Author Topic: Accredited Investor Rules  (Read 12313 times)

spider1204

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Accredited Investor Rules
« on: January 07, 2013, 08:55:39 PM »
Anyone else getting sick of being blocked out of investments due to these silly rules?  At 1,000,000 in assets or 200,000 income I wouldn't really have any concern about searching for better investments, would just take the safe 3% and call it a day.  As if net worth or income have any correlation to investment knowledge.  Mostly I'm just ranting about not being allowed to invest in the P2P lending companies.

On the other hand has anybody found any ways around this?

iamsoners

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Re: Accredited Investor Rules
« Reply #1 on: January 08, 2013, 11:21:18 AM »
I don't know much about the rules but it does seem silly to allow opportunities to some and not others (is this America?)--I assume the thresholds are meant to show that someone's able to tolerate risk?  I'm guessing I could find a lot of people making over $200k teetering on the verge though.

Anyhow, I was checking out https://joinmosaic.com/ recently--it seems really cool but only open to accredited investors or people in NY, CA, CO, OR or NV or people with business, finance, econ degrees.  Maybe you could find a way to set up a company or some sort of proxy in one of those places who could invest on your behalf? Or get a quick and dirty associates degree in one of those fields.

I'd be interested to see MMM try Mosaic and blog about the results...

tooqk4u22

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Re: Accredited Investor Rules
« Reply #2 on: January 08, 2013, 12:06:00 PM »
I don't know much about the rules but it does seem silly to allow opportunities to some and not others (is this America?)--I assume the thresholds are meant to show that someone's able to tolerate risk?  I'm guessing I could find a lot of people making over $200k teetering on the verge though.


No - the rules were not created for risk tolerance, they were created because the politicians believe that if you have a million or a $200k income then you have intelligence, resources, and access to attorneys/accountants for guidance so you know what you are doing.  If you don't have it, the politicians feel you are too stupid to understand and will be fleeced by the sponsor companies.  It is simply a matter of washington protecting you from yourself.

Nords

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Re: Accredited Investor Rules
« Reply #3 on: January 08, 2013, 01:33:50 PM »
As if net worth or income have any correlation to investment knowledge. 
I've been an angel investor for the last five years, and I'll probably be stuck in it for another five years.  I can attest that those bars are not high enough to keep out the stupid people, and I may be included in that characterization.

No - the rules were not created for risk tolerance, they were created because the politicians believe that if you have a million or a $200k income then you have intelligence, resources, and access to attorneys/accountants for guidance so you know what you are doing.  If you don't have it, the politicians feel you are too stupid to understand and will be fleeced by the sponsor companies.  It is simply a matter of washington protecting you from yourself.
I think that answer misses another issue-- corporate liability.  By setting the bar, the SEC has given startup companies a shield against litigation.  It affords them the freedom to execute their business plan without fear of being sued by disgruntled shareholders. 

I've seen a startup company whose board voted out a founder.  It was the right thing to do, and they'd already lost tens of thousands of dollars by not firing him earlier, but it's costing them $30K in legal fees (so far) just to deal with the groundwork to avoid full-on scorched-earth litigation. 

Jack

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Re: Accredited Investor Rules
« Reply #4 on: January 08, 2013, 01:35:25 PM »
I mentioned it in another thread (but never got a response), but it seems like you don't have to be "accredited" for Prosper, depending on what state you're in:

I don't quite make it through the requirements to lend.  I'd be interested in this once I am eligible though.

https://www.lendingclub.com/info/state-financial-suitability.action
http://www.prosper.com/legal/financial_suitability.aspx

For Prosper, it sounds like there are no requirements if you reside in a state other than the seven listed. Am I reading that right?

If so, I wonder why LendingClub is so much more restrictive (and why there's no California-like "$2500 exemption" rule for other states)?

It's annoying: I'd prefer LendingClub based on the opinions here, but I'd only be eligible for Prosper...

spider1204

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Re: Accredited Investor Rules
« Reply #5 on: January 09, 2013, 08:32:57 AM »
Unfortunately, both my home state and the one that I've moved to are not included.  There's also the theory that it protects accredited investors that meet the requirements from those that don't more than anything else.

http://undergroundeconomist.com/post/22847068021

Woolie

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Re: Accredited Investor Rules
« Reply #6 on: January 14, 2013, 09:06:11 AM »
I'll throw my less than 2 cents in here. I work in the insurance industry, providing liability coverage for investment advisors and stock brokers that recommend and sell financial products to the general public. The Accredited Investor standards are a way for those companies, and the insurance carriers that cover them, to apply some sort of standard for risk tolerance. I'm not saying the standards are right, appropriate, or do what they are intended to do, but it does provide the companies with some sort of peace of mind.

Most of the claims I see under these insurance policies are for unsuitability in long term illiquid investments like REITs, 1031s and TICs. I agree that these standards don't in any way actually distinguish sophisticated investors from non-sophisticated investors, though the theory is that if you meet those Accredited Investor standards, your portfolio is more able to take a hit in these illiquid investments than the average joe. We all know that isn't necessarily the case.

Mustachians are certainly not average joes and from reading here, many are much more sophisticated and willing to learn and understand the risk involved with a product like a REIT than many average investors are. And it's also true that the Accredited Investor status is not required on all types of investments either.

Though I sell insurance to cover claims from these types of products, I still feel rather lacking in my knowledge on how they actually work and what makes them good investments for some, which I hope to rectify by hanging around the forum more often.

sirspiffy

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Re: Accredited Investor Rules
« Reply #7 on: August 12, 2014, 09:42:55 PM »
I'm fairly certain that a trust with a trusted AI as the trustee could circumvent the laws in the eyes of the court and divert the loss liability from the start up to the trustee.  I'm not an attorney but have a little experience using trusts, for similar purposes.  Or you could be hired and ask for stock as compensation. 

AssetGrinder

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Re: Accredited Investor Rules
« Reply #8 on: August 12, 2014, 10:21:52 PM »
There are ways around it. I ran into the same issue not long ago in an investment. I was very close to being accredited but just under the local threshold. To get around things I invested through my holding company and there were no issues there.

MrsOz

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Re: Accredited Investor Rules
« Reply #9 on: August 12, 2014, 10:46:00 PM »
Ummm...It's not like you have to prove you're over the threshold or anything.  Just sayin'.

bacchi

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Re: Accredited Investor Rules
« Reply #10 on: August 13, 2014, 08:52:15 AM »
Joinmosaic does ask for proof but, yeah, a lot of other investments don't.

gimp

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Re: Accredited Investor Rules
« Reply #11 on: August 13, 2014, 01:30:32 PM »
Honestly, I think it's a good thing. You know kickstarter? Great idea. Often, however, the projects are terrible and they hock a dumb-ass, never-going-to-work idea and manage to get funded, piss away the funding, and close.

The good news is that they don't promise you anything for your "donation". Sure, sometimes you get a t-shirt shipped to you, and sometimes it's a pre-order-if-it-happens type of deal, but it's very rarely either a big sum or a big promise. People are happy to throw $20 at something on the chance that it works and they get to pre-order it, and if not, no big deal.

Now imagine kickstarter, except instead of offering t-shirts and hypothetical-pre-orders, they're offering you percentages of the company and making wild promises of returns. Perfect storm: investments small enough that people can make them, often big enough that people will really miss the money, and targeted at the financially illiterate.

No thank you. Block that venue before it ever gets used, and keep it blocked. Normal people should not be investing in private companies. Hell, they should barely be investing in single stocks, let alone private companies.

Accredited investors may not be financially savvy, but they should have enough savings / income that a loss won't be devastating. Sure, it may be devastating to them, but it'll still leave them able to eat, work, and live indoors. You let your average idiot - or, especially, your average senior - put their life savings into Free Energy or whatever, and you have people ending up on the streets.

"But there are ways around it." If you know the ways around it, and use them, then you're knowledgeable enough to understand the risks - and if things go south, there's not much pity coming your way, since you drove right past the ten warning signs and off the cliff.

chesebert

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Re: Accredited Investor Rules
« Reply #12 on: August 14, 2014, 03:17:14 AM »
"But there are ways around it."

Doubt any reputable issuer would want to take on potential litigation risks. AI are usually required to sign a "big boy" letter before they are allowed to invest and make all kinds of reps in the purchase agreement.

I agree with Nords that the threshold is too low.
« Last Edit: August 14, 2014, 03:23:07 AM by chesebert »

chesebert

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Re: Accredited Investor Rules
« Reply #13 on: August 14, 2014, 03:29:51 AM »

Anyhow, I was checking out https://joinmosaic.com/ recently--it seems really cool but only open to accredited investors or people in NY, CA, CO, OR or NV or people with business, finance, econ degrees.  Maybe you could find a way to set up a company or some sort of proxy in one of those places who could invest on your behalf? Or get a quick and dirty associates degree in one of those fields.

I'd be interested to see MMM try Mosaic and blog about the results...
Seems like a P2P lending with an environmental twist. What is so cool about that? The middleman takes a cut on matching borrower and lender with lender taking all the credit risk and middleman get a profit cut regardless. I might as well go with junk bond, which carries a credit risk (betting on big public companies vs individuals) but I get to see all the disclosure required under securities law.

hodedofome

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Re: Accredited Investor Rules
« Reply #14 on: August 14, 2014, 06:14:02 AM »
If I had to choose, I'd rather poor people make private investments in small companies than completely waste it on gambling and the lottery. At least with a private company you have a chance of buying a winner. The lottery pretty much gives you no chance, and the odds are stacked against you in the casinos over the long term.

gimp

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Re: Accredited Investor Rules
« Reply #15 on: August 14, 2014, 12:32:39 PM »
hodedofome - That's a false dichotomy, because it's not either/or, there's also the obvious option of neither; and most people gambling against the house aren't tricked into believing their chances are good or it's a way to make a profit. Besides which, people have a simple way to make a private investment in a small company - start one, or be a partner in starting one.

But I like your username.

Nords

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Re: Accredited Investor Rules
« Reply #16 on: August 16, 2014, 12:06:39 AM »
"But there are ways around it."

Doubt any reputable issuer would want to take on potential litigation risks. AI are usually required to sign a "big boy" letter before they are allowed to invest and make all kinds of reps in the purchase agreement.

I agree with Nords that the threshold is too low.
My point was that there will be stupid accredited investors no matter what the threshold may be. 

If the threshold was adjusted for inflation since the last time it was tweaked, I would no longer qualify.

The "right way" around the accredited investor rule, as another poster mentioned, is to form a LLC of pooled funds that meet the accredited investor rule.  This tends to involve more accounting and other expenses that make the idea more expensive. 

The "other way" around the accredited investor rule is to lie on the affidavit and hope that nobody ever makes an issue of it. 

chesebert

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Re: Accredited Investor Rules
« Reply #17 on: September 29, 2016, 07:29:30 PM »

Anyhow, I was checking out https://joinmosaic.com/ recently--it seems really cool but only open to accredited investors or people in NY, CA, CO, OR or NV or people with business, finance, econ degrees.  Maybe you could find a way to set up a company or some sort of proxy in one of those places who could invest on your behalf? Or get a quick and dirty associates degree in one of those fields.

I'd be interested to see MMM try Mosaic and blog about the results...
Seems like a P2P lending with an environmental twist. What is so cool about that? The middleman takes a cut on matching borrower and lender with lender taking all the credit risk and middleman get a profit cut regardless. I might as well go with junk bond, which carries a credit risk (betting on big public companies vs individuals) but I get to see all the disclosure required under securities law.
+1 I completely agree with the AI requirements. I think it should be even higher like $5M in assets or $500k in earned income or actively engaged in the business of investing (e.g., if you work in front office of a PE fund)

chesebert

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Re: Accredited Investor Rules
« Reply #18 on: September 29, 2016, 07:32:41 PM »
"But there are ways around it."

Doubt any reputable issuer would want to take on potential litigation risks. AI are usually required to sign a "big boy" letter before they are allowed to invest and make all kinds of reps in the purchase agreement.

I agree with Nords that the threshold is too low.
My point was that there will be stupid accredited investors no matter what the threshold may be. 

If the threshold was adjusted for inflation since the last time it was tweaked, I would no longer qualify.

The "right way" around the accredited investor rule, as another poster mentioned, is to form a LLC of pooled funds that meet the accredited investor rule.  This tends to involve more accounting and other expenses that make the idea more expensive. 

The "other way" around the accredited investor rule is to lie on the affidavit and hope that nobody ever makes an issue of it.
AI thresholds are different for entities (different for investment companies, non-profits, trust, etc) and are higher than natural person. If your LLC comprises only AI members then no other requirement. Also LLC promoter also has to comply with Securities Law with respect to its own fund raising... Just our gov looking out for your best interest.

Lying is no good as issuer is required to do a bit more independent homework than to rely on an affidavit. Oftentimes a third party is brought in to ensure all investors are AI.
« Last Edit: September 29, 2016, 07:35:53 PM by chesebert »