The basis of US securities law is that rich people ("accredited investors") know enough to be responsible to take risks. Whereas poor people are too stupid to make risky investments without turning into degenerate gamblers.
A lot of debates about financial regulation basically come down to whether this is a good principle or not. Too many times, both sides are arguing at cross purposes, because one implicitly assumes this is common sense, whereas the other thinks it's classist and paternalistic.
It isn’t a ‘poor people are too stupid’ argument. It’s a ‘poor people don’t have the resources to do enough due diligence, go after someone who scams them using a legal team, or diversify enough they won’t be eating dog food or homeless if this goes sideways’. Which is true.
Additionally, if someone is rich enough they are a millionaire or billionaire or whatever and DOES somehow get ripped off enough to be homeless or eating dog food out of necessity, the general public is going to be cheering for whoever did the ripping off in the next Hollywood blockbuster, not calling their congresspeople angry about how that poor grandma is now destitute and the government SHOULD DO SOMETHING.
It’s a combination of having enough resources to plausibly be able to defend themselves and not lose everything, and a lack of public empathy if they screw up and get ripped off.
> rich people ("accredited investors") know enough to be responsible to take risks
This is a straw man.
The real argument: someone with more money is less likely to become destitute as a result of a bad investment. Also: someone with more money is less likely to become a political problem that shuts down the market, or a drain on the public purse, when they lose money.
When it comes to private investments, someone investing e.g. $10k cannot afford to do legal diligence. They are also unlikely to unilaterally pursue someone who sued them in court. That almost guarantees they’ll be the sucker in the long run.
I would agree with this except for one huge fact that has existed for close to 100 years - poor investors can put their money into options and blow up in a day, but can't put it into private equity.
I'm not ascribing any good or bad intent to the regulators here, but this is so big of a hole that I can't believe this has anything to do with destitution.
For what it's worth, I've seen an actual person do this first hand (options trading), and destroyed their life as a result.
> poor investors can put their money into options and blow up in a day, but can't put it into private equity
Cost of diligence. One can theoretically fully diligence an option and its underlying stock’s issuer with public information. One cannot do that in private investments. Private investing requires expensive legal work; it also requires the ability to enforce one’s rights in court. Investing $10 or 20k pretty much guarantees one isn’t doing the former and can’t do the latter; that’s a recipe for disaster.
As a former options market maker who is now in private equity, I (a) agree that options should be more roped off from retail investors and (b) minimally dabble in private equity and don’t touch options in my PA.
The only responsible buyers of options buy them expecting to lose money. They’re the lossy leg of the trade, the insurance. When hedge funds want to go long or short they use cash positions or leveraged swaps. Not options.
There are plenty of opportunities every day to responsibly buy a put or call because it happens to be the best price you can get for entry to execute on an investing thesis. Your background notwithstanding, there is nothing mystical or sinister about options as a vehicle when the price is right.
>someone with more money is less likely to become a political problem that shuts down the market, or a drain on the public purse, when they lose money.
A lot of ‘08 was because it impacted the every day Joe quite a lot. If prices drop because people can’t get mortgages, and people can’t pull money out of their bank because the bank is insolvent?
Those are now people who don’t have the HELOC they though they had, or their primary asset for retirement is now worth half of what it was, or can’t or won’t use the savings available when they need it - and also the people getting laid off because other Joe’s aren’t spending money or buying houses anymore. The banks are at the center of this.
Many big banks were nationalized for awhile, Lehman was blown up, Fannie and Freddie were taken over. Not because they had more money. Rather because they were at the center of the crisis that touched assets almost every American owned - and had more money because of it.
If this only impacted folks with > $1m net worth, it would have looked a lot different.
"Rich people" can also afford time / money / labor costs to do independent due diligence to confirm if a company's finances are true and correct, or an elaborate sham.
Yet WeWork happened still. And tons of investors get screwed by scams or companies completely lying.
Makeup company Coty couldn't verify Kylie Jenners companies earning and once they audited it they found out that it wasn't making nearly as much as they thought.
So it's not like its uncommon for investors to get taken for a ride. Why should we then treat them differently than lower income investors?
Should be easy enough to look up what was happening that motivated those rules in the first place, for anyone who cares about them enough to consider removing them.
I tend to find "argument from reality" more compelling than arguments based on feeling, ideology, guesses about why people support a position, or reasoning from some moral axioms like one is completing mathematical proofs, personally. Possibly there were no major problems without those rules and it would be fine to remove them. Possibly a bunch of people were being significantly hurt with no recourse. Which was it?
I get the point you are trying to make, but in the world of stock trading, I'm definitely poor. However, I'm not stupid. I am smart enough to know that the game is rigged for those in-the-know. Much like the poker adage "if you can't tell how the sucker is after $shortTimeInterval, you're the sucker".
>make risky investments without turning into degenerate gamblers.
It seems to me that this is exactly what they want. Does having a gambling problem equate to stupidity?
A lot of debates about financial regulation basically come down to whether this is a good principle or not. Too many times, both sides are arguing at cross purposes, because one implicitly assumes this is common sense, whereas the other thinks it's classist and paternalistic.