Laws restricting investment should be about promoting investment diversity, and restricting risk concentration. This would actually allow small investments from mom and pop (a good thing with other safety rules), and prevent the moderately wealthy from losing everything (a la Lloyds “names”). Most people are 100% exposed to their job and perhaps their home, and I think it would be good if they would also invest small amounts long-term in businesses directly (rather than indirectly via bank savings).

> Employees of investment funds can be accredited for purpose of investing in their employers fund

This is a bad precedent. The biggest danger with investment is lack of diversity. Investing in your employer severely increases your risks (albeit increases rewards if you win). A great gamble when you win (startup unicorn) but a terrible gamble when you lose (company bankruptcy => lose job and lose retirement fund. Game over: play again?)

The critical factor missed in these discussions is the cost of diligence.

Someone writing a $20,000 cheque cannot spend $2,000 to $5,000 on lawyers every deal. This self selects for getting screwed. I would go so far as to say it is not possible to invest in private markets responsibly, outside one’s employer’s stock, with solely $5 to $25k cheques.

This is different in the public markets where the burden for disclosure is on the issuer. There is still risk. But you can’t buy Apple stock that loses money when Apple goes up. Options are complicated. But the complexity is standardised. It is totally possible, on the other hand, to buy common stock in a company that gets restructured to zero, or invest in an SPV that loses its shares to third-party repurchase rights. No amount of Googling will save you because the terms on each deal are bespoke.

> it is not possible to invest in private markets responsibly, outside one’s employer’s stock

I'd argue that if your employer is still private, investing in their stock is often quite unresponsible as well. Often you don't even get real stock but options, there can be arbitrary dilution, and there is no contractual right for you to get your money back (unlike if you invested money).

> investing in their stock is often quite unresponsible as well

Often, but not always. You work there. And you are surrounded by others evaluating the same, or a similar, investment. That creates the possibility of an edge.

That possibility doesn’t exist for non-insiders. Without those advantages you’re relying on “knowing the right guy”. Nothing more.

You work at the place so you are already invested in them, and are surrounded by others who are also already invested in them. So you and your colleagues already do the bet that the startup is going to be successful, which might skew your judgement on further investment. Sure, you know more about the company than a small investor would, but neither of two cases give you a board seat, which would give you insight into how the company is really doing, and there are no regulated shareholder communications like a public company has.

Nobody is arguing private employee stock is a good deal. Just that it isn’t necessarily a bad deal.

So mush for freedom... I can't learn the law myself? What if I'm already lawyer completely capable of skipping this fee obstacle. Who is anyone to rate the capabilities of an individual?

Wouldn't it be a better, more free, system to just make it law to issue strong warnings suggesting up to $20,000 in legal fees for the inexperienced noobies upon any share issuance.

> Wouldn't it be a better, more free, system to just make it law to issue strong warnings suggesting up to $20,000 in legal fees for the inexperienced noobies upon any share issuance

These clauses are already commonplace. People don’t read them. They then turn their losses into a political problem that breeds feel-good laws mandating red tape for everyone. Best case. Worst case: a crisis of confidence in our markets and an ensuing depression.

Better law might be a cap on this asset class as a percent of one’s investable assets?

You raise a good point. The problem with early-stage high risk investments is that investors take a lot of assumptions from the public markets and project them on to private markets where the same rules don't apply.

I have seen many very wealthy investors lose a lot of money on private investments because they haven't understood their share rights relative to other investors. These companies often need to raise further capital at pretty low valuations so they end up being significantly diluted.

However the most important thing is that wealthy investors can afford these losses, other investors much less so. Only after building up significant pension savings and owning a home would I ever advise someone to invest in a higher risk opportunity.

I should have been clearer (I sort of assume what everyone here wants to know is whether startups can essentially promote their stock on HN), but it's not any employee --- it's director-level management and those employees that are actually responsible for the investment activities of the fund.

I have seen people of all ages make all-in bets with their wealth. Previously successful people often over-estimate their skill and have a naive belief in their ability to pick or make a winner. They can fail and lose most everything, and the consequences for their families and friends are harsh (although I don’t know if it is ends up being a benefit for the economy overall; and restarting from scratch again is easier if younger).

Some requirements for diversification (instead of accreditation) would help mitigate such risky behaviour, and allow small investors to invest too.

Do “director-level management and those employees that are actually responsible for the investment activities of the fund” make sensibly diversified investment decisions? I don’t have a wide enough experience to answer that, but my very limited experience says no, they are just as likely to concentrate everything into one risk.

The SEC doesn’t create rules to help people make good investment decisions. They create rules to help people (1) get timely & accurate information to make an investment decision and (2) not get taken advantage of and/or scammed.

The SEC doesn’t care whether accredited investors are more or less likely to go all-in or to make terribly risky and concentrated investment decisions. They only care about whether or not accredited investors are in a position to get (and to a lesser extent, understand) the information they need to make the investment.

To a lesser extent, they do care about risk, but only risk with systemic level impacts.

This is a good point. Limiting risk at the individual level by restricting the size of the investor pool can limit systemic risk.

Sunk cost fallacy is one of the vectors that leads to “all-in”. They may have started off with a reasonable position, but rather than losing half their net worth they keep piling more in to try to rescue the rest.

The psychology of this occupies a chunk of Thinking Fast and Slow. People discount the probabilities when taking a bigger risk to avoid a loss.

I'm just clarifying what the rule says, because I definitely made it sound like secretaries who work for prop shops can invest their own money in their employers, which is explicitly not the case.

People make bad decisions all the time, I don’t think the government should be in the position to make sure rich people don’t squander their wealth on bad investment. The government should make sure a scammer doesn’t fleece a naive person. “Protecting people from themselves” is an awful reduction in freedom — no thank you. Health insurance on the other hand...

But it’s over regulation.

The simple example is anyone who has ever started a business, no matter what field. At some point, many had to pony up more cash (either as investment into the company or as drawn out living expenses).

So what’s the difference? And why allow one but not the other?

The goal of the SEC isn’t to prevent people from making stupid decisions - it’s to have a fair an honest paying field without bad actors.

My employer has a system for employees to invest in it. They explicitly tell everyone “we don’t recommend you do this because if we go bust you’ll lose both your job and your investment”, and limit the total investment to a reasonable fraction of compensation.

It's interesting to consider that most tech companies implicitly allow their employees to invest their own cash, because the cash/equity split is a negotiated term in comp packages.

Also explicitly. I recently interviewed for a new job. Recruiters at both Amazon and Google encouraged me to invest my 401(k) contributions in the company stock. The Google recruiter even had the audacity to (falsely — 2008, 2014) claim that Google had "never had a down year."

Those are public companies; you can do basically whatever you want with their stock, as can anyone in the investing public, because they're subject to stringent audited disclosure rules. What's interesting are the private companies that allow employees to allocate capital to company equity.

Oh, sure.

Having worked at Google until 2019, I do not recall their stock being available in the 401k, nor any direct stocks there. All things available were the boring broad Vanguard funds.

Might have been Amazon with the 401k, and the Googler told me to never sell my RSUs.

Regarding allowing small-dollar investors access, isn't this amply accomplished by the public markets? Am I misunderstanding you?

You can get a diversified (fractional share) portfolio today with a minimum deposit on the order of $10. That seems more than adequate.

I can dream up any number of scenarios where allowing someone with $10k to invest in a certain private business is good for everyone (something local or specialized, for instance), but these are outweighed by the risks of opening the door to all sorts of exploitation of investors without even the little bit of protection the public market standards supply.

People can already get semi-direct access to capital markets by directly engaging with a broker or wealth management fund.

A brief review of the shenanigans surrounding the shit-coin boom gives you a taste of what happens when you grant the uninitiated unfettered access high risk assets.

I don't think you can adequately regulate that volume of market participation.

> This is a bad precedent. The biggest danger with investment is lack of diversity. Investing in your employer severely increases your risks

Depends on the investment firm in question. There are many prop trading and HFT firms that essentially never lose money and consistently return 100%+ on invested capital. Junior employees often can't invest in the strategy because they don't meet the accredited threshold. It'd be pretty to hard to argue that this is doing them a favor.

In my experience, partners at these firms won't even let junior firms invest in the fund. There is a clear cut pyramid hierarchy, and if admitting junior members means having to expand the AUM (thus crossing the threshold of the fund's strategy), I don't see this change being any meaningful to letting junior members invest.

For guys at mega funds, it's going to be really easy. For people in prop shops? Not that much.

AUM = assets under management

> Essentially never lose money

Just like Long Term Capital Management. Can't lose!

I'm sure some employees of such funds would like the option to invest a portion of their capital in their employer's fund/s.

That they've chosen to work for that employer vs others implies they already think it's a good bet and worthy of investment, but not necessarily that they're going to put all of their funds into it.

If they treat it as just another diversification option, shouldn't be a major problem.

>Laws restricting investment should be about promoting investment diversity, and restricting risk concentration.

I thought they updated the law recently (or at least considered doing so) to allow non-accredited investors to invest in such enterprises, so long as it was a small amount, thus satisfying that (better) desideratum?

Though I can't seem to find it easily from googling.

So the SEC is going to regulate an individual’s level of diversification now?

No way. They are there to make for a level playing field with honest players and weed out the bad actors.

Your or my stupid decisions are outside of that mandate (and should remain outside of it).

Also it would look bad for the employee not to invest in the firm. "don't you believe in us like your other colleagues?"

> Most people are 100% exposed to their job and perhaps their home, and I think it would be good if they would also invest small amounts long-term in businesses directly (rather than indirectly via bank savings).

$VT/$VTWAX let them invest in 8800+ different companies across the globe.

> * The SEC can designate professional certifications from accredited institutions as a surrogate for wealth --- to begin with, FINRA Series 7, 65, and 82.

It seems like an oddly American thing to me that investors can actually use wealth as a surrogate for professional certifications.

It makes sense in this instance, as the rule is designed to minimize the number of people whose lives will be ruined (and thrown to the state to support) by bad investing decisions, and the asset requirement both minimizes the likelihood of any one investor losing their shirt, and minimizes the number of investors. And again: the real teeth in this rule are about who issuers can market securities to, not about what random people are allowed to do.

No, it’s not about bad investing decisions. It’s about prevent bad actors perpetrating fraud on unsuspecting victims.

Bad investing decisions have always and will always be allowed.

Newly minted undergrads going into finance often get their Series 7 or 63 during training.

Not sure if giving them all accreditation is wise for them personally. On the other hand, they’re also professionally giving investment and trading advice, so shrug at least it’s consistent?

Is a "family office" well defined? $5M seems too small for what is normally considered a "family office." Also if you have a "family office" with $5M in it you'd meet the old standards for an accredited investor anyway.

They are well-defined. A family office is a company fully owned by a family, with no clients other than the family, that doesn't hold itself out as a public investment advisor.

The SEC release notes that most family offices already qualify, but the law was somewhat ambiguous. The problem isn't that family offices can't legally invest, but rather that companies are reluctant to sell to them --- that's where the real risk is in running afoul of these rules, to the securities issuer, not the investor. Clarifying the rule mitigates that reluctance on the part of issuers.

https://www.law.cornell.edu/cfr/text/17/275.202(a)(11)(G)-1

Thanks. That makes sense.

When does it make sense to have a family office? I would guess, when you want to employ at least one financial professional full time? Is that right?

At the lower end of asset value range families often end up with a "family office" because the previous generation ran a family business which was passed down and now it's jointly owned by a number of family members. The option is to sell the family business and distribute the cash or start a "family office" and run it and it's assets together in a pool.

For both sentimental and other reasons the family business is not sold (i.e. may have never had audited financials since it had a single owner and no outside investors so it would be near impossible to sell it for a price the family believes is fair).

These type of "family offices" don't have any full-time investment management staff. They work with the same type of advisors an individual who had $5M of investment assets would.

That’s not what a family office is. That is a family-owned business. See the link in the sibling comment.

Also, it’s possible to determine a value for any company.. not sure why you think it isn’t? Net profit/compensation to owner multiplied by a multiple determined by what industry/sector it is in is how small business valuation is done, plus/minus assets/liabilities.

There's a reason I put family office in "quotes", your view may be the Wikipedia definition of family office with $100M+ of investment assets, that isn't the view of many "family offices" out there and not matching Wikipedia doesn't make them wrong.

Second issue on valuation, logically you're totally correct. In a jointly owned family business logic and Excel aren't the only way the business gets evaluated. Depending on the structure a sale may even be blocked by a minority owner member so all parties have to agree it is a fair sale price to sell.

If this "family business" has built up $5-10M in investment assets and the operating business runs at a break even while the investments generate $1-3M a year in gains is it a small "family office" or a struggling family business with an excellent treasury team managing the investment assets?

People also use the term to mean something else, e.g.:

https://en.wikipedia.org/wiki/Family_office

But I think you're right as well.

> When does it make sense to have a family office?

When your networth is high enough such that paying for a professional money management means you get to recoup back the time you otherwise would have to spend to do so.

Family offices often deals with more than just finances, but also things like butler/chauffeur and other utilities (like gardening etc), and if they are truly rich, they would provide a fixer type service (e.g., somebody to get you what you want - like if you wanted a yacht/mansion/luxury goods, they'd be the one doing the looking and present to you the good options without you having to sweat).

That makes sense, although of course most people with significant assets pay for professional money management (there are several "tiers" of this kind of service, e.g. wealth managers) without actually having a family office.

The tl;dr seems to be "when it saves you time/effort," vs. "here is a financial threshold where a family office is more financially efficient than a traditional wealth manager." Right?

"The SEC can designate professional certifications from accredited institutions as a surrogate for wealth --- to begin with, FINRA Series 7, 65, and 82."

Click here for your once in a lifetime chance of a accredited investor certificate!!

Didn’t they already have a joint thing that required $300K?

Now the household needs to just earn $200K?

To meet the individual standards of accreditation, households can pool wealth between spouses, regardless of whether both spouses are acquiring a security.

> The SEC can designate professional certifications from accredited institutions as a surrogate for wealth --- to begin with, FINRA Series 7, 65, and 82.

Anything about CFAs? In official or un-official sources.

I'm guessing Coursera will start offering a FINRA certification program.

Google "Series 7" or "Series 65" to see how enthusiastically this market is already served.