is room for a challenge and invalidation of the entire concept because the wealth test actually used to be different kinds of tests as recently as the 70s. Those were no good because it led to arbitrary discrimination by the brokers and companies. And now we are back to that because FINRA licenses are more standardized. Can likely invalidate the entire concept with more recent case law such as spending is speech via 1st amendment, 5th amendment and 14th amendment equal application of laws in comparison to the wealth/access dichotomy as well as ability to speculate and gamble in other markets.
tptacek 6y ago
Is there a variant of this framing that doesn't also argue against all securities regulation and a return to the status quo ante of the Great Depression? Because the Accredited Investor standard essentially bypasses securities disclosure laws. Without it, every company would obtain the benefits of being public company, with none of the associated obligations.
- mmm_grayons 6y ago
  I'm of two minds about this - on one hand, we don't want shoe-shine boys losing their savings on a bad investment. On the other, if my friends and I want to pool our money to make an investment I resent being kept out of that sort of thing. Things like opening it to VC fund analysts make a ton of sense.
- nokcha 6y ago
  How about a knowledge/skills test instead of a wealth test? Something like the bar exam, but for investing instead of law. That would keep out people who have no idea what they're doing, without unfairly keeping out knowledgeable middle-class citizens.
  - thursday0987 6y ago
    did you even read the SEC announcement? it is literally the first bullet point: * add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.
    - madamelic 6y ago
      Cool, I was bummed when I googled Series 7 and saw I needed to be sponsored. Looks like series 65 is the way to go since series 82 also requires sponsorship.
georgeecollins 6y ago
>> There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. That is an exageration for publicly traded securities. It used to be possible (in the roaring '20s) to be 10:1 leveraged in public stocks. The SEC forbid that because so many people were wiped out. Nowadays retail stock accounts can under-perform, but it's a big deal when a lot of people see their portfolio decline by 30% -- think 2009. People have gotten wiped out in large numbers on real estate. I just think it is an exaggeration to say people are taking huge risks with a normal stock account
- nickpinkston 6y ago
  No, it's still easy for any asshole to get a margin or options account and lose a ton of money. Here's a recent news story: "20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance" https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/ https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y...
  - georgeecollins 6y ago
    I didn't say it is impossible. It's just relatively rare. The point of the SEC is not prevent anyone from doing something stupid and losing a lot of money. The point is to keep lots of people from doing something stupid. And in particular, to keep lots of people from doing the same stupid thing at the same time! (1929, 2008.. )
    - nickpinkston 6y ago
      I'm unsure how rare it is, but even if it is rare, it may be because anyone motivated enough to know what a margin/options account is and to get one may be sophisticated enough to not lose all of their money doing it.
  - bjt 6y ago
    Worth noting that he didn't actually lose a ton of money. Bad UI just made it appear so.
mywittyname 6y ago
There's a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive. Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed by the owners and directors of companies. Private markets don't have these regulations because the assumption is that past financial success is indicative of financial sophistication. It doesn't prevent fraud, but at least it helps reduce the likelihood of success. If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore. Companies will go back to all being "private" because there are fewer regulations, then there will be another Enron, and a subsequent shift towards regulation to prevent another such scandal.
- otoburb 6y ago
  >>If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore. Couple this with 401Ks now giving retail investors (likely high-fee) choices to invest in private equity[1], and the picture looks much more volatile as the next generation draws closer to retirement. [1] https://www.latimes.com/business/story/2020-06-19/private-equity-401k-plans https://www.latimes.com/business/story/2020-06-19/private-eq...
- colordrops 6y ago
  It's a matter of principle though. You don't restrict the freedom of individuals to protect them from other individuals that are bad actors. You go hard and strong after the bad actors. What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? It's absurd and not in the scope of what government should be doing.
  - bsder 6y ago
    > You don't restrict the freedom of individuals to protect them from other individuals that are bad actors. You go hard and strong after the bad actors. That's fine. But you first up the enforcement and second decrease the qualifications. I can tell you from personal experience that the SEC has a lousy record of enforcement against even serial bad actors. And the civil system is even worse. 4 of 9 startups that I have been involved with have had criminal levels of malfeasance and have gone to court and lost--however, that didn't win anybody any money. And the SEC was nowhere to be found. Perhaps I'm just bad at picking startups, but anecdata from my friends suggests that I'm batting better than most and that the fact that they got judgments against them is the unusual part and not the 50% having malfeasance. Story time of the worst: worked for a startup that had the usual friends and family investment structure. A couple dozen people all at $50K-$100K. No big deal. Came in to do technical work. Okay, once I got there it was clear that everybody was out of their depth and the work was going to be significantly more than expected. Not unusual, and I'm working hourly with some number of hours defrayed by stock options if I think the idea is useful. Start down the path. CEO is spending money like water on marketing. That's not unheard of and probably not even a bad idea. The CEO then gets a "lawyer" from Silicon Valley who attempts a maneuver to take control of the company from the investors without buying them out. And here come the lawyers. So, of course, at this point, a chunk of us demand both the financial records as well as the documents behind the maneuver. Denied, so we need to compel the request. And, of course, once we get the documents, we find that the company has been bled of nearly $1.5 million in cash in what were later found to be illegal arrangements. Off to court we go. So, what are your options? You can sue individuals, but that means piercing the corporate veil. You can force the company into bankruptcy, but if you're found against, you can wind up with a big penalty on your hands. You can report to the SEC, who basically ignore you because this simply isn't worth their time to bother with ($10 million is the minimum to even get them to call you back). And through all of this, you will be spending cash to your lawyers while the opposing side is spending investor cash to fight you. Or, in this instance, has cut a special deal with the "lawyers" by giving them a "retainer" of $300K and now is doing work "for free". Oh, by the way, the clock is ticking. If you don't push the company into bankruptcy soon, that "retainer" can't be clawed back because it will be outside the time window. Fine. File a suit to force payment due and force them in bankruptcy. The opposing "lawyer" shows up and his sole job is to delay while doing nothing. The judge even finds in your favor and admits that he has no sufficient way to penalize the company or the lawyer. And likely won't penalize the lawyer anyway because the court system protects its own--even the scumbags. And, by the way, a significant cohort of the investors are VERY upset with you. They like the con-man, after all. So, you aren't crusaders for justice; you're interlopers who upset the apple cart. And, if you're vulnerable, you may get a suit launched against you by the company for "reasons". Yes, it's a nuisance and you will win, but it will cost you even more money. The moral is: We probably would have been better off to simply let him keep stealing money from people, cut a deal for some level of payment and just walk away. THIS is the reality you are championing for. Just so you know.
elliekelly 6y ago
> It's insanely paternalistic & economically destructive - a ghostly holdout from some bad experiences in another era, the 1930s, when the ranges of available information, experience, and alternative temptations were all tiny & quaint compared to the 2020s. Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks. And this same tired argument comes along, repeatedly, to justify rolling those regulations back so that a handful of people have a chance at striking it rich while we as a group learn those same difficult and expensive lessons all over again. Our securities markets work. They are predictable, mostly fair, and most importantly, they are trusted. Are all of the rules perfect? No. Do some of the rules and regulations have compliance costs that outweigh their benefit? Of course. There is plenty of room for improvement and we should absolutely identify the areas in need of modernization but you’re advocating we tear the whole house down when you haven’t made an effort to understand why it was built this way in the first place.
- ibeckermayer 6y ago
  > Our securities markets work According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “working”? Not according to any rationally justifiable standard. Certainly the impulse to protect grandma’s life savings from predatory fraud is a good one. But the proper way to better society is through empowering individuals to make better decisions. An example of a better system along this principle would be a local (county/state) investment office that you go through that checks over the terms of the deal to make sure the terms are legal and the parties are fully aware of what they’re getting themselves into. That would protect against fraud, without violating my right to freely and consensually associate with other consenting adults. “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections. Your view that these markets are “working” is merely an indication that you lack imagination. How much better would the world be if there weren’t arbitrary restrictions on economic exchange? It’s impossible to know, but history shows that advancements in liberty and justice have breed unprecedented wealth.
deleted 6y ago
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GCA10 6y ago
Actually, the information asymmetries in public vs. private can be huge -- and I don't mind a little SEC paternalism at all. I had an OMG experience trying to look up a very interesting non-public software company on SharePost a week ago. They will offer me a chance to buy something. I don't get any clarity on the cap table, so I'd be completely in the dark on preferences, dilution, etc. I'm being asked to offer a price range before seeing any trading history. And there's no availability (at first) of any financial history. There's potential here to make a uniquely bad investment in what might be a uniquely great company. We won't cry a lot of tears for rich people who make some bad investments in the dark. For people living closer to the edge, having them get fleeced has spillover effects that are ugly enough to argue against letting it all play out with total laissez-faire. Especially if lax rules invite the hustlers to overwhelm the market. (Gresham's law)
JumpCrisscross 6y ago
> abolishing all wealth-tests entirely would still be better The problem is the cost of doing diligence. Not investor competence. In public markets, the cost of producing reports on the issuer. In private markets, almost by definition, it's on the investor. Each investor must thus have the resources, legal at a minimum, to evaluate an opportunity. Given these resources have a high minimum cost, an investor of limited means is faced with two options: forego the opportunity or gamble. When the latter is chosen, it doesn't just hurt the investor per se. It creates a fecund field for fraud, seedstock for scammers. (To say nothing of the fact that when retail investors lose money, it has social and systemic effects in a way that someone who loses 10% of their portfolio on a failed start-up investment does not.) I agree that there might be room for a friends-and-family exemption. But private companies should not be allowed to solicit, directly or indirectly, retail investment dollars.
- hinkley 6y ago
  Family rips each other off all the time. And for some reason it’s the cheated party who has to risk being ostracized if they don’t let it go.
RockIslandLine 6y ago
"But if you want to put $5-$20K into a friend's business, or a business you know well, the SEC makes it hard unless you're already a millionaire." What do you mean? Individuals are still allowed to sign contracts. So write up a specific contract.
- gojomo 6y ago
  The SEC makes it easy to use standard arrangements if the investors are 'accredited'. But mixing in any 'unaccredited' investors drives up the legal complexities and costs, through extra liabilities. A generous (or desperate) founder might still go through the extra headaches to take money from a wider circle, but many potential knowledgeable investors are encumbered and essentially frozen out, simply because they are sub-millionaires, due to extra legal hurdles. It's like everyone who's not a millionaire is a minor, not trusted to contract like an adult - but not based on age or competence, just net worth. Millionaires face no such restrictions – and thus enjoy the state's support in preserving for themselves privileged, first-look access to a class of potentially-lucrative investments. It'd be like if millionaires were granted their driver's license on request, because hey, they can be trusted. And we'll waive their fees for permit applications, because they surely hired good advice before applying. Car registration, marriage license? Free if you're rich, we know you won't be getting into any trouble. But you're not a millionaire? Find a rich sponsor willing to be a counterparty, and pay extra fees, because you poor folks are just too risky to [drive, build, marry, etc].
  - RockIslandLine 6y ago
    "legally complex" is different from "impossible". And yes, people who have years worth of expenses saved are clearly better able to accept risk than someone with $10K in an IRA. You're not making persuasive arguments here at all. An in both theory and in practice I'm on your side.
awinder 6y ago
I always love to see the "fancy public-market securities" lingo upfront :-). I'm interested to see how this plays out, even though I'm not sure I agree, but this may be the last time to make the information density argument. This time should be a good test of that, and it's one of these things that I hope (not too hard) might just inform some policy and take a policy hostage off the table.
m0zg 6y ago
It's not really a "wealth test". It's more of a "is this person likely to have proper legal counsel" test. Or at least that's how I understand its intent.
- gojomo 6y ago
  The 'accredited investor' definition is absolutely & literally a "wealth test". It does not ask if you have legal counsel. Indeed, even being an investment-specialized, bar-licensed lawyer yourself, drafting agreements upon which other 'accredited investors' depend, wouldn't make you 'accredited'! But having $1,000,000 in the bank would. Prior wealth.
  - m0zg 6y ago
    Yes, but someone with $1M in investable capital will almost certainly have a lawyer and they will not be easily taken advantage of. I don't think you can require a lawyer per se in this country. I didn't come up with this myself - that's what Robert Shiller (of Case-Shiller index fame) says in his economics course, which I did take.
nradov 6y ago
I know several regular middle class people who became "accredited" investors by simply lying on the form. While I don't condone that, it seems like no one really verifies assets in most cases.
- gojomo 6y ago
  Indeed, & that's one of the things fueling my righteous anger here. Several now very-rich, even 'celebrity' tier investors have mentioned that they simply faked the accreditation at a crucial early stage. Of course, there's survivorship bias in such stories. But I feel like a sucker for not doing that - and thus losing money in approved things like NASDAQ instead. Or being over-concentrated in my own risky projects – which no SEC rule can protect a person from! – where other private investments would've been usefully uncorrelated. I could've survived a 100% loss in whatever dozen or two startups I might have taken a flyer in – but in fact, they wouldn't have all cratered, and even if they did I'd have had far more insight into investing, and a broader network, than otherwise. Instead, that valuable experience was reserved for the rich, and those willing to lie about their riches. So who is this rule protecting, exactly?

by gojomo 6y ago

incompatible 6y ago

In any case, we aren't supposed to have "one law for the rich and another for the poor".

throwaway_kufu 6y ago

These law weren’t enacted to keep people with less wealth out, but because people with less wealth were fraudulently victimized in mass. The masses now are most certainly just as, if not more, susceptible to fraud now then they ever were. Then people were literally selling stock certificates on the street, now people line up like sheep to be lead to the slaughter and fight their way to the front. This may be celebrated like a much needed deregulation, but this was pushed by some deep pocketed special interests that can’t wait to give the unemployed masses the ability to day trade right from their phones.

lootsauce 6y ago

Agree it's paternalistic, but you really want to educate yourself whatever the requirements. https://www.macrovoices.com/aia/218-accredited-investor-academy https://www.macrovoices.com/aia/218-accredited-investor-acad...

bobthepanda 6y ago

How many of those are capable of creating systemic financial risk, though? People in the '20s were literally mortgaging their house and car to buy stocks on margin en masse because they took in advertising and word of mouth that told them it was a good idea. You could theoretically also do that at a casino, but practically speaking that's not a big problem. Look at the crypto hype-train that got latched onto by people who didn't do their homework on crypto, or the craziness of WSB on reddit. We are still capable of letting that happen today.

asdff 6y ago
People in the 90s were doing the same to buy beanie babies. People will do dumb things with their money. That being said, I don't think things like pattern day trading bans have ever been beneficial to the retail investor. It just keeps poorfolk from engaging in strategies used by wealthier people regularly.
- bobthepanda 6y ago
  People will do dumb things with their money, but the point of the regulation is to increase frictions on lots of people doing dumb things with their money at the same time. "Beneficial to the retail investor" has nothing to do with it. If one person can't pay their home loan for the month that's the borrower's problem. If millions of people can't pay their home loan for the month that's the bank's problem, and generally speaking that's enough to start bank runs.
vmception 6y ago
Which is why there shouldn't be any prohibition exclusively in the securities market. There are even higher wealth tests in some aspects of the commodities market. These things just haven't been challenged in the courts because those wealthy enough don't know or consider this is an issue, and people less wealthy aren't even exposed to these kinds of opportunities and probably also can't afford the court challenge. I think there is room for a challenge and invalidation of the entire concept because the wealth test actually used to be different kinds of tests as recently as the 70s. Those were no good because it led to arbitrary discrimination by the brokers and companies. And now we are back to that because FINRA licenses are more standardized. Can likely invalidate the entire concept with more recent case law such as spending is speech via 1st amendment, 5th amendment and 14th amendment equal application of laws in comparison to the wealth/access dichotomy as well as ability to speculate and gamble in other markets.

tptacek 6y ago

Is there a variant of this framing that doesn't also argue against all securities regulation and a return to the status quo ante of the Great Depression? Because the Accredited Investor standard essentially bypasses securities disclosure laws. Without it, every company would obtain the benefits of being public company, with none of the associated obligations.

mmm_grayons 6y ago
I'm of two minds about this - on one hand, we don't want shoe-shine boys losing their savings on a bad investment. On the other, if my friends and I want to pool our money to make an investment I resent being kept out of that sort of thing. Things like opening it to VC fund analysts make a ton of sense.
nokcha 6y ago
How about a knowledge/skills test instead of a wealth test? Something like the bar exam, but for investing instead of law. That would keep out people who have no idea what they're doing, without unfairly keeping out knowledgeable middle-class citizens.
- thursday0987 6y ago
  did you even read the SEC announcement? it is literally the first bullet point: * add a new category to the definition that permits natural persons to qualify as accredited investors based on certain professional certifications, designations or credentials or other credentials issued by an accredited educational institution, which the Commission may designate from time to time by order. In conjunction with the adoption of the amendments, the Commission designated by order holders in good standing of the Series 7, Series 65, and Series 82 licenses as qualifying natural persons.
  - madamelic 6y ago
    Cool, I was bummed when I googled Series 7 and saw I needed to be sponsored. Looks like series 65 is the way to go since series 82 also requires sponsorship.

georgeecollins 6y ago

>> There's no wealth-test that prevents a person from losing all their money in highly-leveraged investments - from real-estate to fancy public-market securities. That is an exageration for publicly traded securities. It used to be possible (in the roaring '20s) to be 10:1 leveraged in public stocks. The SEC forbid that because so many people were wiped out. Nowadays retail stock accounts can under-perform, but it's a big deal when a lot of people see their portfolio decline by 30% -- think 2009. People have gotten wiped out in large numbers on real estate. I just think it is an exaggeration to say people are taking huge risks with a normal stock account

nickpinkston 6y ago
No, it's still easy for any asshole to get a margin or options account and lose a ton of money. Here's a recent news story: "20-Year-Old Robinhood Customer Dies By Suicide After Seeing A $730,000 Negative Balance" https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-year-old-robinhood-customer-dies-by-suicide-after-seeing-a-730000-negative-balance/ https://www.forbes.com/sites/sergeiklebnikov/2020/06/17/20-y...
- georgeecollins 6y ago
  I didn't say it is impossible. It's just relatively rare. The point of the SEC is not prevent anyone from doing something stupid and losing a lot of money. The point is to keep lots of people from doing something stupid. And in particular, to keep lots of people from doing the same stupid thing at the same time! (1929, 2008.. )
  - nickpinkston 6y ago
    I'm unsure how rare it is, but even if it is rare, it may be because anyone motivated enough to know what a margin/options account is and to get one may be sophisticated enough to not lose all of their money doing it.
- bjt 6y ago
  Worth noting that he didn't actually lose a ton of money. Bad UI just made it appear so.

mywittyname 6y ago

There's a strong financial incentive for the market to engage in fraudulent activities against investors. And the smaller the investor, the greater then incentive. Public companies have regulations that help prevent such fraud by requiring things such as audits by third party accounting firms, and regulating how these audits may be performed. Such regulations came about specifically as the result of fraud committed by the owners and directors of companies. Private markets don't have these regulations because the assumption is that past financial success is indicative of financial sophistication. It doesn't prevent fraud, but at least it helps reduce the likelihood of success. If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore. Companies will go back to all being "private" because there are fewer regulations, then there will be another Enron, and a subsequent shift towards regulation to prevent another such scandal.

otoburb 6y ago
>>If you start making private markets open to everyone, then there's no reason to differentiate between public and private markets anymore. Couple this with 401Ks now giving retail investors (likely high-fee) choices to invest in private equity[1], and the picture looks much more volatile as the next generation draws closer to retirement. [1] https://www.latimes.com/business/story/2020-06-19/private-equity-401k-plans https://www.latimes.com/business/story/2020-06-19/private-eq...
colordrops 6y ago
It's a matter of principle though. You don't restrict the freedom of individuals to protect them from other individuals that are bad actors. You go hard and strong after the bad actors. What other examples of laws outside of finance can you cite where individuals are restricted in order to protect them from other bad actors? It's absurd and not in the scope of what government should be doing.
- bsder 6y ago
  > You don't restrict the freedom of individuals to protect them from other individuals that are bad actors. You go hard and strong after the bad actors. That's fine. But you first up the enforcement and second decrease the qualifications. I can tell you from personal experience that the SEC has a lousy record of enforcement against even serial bad actors. And the civil system is even worse. 4 of 9 startups that I have been involved with have had criminal levels of malfeasance and have gone to court and lost--however, that didn't win anybody any money. And the SEC was nowhere to be found. Perhaps I'm just bad at picking startups, but anecdata from my friends suggests that I'm batting better than most and that the fact that they got judgments against them is the unusual part and not the 50% having malfeasance. Story time of the worst: worked for a startup that had the usual friends and family investment structure. A couple dozen people all at $50K-$100K. No big deal. Came in to do technical work. Okay, once I got there it was clear that everybody was out of their depth and the work was going to be significantly more than expected. Not unusual, and I'm working hourly with some number of hours defrayed by stock options if I think the idea is useful. Start down the path. CEO is spending money like water on marketing. That's not unheard of and probably not even a bad idea. The CEO then gets a "lawyer" from Silicon Valley who attempts a maneuver to take control of the company from the investors without buying them out. And here come the lawyers. So, of course, at this point, a chunk of us demand both the financial records as well as the documents behind the maneuver. Denied, so we need to compel the request. And, of course, once we get the documents, we find that the company has been bled of nearly $1.5 million in cash in what were later found to be illegal arrangements. Off to court we go. So, what are your options? You can sue individuals, but that means piercing the corporate veil. You can force the company into bankruptcy, but if you're found against, you can wind up with a big penalty on your hands. You can report to the SEC, who basically ignore you because this simply isn't worth their time to bother with ($10 million is the minimum to even get them to call you back). And through all of this, you will be spending cash to your lawyers while the opposing side is spending investor cash to fight you. Or, in this instance, has cut a special deal with the "lawyers" by giving them a "retainer" of $300K and now is doing work "for free". Oh, by the way, the clock is ticking. If you don't push the company into bankruptcy soon, that "retainer" can't be clawed back because it will be outside the time window. Fine. File a suit to force payment due and force them in bankruptcy. The opposing "lawyer" shows up and his sole job is to delay while doing nothing. The judge even finds in your favor and admits that he has no sufficient way to penalize the company or the lawyer. And likely won't penalize the lawyer anyway because the court system protects its own--even the scumbags. And, by the way, a significant cohort of the investors are VERY upset with you. They like the con-man, after all. So, you aren't crusaders for justice; you're interlopers who upset the apple cart. And, if you're vulnerable, you may get a suit launched against you by the company for "reasons". Yes, it's a nuisance and you will win, but it will cost you even more money. The moral is: We probably would have been better off to simply let him keep stealing money from people, cut a deal for some level of payment and just walk away. THIS is the reality you are championing for. Just so you know.

elliekelly 6y ago

> It's insanely paternalistic & economically destructive - a ghostly holdout from some bad experiences in another era, the 1930s, when the ranges of available information, experience, and alternative temptations were all tiny & quaint compared to the 2020s. Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks. And this same tired argument comes along, repeatedly, to justify rolling those regulations back so that a handful of people have a chance at striking it rich while we as a group learn those same difficult and expensive lessons all over again. Our securities markets work. They are predictable, mostly fair, and most importantly, they are trusted. Are all of the rules perfect? No. Do some of the rules and regulations have compliance costs that outweigh their benefit? Of course. There is plenty of room for improvement and we should absolutely identify the areas in need of modernization but you’re advocating we tear the whole house down when you haven’t made an effort to understand why it was built this way in the first place.

ibeckermayer 6y ago
> Our securities markets work According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “working”? Not according to any rationally justifiable standard. Certainly the impulse to protect grandma’s life savings from predatory fraud is a good one. But the proper way to better society is through empowering individuals to make better decisions. An example of a better system along this principle would be a local (county/state) investment office that you go through that checks over the terms of the deal to make sure the terms are legal and the parties are fully aware of what they’re getting themselves into. That would protect against fraud, without violating my right to freely and consensually associate with other consenting adults. “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections. Your view that these markets are “working” is merely an indication that you lack imagination. How much better would the world be if there weren’t arbitrary restrictions on economic exchange? It’s impossible to know, but history shows that advancements in liberty and justice have breed unprecedented wealth.

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GCA10 6y ago

Actually, the information asymmetries in public vs. private can be huge -- and I don't mind a little SEC paternalism at all. I had an OMG experience trying to look up a very interesting non-public software company on SharePost a week ago. They will offer me a chance to buy something. I don't get any clarity on the cap table, so I'd be completely in the dark on preferences, dilution, etc. I'm being asked to offer a price range before seeing any trading history. And there's no availability (at first) of any financial history. There's potential here to make a uniquely bad investment in what might be a uniquely great company. We won't cry a lot of tears for rich people who make some bad investments in the dark. For people living closer to the edge, having them get fleeced has spillover effects that are ugly enough to argue against letting it all play out with total laissez-faire. Especially if lax rules invite the hustlers to overwhelm the market. (Gresham's law)

JumpCrisscross 6y ago

> abolishing all wealth-tests entirely would still be better The problem is the cost of doing diligence. Not investor competence. In public markets, the cost of producing reports on the issuer. In private markets, almost by definition, it's on the investor. Each investor must thus have the resources, legal at a minimum, to evaluate an opportunity. Given these resources have a high minimum cost, an investor of limited means is faced with two options: forego the opportunity or gamble. When the latter is chosen, it doesn't just hurt the investor per se. It creates a fecund field for fraud, seedstock for scammers. (To say nothing of the fact that when retail investors lose money, it has social and systemic effects in a way that someone who loses 10% of their portfolio on a failed start-up investment does not.) I agree that there might be room for a friends-and-family exemption. But private companies should not be allowed to solicit, directly or indirectly, retail investment dollars.

hinkley 6y ago
Family rips each other off all the time. And for some reason it’s the cheated party who has to risk being ostracized if they don’t let it go.

RockIslandLine 6y ago

"But if you want to put $5-$20K into a friend's business, or a business you know well, the SEC makes it hard unless you're already a millionaire." What do you mean? Individuals are still allowed to sign contracts. So write up a specific contract.

gojomo 6y ago
The SEC makes it easy to use standard arrangements if the investors are 'accredited'. But mixing in any 'unaccredited' investors drives up the legal complexities and costs, through extra liabilities. A generous (or desperate) founder might still go through the extra headaches to take money from a wider circle, but many potential knowledgeable investors are encumbered and essentially frozen out, simply because they are sub-millionaires, due to extra legal hurdles. It's like everyone who's not a millionaire is a minor, not trusted to contract like an adult - but not based on age or competence, just net worth. Millionaires face no such restrictions – and thus enjoy the state's support in preserving for themselves privileged, first-look access to a class of potentially-lucrative investments. It'd be like if millionaires were granted their driver's license on request, because hey, they can be trusted. And we'll waive their fees for permit applications, because they surely hired good advice before applying. Car registration, marriage license? Free if you're rich, we know you won't be getting into any trouble. But you're not a millionaire? Find a rich sponsor willing to be a counterparty, and pay extra fees, because you poor folks are just too risky to [drive, build, marry, etc].
- RockIslandLine 6y ago
  "legally complex" is different from "impossible". And yes, people who have years worth of expenses saved are clearly better able to accept risk than someone with $10K in an IRA. You're not making persuasive arguments here at all. An in both theory and in practice I'm on your side.

awinder 6y ago

I always love to see the "fancy public-market securities" lingo upfront :-). I'm interested to see how this plays out, even though I'm not sure I agree, but this may be the last time to make the information density argument. This time should be a good test of that, and it's one of these things that I hope (not too hard) might just inform some policy and take a policy hostage off the table.

m0zg 6y ago

It's not really a "wealth test". It's more of a "is this person likely to have proper legal counsel" test. Or at least that's how I understand its intent.

gojomo 6y ago
The 'accredited investor' definition is absolutely & literally a "wealth test". It does not ask if you have legal counsel. Indeed, even being an investment-specialized, bar-licensed lawyer yourself, drafting agreements upon which other 'accredited investors' depend, wouldn't make you 'accredited'! But having $1,000,000 in the bank would. Prior wealth.
- m0zg 6y ago
  Yes, but someone with $1M in investable capital will almost certainly have a lawyer and they will not be easily taken advantage of. I don't think you can require a lawyer per se in this country. I didn't come up with this myself - that's what Robert Shiller (of Case-Shiller index fame) says in his economics course, which I did take.

nradov 6y ago

I know several regular middle class people who became "accredited" investors by simply lying on the form. While I don't condone that, it seems like no one really verifies assets in most cases.

gojomo 6y ago
Indeed, & that's one of the things fueling my righteous anger here. Several now very-rich, even 'celebrity' tier investors have mentioned that they simply faked the accreditation at a crucial early stage. Of course, there's survivorship bias in such stories. But I feel like a sucker for not doing that - and thus losing money in approved things like NASDAQ instead. Or being over-concentrated in my own risky projects – which no SEC rule can protect a person from! – where other private investments would've been usefully uncorrelated. I could've survived a 100% loss in whatever dozen or two startups I might have taken a flyer in – but in fact, they wouldn't have all cratered, and even if they did I'd have had far more insight into investing, and a broader network, than otherwise. Instead, that valuable experience was reserved for the rich, and those willing to lie about their riches. So who is this rule protecting, exactly?