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).
> 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.
> 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.
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.
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.
> 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?
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.
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.
>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.
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)
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?
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.
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.
A walk down r/WallStreetBets shows you that if there is an argument about a gov agency protecting unsophisticated investors, its failing spectacularly.
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.
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.
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.
> 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).
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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?
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".
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.
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?
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.
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.
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?
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.
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.
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.
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.
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).
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.
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.
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.
kenneth|6 years ago
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).
gumby|6 years ago
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.
bsder|6 years ago
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.
alasdair_|6 years ago
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.
nradov|6 years ago
(I am not recommending breaking the law.)
gist|6 years ago
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?
baybal2|6 years ago
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.
Nuzzerino|6 years ago
travisoneill1|6 years ago
cortesoft|6 years ago
> 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.
gruez|6 years ago
My understanding is that it's supposed to protect investor from fraud (eg. along the lines of ICOs), not necessarily from risky/volatile investments.
Mvandenbergh|6 years ago
(Note that in the UK private individuals can trade things like contracts for difference and spread bets which I actually think is slightly mad)
tptacek|6 years ago
Areading314|6 years ago
notahacker|6 years ago
conanbatt|6 years ago
nullc|6 years ago
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.
icedchai|6 years ago
gnopgnip|6 years ago
gist|6 years ago
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).
ve55|6 years ago
say_it_as_it_is|6 years ago
imeron|6 years ago
unknown|6 years ago
[deleted]
vpmpaul|6 years ago
Keverw|6 years ago
thephyber|6 years ago
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.
miguelmota|6 years ago
aguyfromnb|6 years ago
Hang on to your hats!
oh_sigh|6 years ago
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.
CyanLite2|6 years ago
cortesoft|6 years ago
chiph|6 years ago
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.
relaunched|6 years ago
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|6 years ago
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.
Nuzzerino|6 years ago
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...
KoftaBob|6 years ago
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".
SpicyLemonZest|6 years ago
TheRealSteel|6 years ago
icedchai|6 years ago
superflit|6 years ago
This is the right answer
Gatekeeping
ponsin|6 years ago
unknown|6 years ago
[deleted]
alexmingoia|6 years ago
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|6 years ago
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.
unknown|6 years ago
[deleted]
astura|6 years ago
asciimike|6 years ago
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.
icedchai|6 years ago
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.
kenneth|6 years ago
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.
rolltiide|6 years ago
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.
dswalter|6 years ago
kenneth|6 years ago
say_it_as_it_is|6 years ago
scarejunba|6 years ago
say_it_as_it_is|6 years ago
It seems that being an accredited investor isn't protecting anyone from fraud.
chillacy|6 years ago