The general rule of securities law is that they were set up to protect the individual investor who has very little money to save, and that the loss of his savings will cause him to jump off a building. We saw that, back in the 1920s.



The fact of the matter is, that while investor protection laws established a presumption that well informed investors need no protection, they lost as much as the individual investors over the years. In this chapter we'll first discuss who are the different investor groups according to the Securities Act, and then we'll see if they are still relevant in this category. I believe that after presenting a few cases, the differentiation the law presents will seem as archaic and misunderstood, and I'll offer a new way to describe different types of investors.

Section 2 to the act provides two groups of investors; the first is a non-exclusive list of banks, insurance companies, investment companies, retirement plans and other similar firms, and the second is a person who has the sophistication, net worth, knowledge and experience to be defined as one.

The Securities act assumes that there are certain persons, that are called accredited investors who have more knowledge and negotiation options than others. Due to that factor, their investment is usually made while receiving more information than the public does, and with greater possibilities to discover scams. The presumption is that if a big insurance company or a bank come to an investor and offer to invest, their weight and reputation will allow them to receive more information than the regular joe, and that their analysts will be able to discover any potential fraud.

Moreover, the assumption is that they will be able to provide the right legal protections because they have lawyers and tax advisors who safeguard them.

These accredited investors are granted more freedom than the regular joe to invest. For example, a company looking for investors may only address a maximum of 35 unaccredited investors for an investment in a company (Rule 506d ), but accredited investors may be generallny solicited.

Meaning that if you're planning on being a professional investor and joining the big-boy club where the real risks and options for profit apply, you need to understand how to be an accredited investors. Who are these? Under rule 501 the list is comprised of the following:

Under rule 501 the people who may be deemed accredited are the following:

Any bank , or any savings and loan association

Any broker or dealer

Any insurance company

Any investment

A business development company

Any Small Business Investment Company

Any plan established and maintained by a state for the benefit of its employees, if such plan has total assets in excess of $5,000,000;

Any employee benefit plan, if the investment decision is made by a plan fiduciary.

Any private business development company.

Any organization described in section 501(c)(3) ... with total assets in excess of $5,000,000;

Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

Any natural person whose individual net worth, or joint net worth with that person's spouse, exceeds $1,000,000. However, there are some exclusions; when counting the net worth, you cannot count the primary household as an asset (but on the other hand, the mortgage is not counted as a liability).

Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

Any trust, with total assets in excess of $5,000,000.

Any entity in which all of the equity owners are accredited investors.

Meaning, that the regulator thought that when some person's value reaches around US$1M, or when a company is engaged in the business of investing, then less protections should apply on them. This applies 1930s rationality on 2020s business. The fact of the matter is, that unlike the 1930s, data flows today quite fast, on one hand. And on the other hand, being well-funded does not mean that you know how to spot a scam.

We'll go over a few examples that show how accredited investors took the fall instead of being rational. The first is from the movie "The Big Short", which described the stock market crash of 2008. In brief, Banks offered individuals with sub-prime loans; meaning, loans to people who were quite possible unable to return them. This was made due to two factors: (i) the ever increasing price of the real-estate market ensured the banks that they could sell the house at any time and repay the loan; and (ii) following the issuance of the loans, the banks refinanced the loans.