Risk and Responsibility

by Louis Marascio on March 27, 2010

Risk

There was very long discussion about Fred Wilson’s post on the collateral damage that might be caused by Senator Dodd’s financial overhaul bill. In particular there is language in the bill modifying what an “accredited investor” is, significantly raising the financial bar for people to invest in startups as angel investors.

Folks are upset about this because it will make it harder for upstart businesses to get capital to start and grow. Suggested fixes include leaving the current language alone to lowering the bar based on invested capital to some artificially low number—Fred suggests investments up to $25k be exempted, for example.

I got into the discussion asking simply, “Why 25k?” The limit is entirely arbitrary so why set a limit at all. It is not the government’s responsibility to tell its citizens how to spend, invest, or waste their money. Setting these sorts of limits only confuses the legal situation and shifts the burden of responsibility in a fuzzy, non-deterministic way. The result is a mess of regulation that increases the cost of doing business with no real gain other than reducing bad publicity when some grandmother loses money investing in a young wiz-kid’s high-tech startup.

Proponents of investor accreditation suggest that the instruments are simply too complex for an average person to understand and it is too easy for sleaze-balls to take advantage of unsuspecting, uninformed people. This might be true, but then why does the government only provide protection around investments? The government does not tell me whether I’m suited to purchase a house nor do they advise for or against my trip to Las Vegas. This is simply selective nanny-state politics.

To be clear: the government absolutely has a role here. In my opinion that role is to ensure that sufficient law and regulation exist to ensure that people are provided sufficient information to make an informed decision—they should not be trying to define which of its citizens are wise enough to make such decisions. However, if practicality requires such an accredited investor status to exist then the government should solve the real problem. Accredited investors should be required to demonstrate proficiency to prove their ability to make informed risk decisions. Income and wealth levels are terrible predictors of this knowledge.

(photo credit: bluesquarething on Flickr)

  • Larry

    “It is not the government’s responsibility to tell its citizens how to spend, invest, or waste their money”

    I don't think it's unreasonable for the government to prevent people in certain circumstances from doing foolish things. After all I may be able to drive at 85 but I don't think everyone has a Porsche and the skills that I have. And I understand that even if it hurts me the bar has to be set lower (but at least not 55).

    “sufficient law and regulation exist to ensure that people are provided sufficient information to make an informed decision”

    The problem is that the sufficient information isn't sufficient. The only way to make sure grannys are protected is if they have enough money that loosing the amount they invest is only
    a small portion of what they have.

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