February 12, 2007
File number S7-25-06
Re: Accredited Investors in certain private investment vehicles. Changing the minimum net worth requirement from $1 million to $2.5 million.
In the paper proposing changes in defining an accredited investor to those with net worths from $1 million to $2.5 million, it states that these changes are being proposed to make important additional investor protections. This could hardly be the case. All this proposed rule change does is eliminate investment opportunities to this class of citizens. This rule change is yet another example of government attorneys treating successful adults like incompetents. Simply stating that inflation has effectively lowered the minimum requirements for inclusion in this group is not a reason or argument for change. Have you asked citizens in this group what they think? I will guarantee you that those investors in my fund with net worths between $1 and $2.5 million would tell the government to back off. My guess is that if you asked citizens with net worths between $.5 and $1 million, they would say the same. The limits for defining accredited investors should be lowered, not raised.
From my experience, there is little correlation between an individuals net worth and their financial understanding. Net worth is more closely correlated to age. An investors financial understanding is more closely correlated to where their wealth came from. This proposed rule change affects the wrong variable.
The paper specifically mentions hedge funds as a target yet very few hedge fund would ever be affected by this change because most all of them have such large minimum investments that this lower tier of accredited investors are not able to invest with them.
Far more harm would be done to the large number of individuals in this group that you would eliminate from potential investments than would be helped from making bad investments. Most investments targeted to this low end of accredited investors are small scale, locally based and are never marketed beyond word of mouth between friends and associates. I manage such an investment fund and your proposed rule change might put me out of business. I did do a SEC reg D registration for my fund and am committed to following the law, but from what I have seen, most of these small local investment opportunities simply ignore the SEC rules and operate illegally and under the radar. This proposed change is just going to result in more of this.
Sure you can protect people from harm by not allowing them to do something, but is this what people want? If people did not drive cars they could not be killed in car accidents, but we all want the right and the risk to do so.
Put the thieves and frauds behind bars, raise the standard for disclosure, but the elimination of opportunities is just going backwards.