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.
This is an important point to make; usually I am in favor of letting people do anything that they want to, however, the higher-risk it is, the more we should require them to demonstrate knowledge of that risk. But, critically, I'd prefer it to be about knowledge, rather than net worth or social connections. This is still much easier said than done (and as we saw from cryptocurrency IPOs, there are disastrous consequences from just letting people invest in anything they want to with zero laws or accountability, but that is obviously one extreme end), but I think there's still some room for easy improvement.
I would rather see people be more scrutinizing when giving their money to others. It doesn’t matter if there are rules and regulations, people are always going to be duped. When I read about FTX I just think that people need to be better educated.
Maybe one could argue that the rules and regulations are specific to providing consumers with tools to make educated decisions about financial investments.
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.
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.
Limiting direct investment to the very rich (accredited investors) is going to do massive damage to the investing public in the long run. You're denying the bulk of society the trials and tribulations it needs to evolve.
It's obvious to me that the negative unintended consequences of preemptively banning an entire class of economic exchange to the majority of people (unaccredited investors), and creating a centralized gatekeeper that gives exemptions on a case by case basis for projects that it approves, is going to be massive. That we see this so differently suggest we come from a very different set of personal experiences and perspectives on the world.
>>Not in cases where basic human greed is involved. People involved in MLM schemes, for example, are known to even f..k up their family for personal gain. Greed is powerful and highly corrosive.
That is not true. Human greed makes humans motivated to avoid bad investments as well. That's why the market adapts over time to be less gullible.
==I'm rate limited, so I'll respond to your comment below after this point==
>>There's a difference between investment (everyone can go via an online broker and trade with stocks) and dangerous speculations like IPOs or ICOs.
There's value in learning to spot promising new tokens, or in the case of IPOs, securities, as doing so is very lucrative. It's also beneficial for society for more people to become skilled in this activity, as it means faster technological evolution. Creating a class of investment lawyers and VCs who monopolize these sectors is not in society's interest.
>>and look where society is today, where people devise more and more elaborate fraud schemes and people are still believing it and sometimes invest their entire life savings into fraud, despite everyone and their dog blaring that they are investing in a fraud.
That doesn't show that the market doesn't learn. You're not demonstrating that the same proportion of people are falling for manias today as in 1636. You're only pointing out the obvious: that scams and irrationality still exist, and claiming this proves that no learning/adaptation happens.
To Sangermaine:
>>Nope. For the same reason that people still commit crimes despite knowing the consequences, greed for possible profit will always be the more powerful motivator.
If it were "always the more powerful motivator", then everyone would commit crime. You're falling for the pessimistic bias which inevitably leads to repressive societies. Over-reaction to crime is more dangerous than under-reaction.
I think this is a brilliant idea. I love the idea that small investors can participate and provided desperately needed capital to good ideas and business people without all of the "accredited investor" paperwork. The government thinks the average citizen is smart enough to vote, serve on a jury and be shipped off to war, but not invest their own money?
Caveat emptor: Many of the rules and regulations that are in place in US markets are there because someone tried to screw someone else in that particular way at some point in time.
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.
Shame is toxic, but the issue is critical for startup's and worth discussing.
Depositors making individual decisions? Ok.
Funds advising their companies? Ok, but it really hides the agency: deciders are in the funds (what CEO would refuse that advice?), but the companies are the responsible actors.
Now, would it matter if most of those funds were responding to their investors, say, Saudi's or Russians or the Chinese Communist Party, or to a consortium of friends who had shorted the bank? Most would say it does matter, but AFAICT it's perfectly legal, and no outsider would ever know the difference.
Market self-regulation, insurance, and investment diversification all depend on agents acting independently in their own interests, say, of making money.
Once agents are coordinating, or colluding, or have other dominant strategic interests, market self-regulation fails. And everyone else, who reasonably relied on the market behaving stochastically or in response to economic forces, loses.
One might hope that if this were all good, the response to a wall of shame would be a wall of honor, with transparency around decisions. But confidentiality is a key feature for any investment firms, so the best we'll get are retrospective letters of intent.
Aside from bad actors, the irony is that high federal rates means more risk-taking from banks, not less. SVB assets were good and safe, albeit not worth much (as the auction is showing).
I would have no problem with new rules saying that firms with assets big enough relative to the bank needed to schedule major withdrawals in advance. There's really no other reason than a bank run to move $100M emergently. (There'll be a secondary market for large urgent transfers, but it won't cost much, securitized with a pending transfer.)
So: yes the system is susceptible to bad actors, and there's no good way to respond without throwing out the baby with the bathwater. Really society's only defense is that the wealthy are getting wealthy enough legally that there's no real need to go all-out.
Aside from the moral hazard of covering bank risks, there's another moral hazard in creating opportunity and incentive for an already-confidential and largely unregulated industry to collude. It might push good investors into combines with bad actors, amplifying ill effects.
What's shameful really is that these systemic gaps are relatively obvious to thousands of the involved engineer/MBA/JD's, but everyone greedily grabs their local maxima, instead of insisting the system work right. That's where I'd welcome leadership, some way to reduce coordination costs.
Oh, I'm sure there'd be plenty of crap investment opportunities available to ordinary investors. There's an interesting idea called rational ignorance - basically, investigating an investment opportunity costs time and money, and it's irrational to spend more on investigating it than you'd lose if it failed outright.
So being able to offer poorly-regulated "high-risk investments" to normal people who can only invest a small amount would be a scammer's dream; they can't put nearly as much resources into investigating the investment, or into recovering funds if it turns out to be a scam.
Nearly all the good opportunties will continue to go to a handful of well-connected wealthy people because it's far less work to raise money that way.
This sounds like protecting people from themselves. I disagree and believe people should have easy access to buying shares, if its a disaster only themselves are to blame.
Also it is not the same as repairing an Airplane. If you lose all your money you only hurt yourself and your family. (And thats the way it should be, people should loss if they are stupid with their finances.)
When you give someone money to do a thing you have responsibility about that thing. If someone is running a clearly illegal business (trafficing illegal drugs, humans) and you are aware of this and invest in their business then you become an accessory you are not immune to liability for crimes you were aware of before investing - you are immune to liability for actions taken without your knowledge (which is what we assume the great deal of actions taken by investees are).
Causing another massive shock to the stock market is the correct response here because nearly everyone is engaged in behavior that harms society and should be stopped. Also, the market will recover and really isn't that important. If a small proportion of actors were engaged in this activity then getting an industry compact or other token gesture might be good enough to correct it.
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.
The reference was to the mortgage crisis, where unscrupulous mortgage brokers colluded with banks and credit reporting agencies to give mortgages to people who could not repay them. Triggering a remarkable financial crisis which still reverberates over 5 years later.
And to re-iterate, as this tends to get lost sometimes in examples, my position is that I am for broader participation in the early investing stages of companies, but I am also a fan of a "fence" or a "marker" which mitigates the risk of bad actors pulling in unqualified participants. The "qualified investor" rules are just such a fence.
One more example then. Criminals are a small fraction of a population, but the harm they do is disproportionate. The number of mortgage brokers who were acting fraudulently was a small percentage of the total, and yet the harm they was quite high.
Large, interconnected systems, with humans providing some of the linkages are difficult to manage. And some of the humans are trying to "game" that system all the time. My claim is that the "qualified investor" gate is a mechanism which is a current inhibitor on the games players in terms of potential victims for investment fraud. Loosening the rules, as was done in terms of mortgage qualification in early 2000's, will give these bad actors the pool of victims they need to fund their games. The damage they will do will be disproportionate to any gain we might have achieved by getting a company funded which would have otherwise gone unfunded. I hope I am shown to be wrong in this fear, but it is my current best guess at how this "crowdfunding early investment" change plays out.
There other ways to protect small investors - education being one example.
If someone doesn't know how to manage miney they will lose it one way or another - be it forex, or or penny stocks. ICOs cannot possibly be worse than these legal things.
Unfortunately, there’s no shortage of obscure public investments where people can lose lots of money. Options are a classic example. Leveraged ETFs are another. There are many more.
The idea that the SEC should limit access to hedge funds, private equity, and startups is antiquated. A modern approach could simply put the burden on the entity seeking investments. Access to investors with net worth less than $100k could simply require extensive disclosure. Many people would lose money investing in things they know nothing about but this would not be meaningfully different from our current situation.
Enron is an interesting example: first, you had to go back a quarter of a century for the example whereas that kind of thing happens routinely in the cryptocurrency space, and the response wasn’t just to shrug but to pass stricter regulations (Sarbanes-Oxley) to prevent it from happening again.
Remember, the claim isn’t that the traditional finance world is without problems but rather that people who deliberately seek out high-risk investments do share some responsibility when those fail. Someone who trusted Enron’s public audit reports was more comprehensively failed than someone who sought out a company specifically incorporated in the Bahamas to avoid compliance with US regulations!
People only have themselves to blame if they invest in something that is not vetted by credible parties. What you're suggesting is to make the entire market a safe space, where people are forcibly infantilized and have their contract freedom limited, to protect a small minority who don't use their freedom responsibly.
Regulation just means banning an entire category of voluntary interaction and creating a centralized gatekeeper with the power to lift that ban on a case-by-case basis if a project meets its approval.
Such an approach to dealing with complex social issues like fraud is lazy and flies in the face of a free society.
Treating tokens like securities would mean treating token sales like IPOs. Right now it costs $6 million to do an Initial Public Offering of a stock. If you want to eliminate 99% of market activity, and exclude 99% of the population from having market access, that's how you do it.
Anyway your regulations are unenforceable. Decentralized exchanges and the multi-jurisdictional nature of the market assure that. For the first time in history, you can list your financial asset on a globally accessible exchange without needing anyone's permission.
That's a valid point. It came out wrong and unnecessarily harsh.
I should have also added that although the person I was replying to(xorcist) was unqualified in the financial knowledge, I assume by way of being around HN, that they likely have more than enough technical aptitude for such an endeavor.
These regulations, in my opinion work to protect the larger markets from exactly that type of dangerous situation.
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.
[1] https://en.wikipedia.org/wiki/Systemically_important_financi...
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