Will The SEC Ever Stop Breaking The Legs of Entrepreneurs & Start Protecting The Little Retail Investor?

By James Santagata
Principal Consultant, SiliconEdge


"October: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February."
- Pudd'nhead Wilson's Calendar


There is no doubt that the stock market can be a very unforgiving institution but does the SEC's tactics if not self-described mandate of breaking the legs of Entrepreneurs and rolling over little Retail Investors make it any safer?

This is highly doubtful as the SEC has arguably become a poster child for the economic concept of regulatory capture, having moved from their initial role of investment information disclosure in the 1960's to their current role of supposedly "protecting investors" since the 1990's. There is also the issue that the existence of the SEC and what I term to be their "SEC-anointed" stocks injects moral hazard into the system.

But who, prey tell (spelled as intended), is the SEC protecting? 

Surely it isn't the little retail investor who has had to contend with the like of SEC-anointed fraud stocks and scammers like Enron, Global Crossing, the Steve Jobs Options Backdating Scandal and, of course, the Big Daddy himself, Bernie Madoff.

What's most amazing about Bernie Madoff's fraud is not just that he got away with it, but that the SEC had no intention of stopping him!

That may sound like an outlandish or unsubstantiated allegation until one considers the documented facts. Starting in 2000 then again in 2001, and 2005, a forensics accountant by the name of Harry M. Markopolos repeatedly notified the SEC of Bernie Madoff's fraud both verbally and in writing.  Markopolos provided detailed supporting documents only to be ignored by the SEC again and again.

Here is Markopolos' complaint to the SEC regarding Madoff where he identifies 29 Red Flags:

• The World's Biggest Hedge Fund Is A Fraud (slideshare)
  

Now it appears that the SEC is continuing their assault on both individual investors who want better returns than are available through the retail market or whom just want to invest their own money as they see fit (if they can blow their money in Vegas or on penny stocks, smokes or state sponsored lotteries why not stocks?) as well as entrepreneurs looking to raise funds for their companies.

The SEC is doing this by considering to raise the financial requirements for being designated an accredited investor. Currently, an individual accredited investor is defined as follows: 

1. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;



2. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or

Apparently, too many Americans have now become cashed up and have too easily overcome this financial hurdle. In the last go round, the  SEC changed the rules so that an individual's home was excluded but apparently that wasn't enough to keep out the amount of new individuals looking to invest wholesale (as opposed to retail).

To remedy this our  "protectors", the SEC,  now want to index the SEC's individual accredited investor's  financial requirements to inflation. 

Here is a comparison of the current requirements and what the future requirements would mean:

An individual accredited investor is now defined as someone with $1 million in net worth, minus the value of their primary residence, or with annual income of $200,000 in each of the two most recent years and with a reasonable expectation to bring in the same income level in the current year..

The inflation indexed requirements would be about $2.5 million of individual net worth while the annual income requirement would rise to $450,000.

The SEC is offering some protection no doubt, but for whom? It seems this protection is more likely to benefit fraudsters and incumbent wholesale investors than entrepreneurs looking to raise money and the little retail investor.

http://m.bizjournals.com/sanjose/news/2014/05/20/more-than-half-of-angel-investors-could-be-barred.html