December 30, 2006
re: File number S7-25-06
Dear SEC Commissioners and Staff,
I would like to register my strong objection to the proposed rules increasing the threshold to qualify as an "accredited investor."
As someone who qualifies under current rules, but probably will not qualify (at least not for a few years) under the proposed rules, the damage you propose to do to my ability to succeed financially is unacceptable.
It is true that private investments can be more opaque than publicly-traded investments, but it should be obvious to any investor that due diligence is a key responsibility in investing. To the extent that a person, group, or company that I invest with lies or commits fraud, that is already illegal. But it is also in the small minority of investment outcomes, even for those investments which fail.
Many of us have heard the expression the rich get richer. Part of the reason that statement is frequently true is because the rich see investment opportunities that the rest never see. And part of the reason the rest never see them is accredited investor rules.
While many of these opportunities are risky and many fail, there are also tremendous winners on occasion. It does take experience and some intelligence with ones asset allocation to be involved in these investments in a way which is not excessively risky, but people must be allowed to take risk. It is our money, not yours.
You justify increasing the accredited investor standards by saying they were created years ago and that inflation and increases in wealth has rendered them too low. The truth is that the standard was too high when it was created and that the changes in investor wealth have gotten to a place where the accredited investor standards finally make sense.
Someone who has $1 million in net worth, or earns $200,000 a year is likely smart enough to make his or her own investment decisions without being prevented by the SEC from access to some of the most profitable investment vehicles.
The idea of automatically increasing the standard every 5 years for inflation is also not sensible. It would create a paperwork and regulatory nightmare for private companies raising funds, for hedge funds and venture capital funds, and for investors who might be near the threshold while providing no benefit. At those levels of wealth, inflation (unless it is at some historically high level such as in Germany in the 1930s) is nearly irrelevant for the purposes of someones ability to invest.
If you must make a modification to accredited investor rules, the most sensible would be one which prevents a person from putting more than some share (maybe 20%) of his net worth in any one private investment, particularly a very narrowly based one such as an investment in one companys private equity issuance as opposed to a large and diversified hedge fund. Beyond that, you should remember that we live in a free country whose booming economy has always been based on the willingness and ability of entrepreneurs and investors to take risk. While it is a responsibility of the government to prevent and prosecute fraud perpetrated on investors, it is not the proper role of government simply to preclude someone from an investing opportunity based on arbitrary standards.
The current accredited investor rules are already more than sufficient to ensure that the rich get richer and the rest have far fewer opportunities to catch up. People are not stupid, and must be allowed to take risks and make mistakes. I strongly urge you to eliminate your proposed changes to these rules which will only further reduce the chance for willing investors to improve their families financial situations.