SEC due to review the definition of accredited investor
equityzen.com
equityzen.com
I've already "invested" money in Pebble, Reading Rainbow, and a few other business ventures I've seen potential in, but I'm not allowed to benefit from those investments in certain ways because, why, exactly? For my own protection?
Call it a nanny state restricting your liberty if you'd like (though realistically, there's little enforcement of the investor accreditation rules), but since it's the same nanny state that is supposed to keep you from being destitute if things don't work out, we're going to impose some restrictions to keep the worst abuses from happening first.
This is something the market can easily sort out. We don't need to throw out the good with the bad.
If you used dozens of stocks as collateral to finance the borrowing of money to purchase other assets, which you then use as collateral to buy more assets, it would be considered a scam -- but not in a hedge fund. This can lead to large swings in volatility and hedge funds should only be used as part of a portfolio investment strategy -- a professional investor will use them to cancel out risk in other areas of their portfolio.
The risk is that a non-professional investor uses these instruments as primary investment vehicles without understanding their purpose. Because many hedge funds do operate very similar to the ways that illegal stock scams run: the difference is that the investors know exactly how and why these funds can implode and are willing to take that risk.
EDIT: That said, the specific qualifications for a "professional investor" definitely need some work.
Somebody suggested allowing Financial Analysts that have been, in some capacity, verified by FINRA/SEC for their understandings of markets. I would be on board for this.
Uber and Lyft are a different case, but here the regulations (as pointed out elsewhere) don't prevent you from investing your money per se; they just require you (well, the company) to register the securities with the SEC and fill out some paperwork detailing the investment.
The reason they do this is specifically so that they can prosecute any illegal actions down the line; it's basically impossible for them to enforce the existing laws without also requiring the filings and registration, because otherwise they don't know the terms of what was offered in the sale (and who offered it, so they can be identified later).
I'm oversimplifying somewhat, but the point is that this isn't "another law to 'protect'" you - it's required to make the exact prosecutions you're referring to.
And I think that, with a private placement memorandum, and all the info disclosed, ANYONE not just accredited investors can invest. Is that right? How much does such a thing cost to do, and what is involved?
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What's at issue here is just an exemption from those requirements. If you have relatively few investors and they are all deemed to be sophisticated investors, Congress has decided that you can waive the usual investor-protection rules, cut out the SEC's involvement, and negotiate your own conditions directly with the investors. The rationale is that if you have relatively few and presumed-to-be-professional investors, those investors know how to negotiate appropriate conditions on their own, rather than relying on SEC protection, so are allowed to do so. Sophisticated investors often have a "term sheet" they offer (vetted by their lawyer), or else have a lawyer on retainer to negotiate terms with you individually. If you're offering an investment to the general public, on the other hand, the assumption is that they probably don't have a term sheet handy or a lawyer on retainer, or really any knowledge about this whole sector at all. So in that case you need to comply with the regular disclosure and investor-protection rules. But you aren't banned from taking on non-accredited investors, as long as you're willing to comply with standard SEC terms.
The practical problem is that registering your offering with the SEC and complying with the disclosure requirements has pretty high fixed costs, so is often considered prohibitive for small companies. Therefore there's kind of a rule of thumb that you should avoid non-accredited investors in order to fit in the exemption, at least until you grow bigger, which is where I think the myth that you literally can't take non-accredited investors originates. (My own preferred solution to that would be to streamline the system to reduce cost of compliance for small companies, rather than expanding the definition of what constitutes a sophisticated investor.)
The difference is that a cold-call from a a convincing enough salesman can get someone to invest too much money in what is essentially a different type of lottery in the best of circumstances. In the worst of circumstances you have: pump and dumps, Ponzi schemes, etc.
The lottery is usually a state-owned monopoly, so in theory, society as a whole back the cost of gambling. Or the state is simply unwilling to give up its own cash cow.
Yes for your own protection.
Because if you don't have money then the rest of society often becomes the "clean up the mess" of last resort if you make a mistake using one of your last dimes to invest in a potentially risky venture.
"but I'm not allowed to benefit from those investments in certain ways"
The chance of "gambling" is much higher if someone perceives a payout. Not to say there aren't many ways that people throw out their money (QVC, Casinos etc.) but those are grandfathered and part of a different discussion. (And the fact that they are allowed whether the same or different doesn't mean something else should also be allowed).
Case in point[1]. I guess it's fine when Wall Street does it.
[1] http://en.wikipedia.org/wiki/Emergency_Economic_Stabilizatio...
There are no guarantees of return on publicly traded stocks, either, and that same allure of high payout can still exist. The SEC did a bang-up job protecting everyone when they let Facebook IPO at a grossly overinflated value.
Preventing you from investing is the unintended consequence of preventing con-men from stealing retirement savings. In this case, I think the regulation is well-worth the cost.
To those downvoting: This is a response to those who use the terms 'grandma' and 'grandpa' in their comments, not an avocation of these laws, or age discrimination.
anyway: It's not only the elderly that can be conned
Yes. The rationale is that when you "invest" in crowdfunded projects, you're really just purchasing a product in advance or making a donation. The law trusts that you can rationally decide what a product is really worth or how much money you should donate.
What the law doesn't trust you (as an unsophisticated investor) to decide is what the expected return on a speculative venture will be. The concern is that as soon as someone promises you a high rate of return, you're not going to think about this rationally -- i.e. you're going to think of this more as gambling than an investment. In the specific case of crowdfunding, there's not too much worry that someone is going to blow large amounts of money on a Kickstarter if all they're getting out of it is a couple of Oculus Rift headsets. But if that Kickstarter could promise 1000x returns, that might be bad news for someone's college fund.
Put another way, although the risk profiles for crowdfunding and equity may be similar for any given amount of investment, the limited return on crowdfunding keeps any one investor from taking on too much risk.
Money raised through Kickstarter and Indiegogo aren't covered by these provisions, so you're good on your "investments" in Pebble and RR if they are via those platforms. Good use of air quotes, since you're not really participating on the equity upside.
From a macro view, one can argue that the current limitations perpetuate prosperity for the wealthy, while denying everyone else access to higher-performing alternative investments.
They do seem to promote the idea that you're making an investment, just without the sort of potential (or scaling) returns you'd see from a conventional investment.
The purpose of the regulations is deeper than just protecting you, the individual investor. Originally, the regulations were created because of the systematic effects resulting from selling investments to the general public. When a whole bunch of people lose their retirement savings to bad investments, it's something the government ends up having to deal with, and "it's your fault" isn't a politically tenable answer. Not to mention, when these sham investments go under, they create a lot of collateral damage.
In modern times, the securities laws have been rationalized as a response to the information asymmetry that exists between sellers of securities and investors.[2] The nature of this asymmetry is that sellers have a lot more information about the investment than buyers do, and can use this advantage to systematically undermine the market.
Now, and this part is editorializing, the problem with the accredited investor exception is that it misunderstands the nature of what the securities laws exist to correct. The focus on "investor sophistication" is totally misplaced. In economic terms, the relevant asymmetry is not the asymmetry is sophistication between sellers and investors. It is the asymmetry in inside information. While accredited investors are likely to be more financially sophisticated, they are not any more likely to have more inside information than members of the general public. Thus, the rationale behind creating exceptions to the disclosure requirements doesn't hold.
[1] http://www.sec.gov/answers/accred.htm
[2] http://en.wikipedia.org/wiki/Market_failure ("Some markets can fail due to the nature of their exchange. Markets may have significant transaction costs, agency problems, or informational asymmetry. Such incomplete markets may result in economic inefficiency but also a possibility of improving efficiency through market, legal, and regulatory remedies. From contract theory, decisions in transactions where one party has more or better information than the other is an asymmetry. This creates an imbalance of power in transactions which can sometimes cause the transactions to go awry. Examples of this problem are adverse selection and moral hazard. Most commonly, information asymmetries are studied in the context of principal–agent problems. George Akerlof, Michael Spence, and Joseph E. Stiglitz developed the idea and shared the 2001 Nobel Prize in Economics")
Or more cynically, because only rich people are allowed to be rich.
If you are not already rich, the SEC feels it must protect you from yourself, as if you were a child reaching for a hot stove. No matter how many degrees or professional-certifications you have, nor how much domain-expertise you have, nor how wisely your wealth is portfolio-balanced, nor how excellent your credit-score, when you don't pass a firm wealth-test, the SEC is still allowed to discriminate against you as a poor person.
On the other hand, if you've inherited a million dollars, you're obviously brilliant and self-reliant! Here, run through Demo Day with these diamond-plated scissors and your checkbook!
Remember, if you're poor, you're still allowed to buy no-money-down houses at cyclical peaks, or public stocks on deep margins, or derivatives that expire worthless. You may donate all your money to projects you like, with no expectation of monetary reward other than a t-shirt or other symbolic trinkets. You may also max your credit cards and buy state lottery tickets! In fact, you've probably already enjoyed our emotional, misleading ad campaigns encouraging you to do that.
Just no private equity with any chance of recouping any value for you. That's for the Lords, not you poor peons.
[1]http://en.wikipedia.org/wiki/Jumpstart_Our_Business_Startups...
• …an immense explosion in available knowledge; and…
• …many new ways for non-accredited investors to invest and lose all their money in highly-leveraged public equities, real-estate, foreign-exchange, and other vehicles; and…
• …no appreciable complaints from existing accredited investors that they wish they'd been prevented from investing their own money in private equities;
...thus the SEC must be looking into reducing the thresholds, in the spirit of the JOBS Act, to let more Americans invest in innovative upstarts? Right? Right?
What's next? I don't make enough to trade stocks? To gamble? To spend above my means?
Currently you could be professionally certified to advise and manage a millionaire's money, and put it into private ventures, but not be allowed to invest even token amounts into those same ventures yourself, 'cuz you're poor.
There are lots of other laws about it, but you don't have to be rich to sink some cash in private equity schemes. We even seem to have sprouted a kickstarter for equity in the form of Crowdcube. Which I rather like because kickstarter always felt a bit wrong. If I'm micro-investing, surely I ought to be micro-profiting too, if the company takes off?
This strikes me as an incredibly bad idea. The bar for CPA is painfully low.