Accreditation Laws Are Violating The American Dream And Discriminating Against Millions

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To investors,

The Securities and Exchange Commission (SEC) announced a proposal yesterday to update the accreditation laws to increase access to investments for investors. They specifically stated that they “seek to update and improve the definition to more effectively identify institutional and individual investors that have the knowledge and expertise to participate in our private capital markets.


As many of you know, this has been one of my biggest issues with the existing financial system — we use wealth as a signal for intelligence. The existing system requires an investor to have significant income ($200k+ per year for multiple years) or be a millionaire to enjoy the right of participating in many of the best performing investments.

Wait, that doesn’t sound right? Nope, it is true. Take venture capital for example. As a non-accredited investor, you are precluded from investing in the asset class and have to wait for a company to go public before you can purchase equity in an organization. Now why would that be a big deal? Waiting a little bit shouldn’t matter, right?

It matters a lot.

Here are two charts that show venture capitalists performance against the S&P 500:

Image result for venture capital returnsTop VCs vs. Average VCs vs. S&P 500 Returns from 1981 - 2016

The performance data on venture capital is not the only thing that is compelling either. Lets look at what the best performing investors are investing in — Yale and famed CIO David Swenson have more than 20% of their portfolio in venture capital:

Yale Endowment Fund

And the best performing fund in the country — The Dietrich Foundation in Pennsylvania — is known for having 80-90% of their assets invested in illiquid, private investments.

So if these private investments are so good, why are those who aren’t wealthy precluded from investing in them? There is the stated reason and then the real reason. The stated reason is that regulators and the government want to protect people from losing all their money. You know, the argument that “these investments are risky…you can lose all your money…..we want to protect you” type stuff. While this sounds good at first glance, if this were really the case, these organizations would shut down lotteries and casinos first. There are no accreditation laws preventing people from gambling away their wealth :)

To make things even more ridiculous, the rules are put in place to prevent people from investing in some of the best performing investments. Think about that — they are essentially saying “we don’t want you to lose money so we are not going to let you invest in the good investments.” Laugh out loud funny.

The real reason that non-accredited investors aren’t allowed to invest in these private market opportunities is because there are only so many of them available and the regulations ensure that only rich people can benefit from them. This is the crux of my issue.

The current accreditation laws violate the American Dream.

The American Dream is that anyone, regardless of your nationality, religion, skin color, gender, sexual orientation, or political beliefs, can live in the United States and build a life of wealth. The accreditation laws add an asterisk to this American Dream — that asterisk is “*Only if you’re rich enough to participate!”

As I’ve thought about these issues, I take it even one step further. Not only are the current accreditation laws a violation of the American Dream, but they are the definition of discrimination based on wealth. They quite literally prevent someone from doing something WITH THEIR OWN MONEY based on if they are a millionaire or not.

Pretty ridiculous in my opinion. This leads to the question of what are non-accredited investors allowed to invest in if they can’t participate in the private markets?

Traditionally, these opportunities have been in stocks, bonds, and commodities. According to JP Morgan, here are the annualized returns for the last 20 years or so:

20-year annualized returns by asset class

If you bought the S&P 500 and held it for 20 years, you made a 5.6% annualized nominal rate of return. But don’t forget about inflation! So the real return is closer to 3.5% annualized. Not exactly the path to financial freedom. And this includes data from the longest bull market in history, so this suggests that we are looking at the best scenario data set.

But maybe the S&P 500 isn’t the right way to invest. Maybe the regulators are right. Retail investors should wait until the private market companies go public and they can just buy equity in the individual business once “the professionals” have had a chance to vet the quality of the business.

Lets take a look at how that has gone recently. Here are some of the more popular IPOs:

You get the picture. Many of the popular companies that have been going public are not performing well in the public markets. Now why does this matter? It is because the private market investors are essentially dumping their bags on retail. The non-accredited investor has been precluded from investing in each of these companies while they were private, then they are told how great the companies are, everyone in the private market celebrates the IPO, and when retail buys the stock it tanks aggressively or provides little to no return.

So in effect, the private market investor made many multiples on their money while the public market investor is only allowed to buy equity once majority of the value has been sucked out of the investment. Don’t believe me? Take a look at the early investors in every single one of these companies.

Uber, for example, provided a 5,000x return to their seed investors when the company went public. It doesn’t matter how much money you invested — 5,000x your money is A LOT of money. Now the wealthy people will say that there is only one Uber. What they are actually saying is that “there is only one Uber and if you’re not wealthy, you have no chance of selecting it!”

Which leads me to the most ridiculous part of this issue — the wealthy continue to suggest that the reasons for accreditation laws existence is that it should (1) prevent fraud, (2) protect the uneducated retail investors, and (3) keep people from losing all their money. The problem with these three arguments are that (1) fraud is already illegal, (2) the new proposal is for people to get accreditation based on education and not wealth, and (3) there are no rules that prevent accredited investors from putting all their money in a single investment.

So essentially these arguments make little to no sense. But here is the best example I have that makes the accredited investor regulations so hypocritical — every analyst that works at a venture capital firm that doesn’t make $200,000 a year for multiple years or isn’t a millionaire, is not allowed to invest in the venture capital asset class. So these people can be professionally counted on to invest money on behalf of the rich people, but they are deemed unworthy of investing their own money right alongside those rich people. Again, laugh out loud funny.

The solution is fairly obvious — stop using wealth as a proxy for intelligence. There are plenty of dumb, rich people. And there are plenty of smart non-millionaires. We should create a test (think SAT or ACT) that requires people to understand markets, assets, portfolio construction, risk, and other aspects of investing. Allow people the ability to take the test and gain accreditation status, regardless of wealth or income.

Until we do this, we are actively violating the American Dream and discriminating against millions based on wealth. That isn’t what this country was built on and there is a better way. We must be a country of wealth creation or we risk losing our position as the global super power.

It looks like the SEC is actively working to make this happen, which is encouraging. I just hope it comes to fruition in a form that empowers American citizens to enjoy the life, liberty, and pursuit of wealth that many of them so desperately desire.


This installment of Off The Chain is free for everyone. I send this email to our investors daily. If you would also like to receive it every morning, join the 38,000 other investors today.


Why Facebook’s Libra Hangs in Limbo—and What’s Next in the Digital Currency Race: Given the brutal reception around Libra’s rollout during the summer and fall, why does Facebook remain committed to launching it in 2020? Banks, other tech companies, and national governments—most notably, China’s—are readying digital currency pilots of their own; Libra’s stumbles might ease the path for those that come later, or at least force regulators to clarify what they’ll allow. Libra itself, meanwhile, promises to course-correct based on the (often scorching) feedback it has received. Read more.

SEC Proposal Would Broaden ‘Accredited Investor’ Definition: The U.S. Securities and Exchange Commission wants to allow more individuals and entities to invest in regulated financial instruments. The SEC intends to add a list of new qualifications to become an accredited investor. At present, accredited investors are defined as individuals with more than $1 million in net worth (or who earn more than $200,000 per year), an organization with more than $5 million in assets, banks and institutions which meet certain legal definitions or entities that match certain other restricted terms. Read more.

Accounting Firm Lukka Debuts Tax Tool for Retail Investors: Lukka, one of the first accounting firms for digital assets, is offering a TurboTax-like service to retail crypto investors starting on Jan. 15. The move, announced Wednesday, comes after the U.S. Internal Revenue Service (IRS) issued updated guidance for calculating taxes on cryptocurrencies in October. The last time the IRS issued such guidance was in 2014, when the crypto market was less complex and fewer taxpayers held the assets. Read more.

Ex-Kraken Employee Alleges ‘Unethical and Illegal Tactics’ in Discrimination Lawsuit: Kraken, the U.S.-based cryptocurrency exchange, is being sued by an ex-employee who alleges the company unfairly fired him for raising serious issues with its business practices. The case – filed Nov. 26 in California– has been brought by Nathan Runyon, a military veteran with disabilities. While he seeks damages related to harassment at work, discrimination and breach of contract, some of the claims made against Kraken (Payward Inc.) suggest wrongdoing at the exchange, if true. So far, the veracity of the allegations has not been determined. Read more.

India’s Income Tax Department Is Secretly Training Its Officials to Investigate Cryptocurrencies: The Income Tax Department of India is secretly training its officials to investigate cryptocurrencies. An internal guidebook circulated by the department explains cryptocurrencies, their characteristics, the “dark side of Bitcoin” and the best investigation practices for tax officials. The Indian government doesn’t consider cryptocurrencies as legal tender, but it also hasn’t declared them outright illegal. Crypto investors are therefore still doubtful on how to show their investments in their annual income tax returns. Due to all these circumstances, earning through cryptocurrencies is a gray area for the Indian crypto community. Read more.

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Rong Chen is building Elastos, a decentralized internet powered by blockchain. He has had a long career building network infrastructure, operating systems, and internet services, which has given him an unique perspective on why decentralization matters so much. I really learned a lot from this conversation and found Rong to be equally as entertaining to speak with as educational.

In this conversation, Rong and I discuss:

  • Working at Microsoft in the early days

  • Building network operating systems

  • Why the decentralized internet is important

  • How Elastos is pushing the pace of innovation

  • Where Rong thinks dApps may have gone wrong

I really enjoyed this conversation with Rong. Hopefully you enjoy it too.


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Nothing in this email is intended to serve as financial advice. Do your own research.