The Howey Test defines an investment contract more narrowly than you imply. People lose absolutely staggering amounts of money each year on bad investments. Money is like water. It flows around these regulations. The detours just add friction that slows innovation, and diverts capital to fees for legal/accounting professionals.
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.
Because those legal investments are voluntarily deciding to adhere to a lower level of regulatory scrutiny in exchange for only being able to sell to wealthier and presumably more risk-aware investors.
I agree there should be a competency exemption to the SEC's "accredited investor" requirement [1]. FINRA already loves administering exams [2].
That said, contrast the S&L crisis [3] with Bernie Madoff's fraud [4]. The former lost $160 billion of regular Joes' money (along with wealthy investors'). $132 billion of taxpayer money had to be spent, alongside countless hours of regulators', judges' and lawmakers' time, again, on the public dime. A minor political crisis started (and subsided).
With the latter, $70 billion was lost (though it might have been as "small" as $20 billion). Prosecutors and judges still got involved, but fines repaid their efforts. Systemic effects were largely contained.
TL; DR We restrict the masses from illiquid investments procured through irregular channels because (1) the legal costs of diligence preclude small investments, meaning small investors either invest at a material disadvantage or invest too much (relative to their worth) and (2) the lower your worth, the higher the probability that a busted investment will lose you your shirt. That turns a financial problem into a de-stabilising political problem.
Side note: early-stage investing isn't as profitable, on a risk-adjusted basis, as it might seem if one only counts the winners.
Disclaimer: I am not a lawyer. This is not legal, nor any other kind, of advice. Consult an investment adviser and a securities lawyer before making risky investments.
Individuals can be excused for a lack of knowledge and experience. VC's and investment banks can not. This is a fundamental and basic part of their fiduciary responsibility. To me the article is a red flag that some people need to be investigated.
> 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.
Lol. It’s not about risk, it’s about keeping poor people out of the market. It’s why they are trying to change the rules to make it even harder—because there are simply too many people with a million in cash liquidity today. Can’t have that.
I realize you're trolling but you might have just as well asked "why should only people with good credit be able to buy houses?" That might make the fault in that reasoning a bit more clear. It isn't "rich people" who get to invest as it is "people who understand the risks and are prepared for them" get to invest in "untested companies".
The "accredited investor" rules are an imperfect but functional selection mechanism to select for 'understand risks' and they also add the defense that once you lose enough money to fall below that standard you lose the opportunity to keep playing.
Further, anyone, in the US at least, can become a "rich person" by investing in publicly traded companies (or real estate for that matter) prior to investing in non-public companies. Many thousands have.
And finally, I grew up in Vegas and watched it kill people. Mostly people who managed their pennies and saved their savings. And took a vacation to Vegas and if they were very unlucky won a enough money to pay for their vacation on their first visit to a casino. Then went home broke, sometimes bankrupt. There were enough of those people that it left a mark on me. My buddy in high school who worked at a gas station which was on the the way to I-15 to head back to Los Angeles would have sales guys offering to trade him the demo units they had brought to a convention for a tank of gas to get back to the office.
The trick was you had to actually get there, nobody from a casino called you up and started asking you to play games of chance. And all the games are generally playable at home with your own cards or your own dice. So people can get a feel for just how impossible it is to win long term at those games.
No, this isn't about "rich people" and it isn't about "going somewhere to gamble." This is about enabling a class of unscrupulous people a nominally legal framework for stealing from people who can neither afford, nor effectively defend against it.
Because no matter what your age, if you're poor, the SEC treats you like you're five.
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.
Then why not scrap the Howey Test (which was out forth as the definitive test to determine if an investment is a security) and just keep the existing fraud laws?
Security law is in place for good reason, to protect investors.
That reduces to the absurd conclusion that otherwise smart people doing $500m investments do zero due diligence and don't care about being legally bound by fiduciary duty.
Because our laws are increasingly written for the least common denominator. Some citizens might be scammed by these investments; therefore, we all must forgo the ability to spend our own money on them. Its hard not to be cynical and see this as another leg in a race towards mediocrity.
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