August 17, 2007
Having reviewed your proposed changes to the definition of Accredited investor I must admit I have some severe concerns. Your proposed (as well as current) definition would include my 90 year old grandmother as an accredited investor (believe me she has no expertise in this field) as well as a whole host of the elderly. Meanwhile a young Warren Buffet would have been excluded, as would myself. Switching to an asset test exclusive of one's residence from an income test might lead to some unfortunate results. For instance, it would enable the elderly to invest in private placements (as they often have a higher net worth, yet depend on their assets to live) while prohibiting my college buddy who's in his late 20's and a very successful doctor from investing (even though he would currently be eligible). If we look at who such investments might be more appropriate for we can clearly see the danger in the proposed modifications.
I would like to provide the commission with more background as to my personal situation. I am currently a 26 year old ivy league graduate managing a small investment partnership (approximately $1 million in aum) that invests entirely in the stock market. I have raised this sum from family and friends and would like to continue recruiting assets in this manner. I have relied on the 35 investor limitation as well as the accredited investor limitation in order to comply with SEC regulations. It is my goal to make money, not for the wealthy but for people who I truly care about.
A friend of mine, who is also an Ivy League graduate and makes his living building quantitative models for determining option prices (and works for a major wall street firm) recently asked if he could invest $5,000 with me and I had to turn him down since he wasn't "accredited". However, I can't think of anyone who'd fit the definition in terms of investor sophistication better.
This contrasts to a relative of mine who is currently a major league baseball player and doesn't know the first thing about finance, yet he'd meet the SEC's proposed definition of not only accredited, but large accredited investor.
I feel that the current rules (as well as the proposed rules) are now placing me in the position that I have to exclude family and friends as potential investors and chase after the people I personally know, who have no need for someone to make them more money (i.e. very wealthy individuals). Furthermore, I feel that if I were simply attempting to create a ponzi scheme and scam people out of their money I'd already be violating so many state and local laws that anything the SEC says about the number of investors I have would provide little discouragement to my illicit activities.
Therefore, I feel the SEC should consider adopting tests that look beyond mere financial wealth. I do not believe a single Harvard MBA should be counted as unaccredited while my grandmother is counted as such. Your current and proposed rules prohibit the young, the very people who might be best in the position to take financial risks in business start ups, or benefit most from a successful hedge fund, from participating. In contrast your regulations hugely benefit the established banks, brokerage firms, and large institutional money managers.
I propose that the SEC institute a College Degree component to its accredited investor tests and automatically confer accredited investor status to all individuals who hold a PHD or masters degree from an accredited institution.
Additionally, if funds permit, the SEC should provide means in which individuals can demonstrate their financial competence with the commission and hence become accredited investors even though they would not otherwise qualify as such. This could be accomplished either via a phone interview, an on-line test taken at a testing center and paid for by the individual (similar to how the GMAT is currently taken), or some other means.
Lastly, I believe that family, both immediate and extended, should be eliminated from the investor count or at least automatically given accredited investor status in terms of calculating the number of permitted investors.
Thank you for considering my proposals and I look forward to your response.
-David Lazarovic