> Employees of investment funds can be accredited for purpose of investing in their employers fund
This is a bad precedent. The biggest danger with investment is lack of diversity. Investing in your employer severely increases your risks (albeit increases rewards if you win). A great gamble when you win (startup unicorn) but a terrible gamble when you lose (company bankruptcy => lose job and lose retirement fund. Game over: play again?)
Someone writing a $20,000 cheque cannot spend $2,000 to $5,000 on lawyers every deal. This self selects for getting screwed. I would go so far as to say it is not possible to invest in private markets responsibly, outside one’s employer’s stock, with solely $5 to $25k cheques.
This is different in the public markets where the burden for disclosure is on the issuer. There is still risk. But you can’t buy Apple stock that loses money when Apple goes up. Options are complicated. But the complexity is standardised. It is totally possible, on the other hand, to buy common stock in a company that gets restructured to zero, or invest in an SPV that loses its shares to third-party repurchase rights. No amount of Googling will save you because the terms on each deal are bespoke.
I'd argue that if your employer is still private, investing in their stock is often quite unresponsible as well. Often you don't even get real stock but options, there can be arbitrary dilution, and there is no contractual right for you to get your money back (unlike if you invested money).
Often, but not always. You work there. And you are surrounded by others evaluating the same, or a similar, investment. That creates the possibility of an edge.
That possibility doesn’t exist for non-insiders. Without those advantages you’re relying on “knowing the right guy”. Nothing more.
Wouldn't it be a better, more free, system to just make it law to issue strong warnings suggesting up to $20,000 in legal fees for the inexperienced noobies upon any share issuance.
These clauses are already commonplace. People don’t read them. They then turn their losses into a political problem that breeds feel-good laws mandating red tape for everyone. Best case. Worst case: a crisis of confidence in our markets and an ensuing depression.
Better law might be a cap on this asset class as a percent of one’s investable assets?
I have seen many very wealthy investors lose a lot of money on private investments because they haven't understood their share rights relative to other investors. These companies often need to raise further capital at pretty low valuations so they end up being significantly diluted.
However the most important thing is that wealthy investors can afford these losses, other investors much less so. Only after building up significant pension savings and owning a home would I ever advise someone to invest in a higher risk opportunity.
Some requirements for diversification (instead of accreditation) would help mitigate such risky behaviour, and allow small investors to invest too.
Do “director-level management and those employees that are actually responsible for the investment activities of the fund” make sensibly diversified investment decisions? I don’t have a wide enough experience to answer that, but my very limited experience says no, they are just as likely to concentrate everything into one risk.
The SEC doesn’t care whether accredited investors are more or less likely to go all-in or to make terribly risky and concentrated investment decisions. They only care about whether or not accredited investors are in a position to get (and to a lesser extent, understand) the information they need to make the investment.
The psychology of this occupies a chunk of Thinking Fast and Slow. People discount the probabilities when taking a bigger risk to avoid a loss.
The simple example is anyone who has ever started a business, no matter what field. At some point, many had to pony up more cash (either as investment into the company or as drawn out living expenses).
So what’s the difference? And why allow one but not the other?
The goal of the SEC isn’t to prevent people from making stupid decisions - it’s to have a fair an honest paying field without bad actors.
You can get a diversified (fractional share) portfolio today with a minimum deposit on the order of $10. That seems more than adequate.
I can dream up any number of scenarios where allowing someone with $10k to invest in a certain private business is good for everyone (something local or specialized, for instance), but these are outweighed by the risks of opening the door to all sorts of exploitation of investors without even the little bit of protection the public market standards supply.
A brief review of the shenanigans surrounding the shit-coin boom gives you a taste of what happens when you grant the uninitiated unfettered access high risk assets.
I don't think you can adequately regulate that volume of market participation.
Depends on the investment firm in question. There are many prop trading and HFT firms that essentially never lose money and consistently return 100%+ on invested capital. Junior employees often can't invest in the strategy because they don't meet the accredited threshold. It'd be pretty to hard to argue that this is doing them a favor.
For guys at mega funds, it's going to be really easy. For people in prop shops? Not that much.
Just like Long Term Capital Management. Can't lose!
That they've chosen to work for that employer vs others implies they already think it's a good bet and worthy of investment, but not necessarily that they're going to put all of their funds into it.
If they treat it as just another diversification option, shouldn't be a major problem.
I thought they updated the law recently (or at least considered doing so) to allow non-accredited investors to invest in such enterprises, so long as it was a small amount, thus satisfying that (better) desideratum?
Though I can't seem to find it easily from googling.
No way. They are there to make for a level playing field with honest players and weed out the bad actors.
Your or my stupid decisions are outside of that mandate (and should remain outside of it).
$VT/$VTWAX let them invest in 8800+ different companies across the globe.
It seems like an oddly American thing to me that investors can actually use wealth as a surrogate for professional certifications.
Bad investing decisions have always and will always be allowed.
Not sure if giving them all accreditation is wise for them personally. On the other hand, they’re also professionally giving investment and trading advice, so shrug at least it’s consistent?
The SEC release notes that most family offices already qualify, but the law was somewhat ambiguous. The problem isn't that family offices can't legally invest, but rather that companies are reluctant to sell to them --- that's where the real risk is in running afoul of these rules, to the securities issuer, not the investor. Clarifying the rule mitigates that reluctance on the part of issuers.
When does it make sense to have a family office? I would guess, when you want to employ at least one financial professional full time? Is that right?
For both sentimental and other reasons the family business is not sold (i.e. may have never had audited financials since it had a single owner and no outside investors so it would be near impossible to sell it for a price the family believes is fair).
These type of "family offices" don't have any full-time investment management staff. They work with the same type of advisors an individual who had $5M of investment assets would.
Also, it’s possible to determine a value for any company.. not sure why you think it isn’t? Net profit/compensation to owner multiplied by a multiple determined by what industry/sector it is in is how small business valuation is done, plus/minus assets/liabilities.
Second issue on valuation, logically you're totally correct. In a jointly owned family business logic and Excel aren't the only way the business gets evaluated. Depending on the structure a sale may even be blocked by a minority owner member so all parties have to agree it is a fair sale price to sell.
If this "family business" has built up $5-10M in investment assets and the operating business runs at a break even while the investments generate $1-3M a year in gains is it a small "family office" or a struggling family business with an excellent treasury team managing the investment assets?
https://en.wikipedia.org/wiki/Family_office
But I think you're right as well.
When your networth is high enough such that paying for a professional money management means you get to recoup back the time you otherwise would have to spend to do so.
Family offices often deals with more than just finances, but also things like butler/chauffeur and other utilities (like gardening etc), and if they are truly rich, they would provide a fixer type service (e.g., somebody to get you what you want - like if you wanted a yacht/mansion/luxury goods, they'd be the one doing the looking and present to you the good options without you having to sweat).
The tl;dr seems to be "when it saves you time/effort," vs. "here is a financial threshold where a family office is more financially efficient than a traditional wealth manager." Right?
Click here for your once in a lifetime chance of a accredited investor certificate!!
Now the household needs to just earn $200K?
To meet the individual standards of accreditation, households can pool wealth between spouses, regardless of whether both spouses are acquiring a security.
Anything about CFAs? In official or un-official sources.
* The SEC can designate professional certifications from accredited institutions as a surrogate for wealth --- to begin with, FINRA Series 7, 65, and 82.
* Employees of investment funds can be accredited for purpose of investing in their employers fund.
* Firms that are SEC-registered investment advisors may now be accredited.
* To meet the individual standards of accreditation, households can pool wealth between spouses, regardless of whether both spouses are acquiring a security.
* LLCs with 5MM in assets are accredited, as are family offices with 5MM in assets.