From: Karl T. Muth
Sent: May 17, 2016
Subject: Comments in Advance of Meeting on F Street (ATTN Sec. Fields, Esq., C.P.A.) 265-27

20:30 Eastern Time; 17th May 2016

Dear Mr. Fields, Secretary, and Commissioners Several of the Securities and Exchange Commission,

I have had the pleasure of offering my analysis and opinions to the SEC in the past and had the enormous privilege of having Commissioner Luis A. Aguilar cite my comments on CEO renumeration in his August 5, 2015 comments despite our occasional disagreements, including as to that issue.

I thank you for your attention to my comments in these past few years.

Thank you also for inviting my comment to the Advisory Committee on Small and Emerging Companies; I cannot attend the meeting tomorrow morning on F Street so I instead offer this brief written account of the comments I would offer if I were present. I view the contemporary discussion as one not without precedent and not wanting for prelude.

As the Commission will recall, on January 25, 2011 I presented comments on the family of issues under Section 415 of the Dodd-Frank Act. As this Committee knows, I am a firmly-planted and vociferous opponent of “fine-tuning” of the accredited investor rule (see, e.g., Prof. Karl T. Muth, Supplemental Comments filed under S7-04-11, on file with the SEC). The present conversation is an encore to the accredited investor matter never fully resolved by this Commission.

I quote my earlier comments to your Commission: “The accredited investor standard, to serve its intended purpose as an exception to consumer safeguards, must bear some relation to the ability of consumers to understand financial instruments.  In this, it fails miserably, not only as an estimation of skill, but as a metric for vulnerability.”

The concept that an investor’s net worth excluding primary residence is a good proxy for investment acumen is a remarkably-optimistic assertion of market-based meritocracy at best and an arbitrary reference point for assessing investment knowledge at worst. The idea that subtracting one number from another leads to an accurate estimation of skill hasn’t worked since the subtraction of Russian judges’ gymnastics scores at the 1980 Olympics in Moscow.

The current rulemaking deprives savvy, well-informed people — particularly millennials, who I count among my students and among my friends and among your constituents (economists estimate millennials will inherit more than 25 trillion dollars in investable assets in the near future) — of the chance to invest in interesting companies at their most fragile, difficult, but lucrative stage.

Meanwhile, it implicitly (or, arguably, explicitly) asserts other people who cannot perform basic arithmetic are, by virtue of their incomes (or net worths), financially literate. As an educator who understands, and witnesses first-hand, what it takes to produce financially-literate investors, I can assure you net worth is an especially bad proxy for this characteristic.

Again, to quote my comments to the Commission five years ago:

“One argument that has for decades persisted both in the policy conversation and in the literature is that wealthy people can hire able counsel to guide them through the complex world of more unusual investments.  It needn’t be said that in a post-Madoff world this argument seems particularly dubious. “

The only reasonable alternative is to dismantle, as completely as possible, the consumer protection safeguards espoused within the ambit (and, now, corona) of Regulation D’s Rule 501 and to allow investors, regardless of net worth, to participate in a range of interesting investments. There is no doubt there will be winners and losers, but there is also no doubt – at least in my mind – that these winners and losers should not be chosen by your Commission under the pretext of consumer protection.

By removing 501 guardrails, bright-line subscription minimums, and other limits, investors will be able to participate in a wider range of investments and fuel the startup innovation engine our country so badly needs. One need only look at Kickstarter and other, similar websites to understand the number of non-traditionally-accredited, yet well-informed investors willing to participate in new and interesting things. The SEC should not be a barrier to that participation.

Thank you again for the invitation and opportunity to share my thoughts in advance of your accredited investor taxonomical discussion tomorrow morning and your Regulation D discussion tomorrow afternoon.

I hope my comments serve to inform, if not influence, the Commission’s discussions on these important matters affecting the majority of American investors.


Karl T. Muth, J.D., M.B.A., M.Phil., Ph.D.

Lecturer in Economics, Organizational Behavior, Public Policy, and Statistics
Northwestern University

Lecturer in Law
Pritzker School of Law, Northwestern University

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