From: David Hart
The proposed change to the accredited investor standard has far reaching ramifications that the SEC has failed to consider. I oppose this change as do the 90% of investors who unbeknownst to the majority of them are about to lose a valuable right.
It shows no clear policy or understanding of the business to go from regulating only the big funds to putting all the small funds out of business. The SEC starting with the attempts to regulated funds over 25 million, that the Goldstein case prohibited and moved to this proposal that will eliminate all the small hedge funds by removing the ability of 90% of the current investors to invest. Where and what risk is the SEC trying to address?
In actuality, the smaller funds have less risk than the bigger funds, in that brokers do not allow them to trade the same extreme leverage as the big funds. Further, the small funds have no risk of destabilizing the markets, the way large funds do. The big blow ups have been big funds. In fact, the number one reason that the smaller funds go out of business is the inability to acquire sufficient asset under management, so called critical mass, not because of losing all the investors’ money.
If any type of private investment fund should have a higher accredited investor standard, it should be all funds except hedge funds. Hedge funds hold all asset in a partnership structure, for the sole purpose of investing, primarily in liquid assets. The hedge fund has every reason to preserve the clients capital, since all profits must accrue to the client before the manager can make its profit, and in most cases the manager must make up all previous losses in order to restart compensation on current profits. This is the opposite from other, non- hedge fund, private placements where all the investors’ money is SPENT on various projects and salaries with hopes of perhaps making a profit some day. The investor pays offering expenses and the profits required in order to get a return on the investment are huge. For example, hedge funds might need a 2% profit, before the investor gets a profit and a non hedge fund 50%. The management in these funds have the goal of getting paid and the investors usually face a lot of dilution as additional investments offers are made to new investors.
From the investor stand point the rule unfairly blocks them from access to professional management in alternative investments. Alternative investments are required in any diversified and less correlated portfolio. Further, the key to investment returns is allowing returns to compound over time. This change to accredited investor status prevents people from investing until they are old enough to accumulate 2.5 million, mostly toward retirement.
The individual investors in hedge funds are only risking the money they put in to the fund, not any more. This allows investors to benefit from leverage and shorting without the unlimited risk they would take as individuals. Once again, funds are lower risk than direct investing. The funds also help as a diversifier. The SEC does not protect investors from shorting, buying a penny stock, an internet stock or high leverage commodities, where they risk every asset they own. Why should they refuse 90% of the investors all the benefits of a professional hedge fund manager?
The SEC points to the need to adjust the accredited investor standards for inflation. However, the people with one million net worth or an income of 200,000 are still financial sophisticated and as intended are for the most part professionals or business owners. Inflation has not changed the investor profile; rather it has changed what the investor can buy with his income and net worth.
In the past, investors were required to be accredited, having good income or assets, not both. The idea behind this was that these people had more experience in financial matters, hence were better educated in investing. Today however investors as a group, are more educated than ever. The internet and roaring markets of the past 10 years have everyone interested and educated. In fact, there is so much information available, that in a day on the internet, investors can learn incredible amounts of information and become truly informed. Today even the accredited investor standard, of the past is most likely unnecessary, as it is not correlated to the investor knowledge of alternative investments.
This proposal shows the type of elitism that America was not founded on, only the rich are allowed to get richer, while everyone else is left out in the cold. Clearly, the only beneficiaries of such a proposal are mutual funds and exchange trade hedge funds and indexes who do not want to lose clients to the entrepreneurial emerging hedge funds.
The proposal is also anti business in that it will put the smaller hedge funds and the plethora of service company’s including brokerages, administrators, accounts and law firms out of business. Why should these businesses and the jobs they create be destroyed by an arbitrary change in rules?
The smaller hedge funds are the incubators of the next great traders and investors. As such they must be allowed to flourish. After all that’s where the big successful funds came from, the ability of a manager to put together startup funds and prove his or her skill to the world.
I strongly oppose this proposal as it fails to consider the far reaching effects of such a change. It is a knee jerk reaction to do some thing about a problem that does not exist, and comes out of fear and lack of understanding..
Thank you for reconsidering this action,