> It's insanely paternalistic & economically destructive - a ghostly holdout from some bad experiences in another era, the 1930s, when the ranges of available information, experience, and alternative temptations were all tiny & quaint compared to the 2020s.
Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks. And this same tired argument comes along, repeatedly, to justify rolling those regulations back so that a handful of people have a chance at striking it rich while we as a group learn those same difficult and expensive lessons all over again.
Our securities markets work. They are predictable, mostly fair, and most importantly, they are trusted. Are all of the rules perfect? No. Do some of the rules and regulations have compliance costs that outweigh their benefit? Of course. There is plenty of room for improvement and we should absolutely identify the areas in need of modernization but you’re advocating we tear the whole house down when you haven’t made an effort to understand why it was built this way in the first place.
According to what standard? Is the fact that I can’t invest $5000 in my friend’s startup an example of our securities markets “working”? Not according to any rationally justifiable standard.
Certainly the impulse to protect grandma’s life savings from predatory fraud is a good one. But the proper way to better society is through empowering individuals to make better decisions. An example of a better system along this principle would be a local (county/state) investment office that you go through that checks over the terms of the deal to make sure the terms are legal and the parties are fully aware of what they’re getting themselves into. That would protect against fraud, without violating my right to freely and consensually associate with other consenting adults. “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections.
Your view that these markets are “working” is merely an indication that you lack imagination. How much better would the world be if there weren’t arbitrary restrictions on economic exchange? It’s impossible to know, but history shows that advancements in liberty and justice have breed unprecedented wealth.
> “Others might do a bad thing, therefore you should be banned from doing a good thing” is not a logically coherent standard — yet that is the essential argument of the SEC and it’s “accredited investor” protections.
No. That is not remotely close to summarizing the SEC’s stance on accredited investors or the regulations the SEC enforces to protect retail investors. The securities regulations are, at their core, a disclosure regime. They aren’t intended to police for bad investments and they aren’t intended to prevent you or I or anyone else from making stupid decisions with our money. They’re merely about how much information must be furnished to potential investors before they invest. That’s it.
If you want to sell securities to everyday folks, they have to be registered. Full stop. Any unregistered sale is an exemption to the rule but anyone can register their securities for sale and provide potential investors with a prospectus and some basic information about the investment.
Generally speaking the registration and disclosure requirements are eased or exempted for people with a higher income not because they’re smarter and can avoid bad investments or because they’re better situated financially to absorb the loss. It’s because they have the resources to do the diligence and hire people ask the questions and get the necessary information to make the investment. Think of it as outsourced compliance. Rather than the entity paying for the cost of registering the securities and everything that entails the investors pay for it up front.
And that makes sense. If I have a question about Apple’s prospectus I can’t ring Tim Cook and ask for more information. What you see in the disclosures is what you get. But if I’m one of the 35 unaccredited investors in my friend’s company and I have a question I can absolutely call the CEO and get the answers.
And now think about the middle ground: JFrog, for example, before they filed their S-1. If you or I invested $5,000 and we had a question about operations do you think we’d get answers? No way. If Elon Musk invested and he had the exact same question do you think he’d get answers? Of course.
Presumably Rule 506(b) which prevents fundraising from nonaccredited investors. There is an exception for up to 35 non-accredited investors but taking money from even one non-accredited investor greatly increases the disclosure requirements on your startup. So the startup would essential need to do disclosure as though it were a public company.
> the startup would essential need to do disclosure as though it were a public company
Not quite that onerous. But the start-up and investor would each need to spend at least $5,000 on legal diligence. This would likely be true with or without the rule—if you don’t understand the preferred investors’ terms, you aren’t qualified to invest.
Rule 506(b) doesn't prevent it entirely, and keep in mind that the vast majority of companies aren't venture backed startups, and I believe would be covered under Rule 504.
You absolutely don't need to do disclosure like a public company if you have non-accredited investors.
To cross all the t's and dot all the i's, you might be able to join a friends-and-family round under Rule 504, but your founder friend should still do the due diligence to ensure the participating friends and family investors reside in states where such an offering is exempt from registration/qualification under state blue-sky laws[1].
IANAL. Hopefully your founder friend will have had a startup attorney to ask about all of this.
>Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks.
And then mostly dismantled those changes, in an environment when financial entities have more reach and capital to spin into dubious schemes than ever before. What could possibly go wrong?
Over the last 90 years we have repeatedly learned very difficult lessons about the individual and societal costs of unregulated securities markets and made changes to mitigate those risks. And this same tired argument comes along, repeatedly, to justify rolling those regulations back so that a handful of people have a chance at striking it rich while we as a group learn those same difficult and expensive lessons all over again.
Our securities markets work. They are predictable, mostly fair, and most importantly, they are trusted. Are all of the rules perfect? No. Do some of the rules and regulations have compliance costs that outweigh their benefit? Of course. There is plenty of room for improvement and we should absolutely identify the areas in need of modernization but you’re advocating we tear the whole house down when you haven’t made an effort to understand why it was built this way in the first place.