
SEC proposes changes to “accredited investor” definition - s_r_n
https://www.dlapiper.com/en/us/insights/publications/2020/01/sec-proposes-changes-to-accredited-investor-definition/
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kenneth
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).

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gist
> 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?

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kenneth
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.

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kelnos
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.

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ativzzz
It sounds then, instead of accredited investors, we need an accredited capital
investment designation. Allow anyone to invest, but require those who would
seek investment from anyone to be under more scrutiny. Of course, this is only
if the one seeking investment choose to do so.

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nicd
Isn't this just called a "public company"? (Not sure if your comment was
tongue-in-cheek. If not, I'm genuinely unclear how this is different from the
current situation.)

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ativzzz
Hahaha yea you're right, looks like I invented public companies a few hundred
years after other people.

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travisoneill1
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.

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tptacek
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?

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travisoneill1
This makes a lot of sense, but I don't support it because in this case the
price of having less shady investment marketed to people is cutting off access
to a large number of legit (though risky) investments.

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tptacek
Lots of investments that have no business being marketed to retail investors
are both (1) not reasonable or safe enough to be marketed and (2) believed in
good faith by their marketers to be "legit".

So, two responses here:

First, when you think about the products that could be marketed without
accreditation, you can't just think about the marginal cases where there is
some plausible value; you have to think about _all_ of them, bearing in mind
that there is virtually no correspondence between how well something is
marketed and how plausible it is an investment. See, for instance, the
unregulated nutritional supplement market, which is is a hive of scum and
villainy that kind of perfectly encapsulates this problem while being self-
limited (in the non-pyramid-scheme case) to the amount of colloidal silver
solution any person could reasonably purchase --- unlike an investment, which
begs its purchaser to plow their life's savings into.

Second, contrary to the perspective you get on this issue by just looking at
tiny startups, you have to consider that the entire securities industry is in
a sense gated on accreditation, because the difference between a security that
requires accreditation and one that doesn't is "keeping timely audited
findings with the SEC". So for example: if you did away with accreditation,
why would companies need to produce audited financials?

If your belief is that the edifice of securities regulation is entirely
pointless and people should be able to buy any investment product they want
and companies should be able to sell any investment product they want, that's
a coherent take, but not one ("let's do away with companies having to file
official statements") that most mainstream people would find persuasive.

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Keverw
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.

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thephyber
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.

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rolltiide
This outcome is ridiculous and has no place in American society. It was more
tolerable when high growth companies IPO’d at $30mm market caps but that world
doesn't exist, serving to put a spotlight on these regulations separating the
primary economic growth engine’s opportunities to just the already wealthy.

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miguelmota
Official document describing the amendments:
[https://www.sec.gov/rules/proposed/2019/33-10734.pdf](https://www.sec.gov/rules/proposed/2019/33-10734.pdf)

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

Hang on to your hats!

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oh_sigh
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.

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cortesoft
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.

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oh_sigh
I understand the reason - I'm saying the name is a joke.

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relaunched
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.

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jonas21
The point of the accredited investor regulation is to protect unsophisticated
investors who don't understand the risk of investing in startups and other
unregistered offerings.

These exceptions will let people without a high income or net worth qualify as
accredited investors by proving that they have the financial knowledge to
understand these risks. For example, anyone can take the Series 65 exam.

It sounds like this could be very helpful in allowing people who are not rich
to invest in startups while still protecting people who have no idea what
they're doing.

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Nuzzerino
A similar bill was passed unanimously in the house in 2017, which seems to
have a more broad definition of a professional expert.

I am thinking out loud here but what if this is a scenario where the SEC is
trying to pass a more restrictive version, so that the more relaxed house bill
never gets passed into law?

[https://www.congress.gov/bill/115th-congress/house-
bill/1585...](https://www.congress.gov/bill/115th-congress/house-
bill/1585/all-info)

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KoftaBob
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".

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SpicyLemonZest
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.

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icedchai
Probably because they make enough extra money investing in public markets with
less hassle and much more liquidity. Why even bother with private investments?
90% of them are going to zero.

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

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alexmingoia
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.

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crooked-v
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.

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astura
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?

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asciimike
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.

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rolltiide
Proposal comments to post: all current and former FINRA and NASD license
holders should be eligible as accredited.

A new unsponsored FINRA test for this specific purpose should be created as
well (doesnt need to be in a federal proposal, just what can happen)

Finance and econ degree holders eligible too

I think this still sets the bar too high. There needs to be some way to opt
out of the paternalism and take a chance in the securities market.

People are going to lose their shirts, just add a little disclaimer just like
in public markets and on gambling posters.

Sometimes this will be an efficient allocation of capital for issuers that VCs
dont share affinity for.

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dswalter
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.

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kenneth
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).

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say_it_as_it_is
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.

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

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say_it_as_it_is
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.

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chillacy
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.

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say_it_as_it_is
Of course there will be more tricked unaccredited investors because there will
be more of them and government can't guide the hand. My point is that the
accreditation rule is moot, regardless of income level.

