Indeed, I don't see anywhere else that Americans accept a "wealth test" to exercise a basic economic right (ownership of production).
Note, the accredited-investor rules are not an "ability-to-pay" test. That would be fair: if you can write the check, you're in.
The rules also are not a creditworthiness test: they don't evaluate reliability, and investors want to give money, not take it from others.
And they're not a competence test: you can be credentialed to professionally handle others' investments and businesses (through things like passing the bar or "Series 7" or CPA exams), or otherwise have degrees in law, technology, and business... and still not pass the same "accredited investor" wealth standard that any dolt who inherits a million dollars does, automatically.
The distinction ought to be abolished as a matter of basic fairness.
The reason for the accredited-investor regulation was to prevent people from putting all of their wealth into risky investments they know nothing about and being left destitute.
People on HN are pretty smart, but it's not representative of the entire population.
People get scammed by ridiculously obvious scams. Do you really think they have the ability to invest in a start-up in an intelligent way?
Then why aren't there limits on lottery ticket purchases, or casino gambling, or making highly-leveraged real-estate purchases, or buying any number of other investments (including public stocks and options) that can send any initial amount of money to zero, quite rapidly?
It's an archaic set of rules, from a dumber era, and totally out-of-sync with what people are capable of, and what real risks to "all of their wealth" exist today.
Well, for lottery tickets and casino gambling, people understand it's gambling (a game of chance). If someone came up to you and said "Give me $100K and I'll double it by the end of the year by gambling" nearly everyone will think "that's high risk!".
You can lose all your money doing real-estate deals or buying stocks, but those are regulated financial activities. Basically the gov't is saying "I don't want just anyone buying a private company, but I'm OK with allowing them to purchase equity in a public company because those companies are forced to be transparent."
Note: I'm not defending the law, just trying to explain the rationale for it.
Apparently historically many of the rules came about during the early 20th century US oil boom. Guys used to go door to door selling shares in can't go wrong oil stocks and then not only did some wells not work but often there were no wells at all and the insiders just stole the money. There was political outcry so laws were passed to stop selling direct to small investors. The rational to allowing wealthy investors to punt is that a) they can afford to lose, or at least do so quietly without causing a political stink, and b) can afford professional advice and get their accountant to have a look and so on. Investor protection laws are still useful - there are plenty of scammers out there - but I think could be updated. For example the government could have lawyers and accountants at least check out the money was being invested in a business and not just paid out to the insiders. In the UK we have some equity crowd funding which seems to kind of work.
This has been explained to you about 100 times already, why not start with your best argument instead of pretending the question has never been asked before? For the record I support raising equity through things like Kickstarter and lowering the accreditation threshold for small investments, but you're being extremely disingenuous here.
I don't recall any good explanations, maybe you could recount the best ones?
It can't be because the rule provides strong protection of non-millionaire savings, because there are already endless ways for the gullible to lose all their money. It can't be millionaires are especially immune to common scams, because there's no evidence of that – and in fact quite a lot of evidence to the contrary.
Why not make these government policies wealth-oblivious, the same way they're race-, gender-, or religion- oblivious?
Why not base any necessary protections on objective tests of knowledge and ability, as with driver or occupational licensing?
The problem with small-scale investing is that the smaller your investment, the less you can afford to spend doing research and due diligence on what you're giving money to. Also, companies don't generally want to deal with a bunch of tiny investors if they don't have to, so even if it were legal most of the good investment opportunities still wouldn't be available to people who don't have enough money to count as qualified investors. This is apparently especially true of Silicon Valley VC, where everyone wants investors with good contacts.
Basically, it'd open up individuals to being scammed a lot more and the non-scams would still not be open to them.
>why aren't there limits on lottery ticket purchases, or casino gambling,
Because they're profitable to the state. There have historically been blanket bans on both of these things at all wealth levels in the US. I still know of no private lotteries.
Both exist to exploit people who don't understand probability, and are essentially voluntary regressive taxes. When it comes to these two, now is the dumber era.
Wow, way to live up to your name. There are many private lotteries, they're called raffles. Several times a year in SF there are billboard advertisements for the opportunity to buy lots in a raffling off of a house in the city or several million in cash.
Beside which, capital gains tax probably earns more for the state than either lottery or gambling income in many states.
Gambling is regulated. Loans for real-estate are regulated (sometimes imperfectly). Public stocks are simple and standardized enough that information about them is easily available and a buyer can be expected to understand.
Nobody becomes destitute after funding a failed Kickstarter project because the amounts are small. That doesn't need to change. Limits could be in place. What needs to go is the $1,000,000 threshold for getting any equity at all.
The grandparent was explaining why these laws exist in the first place. Yes, perhaps they should change to accommodate new modalities, but that doesn't happen quickly (nor should it.)
> The reason for the accredited-investor regulation was to prevent people from putting all of their wealth into risky investments they know nothing about and being left destitute.
Perhaps limit the amount that can be invested without accreditation?
Pro: few people are likely to get scammed out of life-damaging amounts of money.
Con: might lead to a system where some scammers are skimming small amounts from large numbers of people, but not causing enough pain to do something about it.
I know it's a bit of a libertarian viewpoint but it is not the government's job to be my nanny. If I wish to throw all of my money down the toilet on some hopeless start-up I should be allowed to do so.
Do you want to live in a country where other people can do equivalently stupid things and you have to deal with the consequences? No man is an island - some people are better making a burden of themselves than others.
We should have a rule that prevents people quiting thier perfectly sensible jobs to work on startups. They are risky as hell and when fali founders are burden to society.
This makes sense when the only actors involved are you, the start-up, and the government. In such a case, I would agree with you. To explain why such a case does not exist, I'll ask you this:
Why is the most important piece of information Kickstarter shares with you the amount already pledged? You can see this in their page layout and in their various widgets.
I would tend to agree in spirit but, of course, no one wants to throw their money away, they get tricked into doing so. Government does have an interest in the livelihood of its citizenry.
The rules are indeed a little ridiculous, especially when juxtaposition against gambling.
The distinction is in the process of being removed with the JOBS Act. It was signed into law in 2012 but the SEC has been slow to enact the regulations. Hopefully it can be used to support the future Oculuses! (Occuli?)
Note, the accredited-investor rules are not an "ability-to-pay" test. That would be fair: if you can write the check, you're in.
The rules also are not a creditworthiness test: they don't evaluate reliability, and investors want to give money, not take it from others.
And they're not a competence test: you can be credentialed to professionally handle others' investments and businesses (through things like passing the bar or "Series 7" or CPA exams), or otherwise have degrees in law, technology, and business... and still not pass the same "accredited investor" wealth standard that any dolt who inherits a million dollars does, automatically.
The distinction ought to be abolished as a matter of basic fairness.