March 6, 2007
My comments relate to the accredited investor definition. I agree investments are becoming more complex. And, many investors are not in a position to effectively evaluate these new vehicles. However, I believe the criteria you are using to identify sophistication is flawed. My experience is that my clients with $5 million net worth are not necessarily more financially sophisticated than those with $1 million net worth. In fact, because I am making the investment decisions for both clients, they are inherently equally sophisticated. Maybe I'm missing it in the language, but why isn't there an exception to the accredited investor definition for situations where a non-accredited investor is relying upon a sophisticated registered investment advisor as his/her purchaser representative? If the SEC is really interested in allowing sophisticated investment decisions, such an exception should be established.
Additionally, I believe you should rely upon the market for some self-regulation. Most private investments require some minimum $ investment to participate. That, in itself, acts to screen out lower net worth individuals. A second mechanism that the SEC could impose would be to limit an individual private investment to 20% of an individual's (allow 100% joint assets to be included) net worth or investments. This constraint, combined with private funds' minimums, and a purchaser representative exemption for investors working with RIA, will do a much better job accomplishing your objectives than establishing arbitrary cutoffs that do not reveal sophistication.
Much of your discussion relates to justifying the new levels based upon those that were established in 1982. I'm not sure what is magical about the amounts established in 1982. The investment world is far different now than it was in 1982. Let's come up with the right solution for today, rather than anchoring the approach to dated, flawed criteria.
Rather than limiting investor behavior, I believe the SEC would be more effective in protecting investors through more stringent registration and disclosure requirements. The free market system has worked for centuries in the U.S.; limiting individual freedoms is not the answer.