February 28, 2017

“Accredited Investor” Definition: Getting the Oprah Treatment?

This speech from Friday by Acting SEC Chair Mike Piwowar reminds me of Oprah Winfrey’s famous free car giveaway: “You get a car! You get a car! You get a car! And you get a car! Everybody gets a car!” [Can you believe it’s been 13 years since Oprah did that!]

Here’s an excerpt from the speech (& here’s a related WSJ article):

In my view, there is a glaring need to move beyond the artificial distinction between “accredited” and “non-accredited” investors. I question the notion that non-accredited investors are truly protected by regulations that prevent them from investing in high-risk, high-return securities available only to the Davos jet-set.

Here, I appeal to two well-known concepts from the field of financial economics to show that, in maintaining an “accredited” status in our regulatory structure, we may have forgotten—and in fact disadvantaged—a set of investors. The first is the risk-return tradeoff. Because most investors are risk averse, riskier securities accordingly offer higher returns. Therefore, prohibiting non-accredited investors from investing in high-risk securities amounts to a blanket prohibition on their earning the very highest expected returns.

The second concept is modern portfolio theory. By holding a diversified portfolio of assets, investors reap the benefits of diversification. That is, the risk of the portfolio as a whole is lower than the risk of any individual asset. The correlation of returns is the mathematical key. When adding high-risk, high-return securities to an existing portfolio, so long as the returns from the new securities are not in perfect positive correlation with the existing portfolio, investors may reap higher returns with little to no change in overall portfolio risk. In fact, if the correlations are low enough, the overall portfolio risk can even decrease. As such, excluding certain investors from diversification options deprives them of important risk mitigation techniques.

These two basic concepts of economics demonstrate how even a well-intentioned policy of investor protection can do more harm than good, for instance, by exacerbating inequalities of wealth and opportunity.

Doubts Arise as Investors Flock to Crowdfunded Start-Ups

Meanwhile, as noted in this NY Times article, there are concerns that unsophisticated investors aren’t being protected in crowdfunding. Replete with fraud. Shocker…

Check out this white paper from the SEC’s DERA about investing in OTC companies…

Tomorrow’s Webcast: “Pay Ratio – The Top Compensation Consultants Speak”

Tune in tomorrow for the webcast – “Pay Ratio: The Top Compensation Consultants Speak” – to hear Mike Kesner of Deloitte Consulting, Blair Jones of Semler Brossy and Ira Kay of Pay Governance “tell it like it is. . . and like it should be” about the upcoming implementation of the pay ratio rules.

Broc Romanek