[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.

[cortesoft]

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.

[wave_function]

Side question: does anyone know the origin of “dentist” being shorthand for “someone who is fairly educated/wealthy and thinks they’re sophisticated, but is actually just dumb money”? I’ve heard it quite a bit, curious about where it comes from.

[kenneth]

A self-reinforcing meme, I'd imagine. The more you hear it, the more you're likely to use it as an example. I've certainly used the phrase "dentist from Ohio" a few times myself — no offense meant to dentists and Ohioans.

[gruez]

>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.

[rolltiide]

I too think it should be scrapped and I look at how other places do it. Often in other countries I see lower wealth requirements and copy the general US SEC framework but sometimes over countries just have no registration exemptions for a private market, which is even worse.

The wealth requirements in US are so aggravating because they pass muster by putting the consequence on the issuer, not actually barring the person from investing. Almost impossible to challenge! But how we got here is that this is a successor to a test, which had horrible guidance and resulted in rampant discrimination - a sign of the times. This proposal reintroduces the test but inherits a more established FINRA testing infrastructure. FINRA tests are still barriers of entry that will hardly make the world more egalitarian as almost all of them require sponsorship from a financial institution - even the test prep materials aren't supposed to be shared. There are ways around it like a bucketshop cant you on payroll and offer you the test but its still an unnecessary and pretentiously exclusionary hurdle, built on purpose.

[SomewhatLikely]

Having more money doesn't make you less susceptible to fraud, but does make you less susceptible to ruin from big losses.

[JumpCrisscross]

> Having more money doesn't make you less susceptible to fraud

Yes it does. If you’re investing $25k in a company, you can’t pay lawyers more than a pittance to review documents and do diligence. That makes you more susceptible to fraud.

[mbesto]

Source for that? I think the general idea is not whether someone is susceptible to fraud, but rather higher likelihood that you have experience with making investments.

How much you wanna bet a white collar worker making $200k/year has made more investment-based decisions in their life than a a blue collar worker making $20/hr?

I don't necessarily agree with the tenants of the idea of an accredited investor, but it's definitely a way to parse out a large chunk of the population unexperienced with investing.

[Mvandenbergh]

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)

[asciimike]

This is basically Matt Levine's argument [1], though he calls it a Certificate of Dumb Investment:

To get that certificate, you sign a form. The form is one page with a lot of white space. It says in very large letters: “I want to buy a dumb investment. I understand that the person selling it will almost certainly steal all my money, and that I would almost certainly be better off just buying index funds, but I want to do this dumb thing anyway. I agree that I will never, under any circumstances, complain to anyone when this investment inevitably goes wrong. I understand that violating this agreement is a felony.”

[1]: https://www.bloomberg.com/opinion/articles/2018-09-24/earnin... [2]: https://www.bloomberg.com/opinion/articles/2019-06-19/privat...

[nullc]

I was okay right up to the never complain part.

There is a lot of fraud that goes unpunished because the victims feel hopeless and embarrassed. As a result, it's a lot more attractive to defraud people.

A dumb investment might be dumb, it might be likely to be fraud. But if it turns out to actually be fraud, the victims should still be able to seek restitution or otherwise you are giving a free pass to commit fraud and creating a huge economic advantage for people willing to do it over people who aren't.

[sk5t]

Maybe the other side of the coin is that allowing all these dumb investments to take place would have the effect of overwhelming regulatory bodies and prosecutors with less-than-clear-cut missteps. I don't know, perhaps it is easier to regulate entities that have to file a 10K than it is to understand anything at all about private entities that have no similar filing requirement?

[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?

[mbesto]

As someone noted above, opening up accreditation to the whole population will do nothing to give those people access to the top performing investment vehicles, because the top performing investment vehicles are already getting their money from investors that they choose. So, all this will do is create more shady investment vehicles and those that can't afford to play with the bigger investments will continue to be sold on worse performing investment vehicles.

[aguyfromnb]

Bingo. Look at the fallout from the mortgage crisis/scandals. Buying a house is a straight forward investment. People were getting into mortgages without even understanding basic borrowing rates. In the end we (rightfully in most cases) blamed the brokers for pushing crap on people unknowingly. How is this going to work?

[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.

[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.

[Areading314]

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.

[notahacker]

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.

[conanbatt]

A walk down r/WallStreetBets shows you that if there is an argument about a gov agency protecting unsophisticated investors, its failing spectacularly.

[gruez]

I think you're misunderstanding the threat model. It's designed to protect unsophisticated investors from fraudsters, not from the investors themselves.

[johnbrodie]

If that's the case, why do Pattern Day Trader rules exist? They seem to generally cover "protecting you from yourself", not from some third-party.

[conanbatt]

I don't think this is true. A clear example is startup stock-options. It is legal for the company to give you that as compensation, you historically get taxed for that compensation, it is legally mandated to get appraisal by a third-party company, but it is generally illegal to offer them for sale in the public.

[caro_douglos]

Still loving that RH glitch which allowed a sophisticated investor to “utilize” more margins than they were entitled to. [1]

There really should be another crack at trading places. I hope those accredited producers out there in Holywoot can make it happen.

[1] https://www.cnbc.com/2019/11/05/some-robinhood-users-were-ab...

[nullc]

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.

[MR4D]

> Its very real potential for downside is also matched by a real potential for upside

This actually isn't true (and that's a big problem).

Leveraged ETFs (such as TVIX) typically are very leaky. [0]

[0] - https://seekingalpha.com/article/1864191-what-you-need-to-kn...

[nullc]

I originally wrote very real potential for upside and weakened it by dropping the "very", specifically thinking about the drag on leveraged ETFs... :) Guess I didn't go far enough.

I feel like this is in the weeds though: some bad investments people get suckered into have extremely high and diversified risk of total loss, but at _best_ can only return a few percent in a year.

Not only are they negative EV, but even if you get lucky and it pays off you only end up with money market fund like income. Deals that no one who was informed and knew how to do the relevant math would ever take.

[icedchai]

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.

[gnopgnip]

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.

[gist]

> 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).

[ve55]

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.

[kenneth]

Most people who take unlimited-downside positions (like selling option contracts or short selling) on a broker will be limited to losing however much cash on hand they have in liquid markets. Their broker will issue a margin call (ask for further capital to be deposited to cover any further losses), and if no further deposit is made, will automatically liquidate their position if necessary. So you're unlikely to see your net worth wiped out, you'll simply lose the amount you put in to the account to trade with.

[throw17ebfruary]

I wouldn't count on that. The market might move so fast that the broker can't liquidate the account before the balance goes negative. In that case the broker has an incentive to try to extract the amount from the customer (if they can), instead of eating the loss on the negative balance.

[throw17ebfruary]

> ...most people can easily be approved to buy options, and easily lose 100% or more of their net work in hours.

How do you lose more than the purchase price of the options when buying options?

[MR4D]

I'm not the OP, but I think they meant "trading options" instead of "buying options."

[say_it_as_it_is]

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.

[imeron]

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.

[nullc]

Woah watch out there. I have never seen a 'coin offering' that was remotely like buying an investment in a business, certainly not "just like".

Instead, they have mountains of fine print that with extraordinary care make sure the recipient has absolutely no property right in the business, no claim to any title, no voting rights, usually no rights to share in profits, etc.

If you wanted to liken them to something offline, they're structured more like making a donation and getting a limited edition t-shirt in return. Maybe with some vague suggestion, but no guarantee, that the t-shirt may entitle you to discounted services in the future should the business actually begin operations.

And this is before getting into the fact that a great many of them are essentially outright scams.

The fact that many people are thinking that ICOs are "just like buying an investment in a small business"-- is a great example of how the SEC is pretty much flat out failing at this part of their job.

[lazyasciiart]

They seem most similar to kickstarter, with a theoretically higher imaginary upside.

[kenneth]

These coin offerings are generally violating securities law.

[sillysaurusx]

Which raises the question of whether securities laws are beneficial in this regard.

[gruez]

The SEC has shut down/suspended numerous ICOs. That sounds like they're working to me.

[nullc]

It has shut down some but it mostly seems to issue nominal penalties.

For example, the EOS ICO unlawfully raised over $4 billion dollars. The SEC settled with them where they paid the SEC $24 million and the SEC agreed to take no further action.

The only lesson here is that if you're going to ignore the law and sell sketchy assets with over-hyped claims to unsophisticated investors in the US... make sure you raise enough that the cost for good attorneys few million to the SEC is just a rounding error.

[sillysaurusx]

Or the value is being transferred out of the US and toward other countries, because you can't even start an ICO in the US unless you have the right connections.

[vpmpaul]

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.