I have seen people of all ages make all-in bets with their wealth. Previously successful people often over-estimate their skill and have a naive belief in their ability to pick or make a winner. They can fail and lose most everything, and the consequences for their families and friends are harsh (although I don’t know if it is ends up being a benefit for the economy overall; and restarting from scratch again is easier if younger).

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 create rules to help people make good investment decisions. They create rules to help people (1) get timely & accurate information to make an investment decision and (2) not get taken advantage of and/or scammed.

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.

To a lesser extent, they do care about risk, but only risk with systemic level impacts.

This is a good point. Limiting risk at the individual level by restricting the size of the investor pool can limit systemic risk.

Sunk cost fallacy is one of the vectors that leads to “all-in”. They may have started off with a reasonable position, but rather than losing half their net worth they keep piling more in to try to rescue the rest.

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.

I'm just clarifying what the rule says, because I definitely made it sound like secretaries who work for prop shops can invest their own money in their employers, which is explicitly not the case.

People make bad decisions all the time, I don’t think the government should be in the position to make sure rich people don’t squander their wealth on bad investment. The government should make sure a scammer doesn’t fleece a naive person. “Protecting people from themselves” is an awful reduction in freedom — no thank you. Health insurance on the other hand...

But it’s over regulation.

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.