Then they should have invested in companies that have stricter controls, or put their money somewhere safer w/ more transparency. That some investors are unsophisticated doesn't absolve them of liability.
In my experience in interfacing with unsophisticated investors, they aren’t aware of the risk.
Should they do more due diligence? Likely. Should there be regulation to protect the unsophisticated? Also likely. Speedrunning securities regulations, as one does.
Investing in companies is supposed to be risky. If someone acts foolishly as per your narrative then that's their problem. I don't see why everyone's freedom needs to be curtailed just to save the fools from themselves.
I agree that investors should be held more accountable. They throw out these millions to fraudsters and get to claim "oh, it was just a bad investment" and move on.
It's not the legal responsibility of the investors, because society has given them limited liability. It may or may not be their moral responsibility, depending on what they knew, encouraged, or whatever. And the usual payoff for morally-shady but legally-blameless behaviour is reputational damage.
There is still a moral duty of care towards non-sophisticated investors. You can make an argument that an investor that buys a company knowing all the risks and who is able to rationally evaluate the risk is responsible for their actions, but many investors are not able to determine the risks involved.
Those pension funds and states should not have invested in dangerous securities. Let's face it: the money seemed easy and these guys took very dangerous investments, with money that was not safe to play with.
> Why can't they be held responsible for the foolishness of their actions?
Because it's politically difficult. Sometimes, infeasible. The public often pays for defrauded grandmas' mistakes.
There are also positive externalities to stable business environments. Diligence costs money. Putting some of that cost on the issuer, once, is more efficient than each investor incurring it. Consistent rules around fraud and disclosure thus prompt new capital formation.
The best examples of the need for this protection are the cesspools that are ICOs.
I disagree. It would be one thing if we could say that a person's decision to get into an ultrarisky investment only affected themselves, but that's not true. When investors get scammed or a high risk venture simply fails, there's a blast radius. People getting ruined strains families, social groups, and organizations. Then the government has to step in in all sorts of ways to help clean up the mess.
The most experienced firms in the world got sucked into FTX. That's going to happen from time to time, and they're built to absorb the losses with limited social fallout.
Now, I do think that the rules as they are right now aren't great. They should be focused more on containing risk (we do this with systematically important financial institutions) and evaluating preparedness from a knowledge perspective.
The other thing you could do is try to increase access to registered security status from the venture side, with frameworks for disclosure, reporting, and accountability that don't require hiring millions of dollars worth of professional banking, accounting, and legal services.
Unsophisticated investors require protective mechanisms, because a lot of people don’t have the intellectual or emotional faculties to make less harmful choices. A function of government is harm reduction at scale, ergo this falls within their mandate.
First, just because people do it doesn't mean it 'should' be done. See the naturalistic fallacy.
Second, just because smaller investors lack resources, doesn't imply they should be prevented from acting with less information. This doesn't follow from your final claim that there is a common interest in preventing them from participating and this is unsubstantiated.
Let people make their own mistakes, you don't get to decide for them.
I'm not saying I agree with the current restrictions on accredited investors, but there should be a middle ground between what we have now and what we had back when the dotcoms collapsed the market. Back then, there were stocks so risky they'd make today's ICO investors nervous if they'd been presented honestly. But they were sold as being relatively safe in a way that allowed early-stage investors to foist their failed bets on to the public.
I witnessed first-hand a situation where executives engaged in outright fraud in an effort to kick the can far enough so that the VCs and execs could cash out. The aftermath of that fraud was two scapegoats who were sentenced to 18 months each and had to pay fines of less than 10% of the profit they made from their crime. If you're an individual who invested in the company and lost all your money, then fine...I can see the personal responsibility angle. But most of the losses were mutual funds and pensions where the losses were felt by people who had no hand in choosing that investment. Instead, that was financial professionals and the perverse incentives they're given that push them to seek outsized returns.
There's a very good possibility that we're in an over-regulated state at the moment, but it's important to remember that in the complete absence of regulation, the public gets fleeced. The focus should be on finding the right regulation rather than vilifying the general concept of regulation.
as an investor, it is your responsibility to be informed as to what people are doing with your money. the entire purpose of liability limitations is to make it so people don't need to do that because all they have risked is money.
They're neither good nor bad. They're just assets. Investors who bought them should bear the consequences of their decision. Depositors knew that their deposits were not insured in excess of 250K. Why do we allow certain groups of people to just rewrite the rules whenever they fail? It's ridiculous. Not to mention totally antithetical to their supposed philosophy.
reply