By Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com or JimV@eLearnSuccess.com. Or you can check out my eLearning course at http://www.elearnsuccess.com/start.aspx?menuid=3075 or http://www.youtube.com/user/eLearnSuccessor or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW
Everyone knows you need a license drive a car.
You also need a license from the Government to be a doctor or a lawyer or an accountant or stock broker.
Wow! It seems like the Government likes to restrict access to all the good paying jobs.
Maybe that's why Government makes it difficult to make an investment, unless you are already mega rich.
You don't need a Government license for minimum wage jobs like flipping burgers at MacDonald's or greeting people at Wal-Mart. The Government lets anyone work in low paying jobs.
Why do you need a special Government permission to make good money, but Government allows anyone to work for the minimum wage?
Maybe the Government licenses doctors, lawyers, accountants and stock brokers because people pay them a lot of money. Or, maybe people pay them a lot of money, because Government license requirements limit competition.
Does this sound like another version of the question: Which came first, the chicken and the egg?
People have long debated whether the benefits of Government licenses justify the increase in cost associated with Government licenses. Few people change their minds.
But let's examine the basic motivation for limiting the ability of people to make investments. Supposedly, Government licenses exist to protect the public from people who aren't competent to perform services.
But does the same rationale apply to investors? What explains why the Government imposes restrictions on who is allowed to make different types of investments? Does licensing investors make any sense?
Investors give money. They don't collect money. And money is fungible. One person's money is no better or worse than another person's money. So, limiting who can invest doesn't promote higher quality investing.
Then why is the Government so intent on limiting who can make investments?
Let's talk about the SEC's recent rule change for Rule 506 (c) private placements under Regulation D that requires businesses to verify that an investor is an "accredited investor."
You used to be able to take someone's word for it, if they told you that they are an "accredited investor."
Now, if you want to advertise your offering, you have to check financial documents people must give you to prove they are an "accredited investor."
It's kind of like a store clerk or bar tender who checks your driver's license before they sell you a beer or wine.
But instead of your driver's license, the clerk or bar tender asks to see your bank statements or tax returns. That's much more intrusive into personal finances and exposes you to identity theft and other risks.
Why would the Government want to increase these risks for investors? Identity theft occurs a lot more often than securities fraud. So, Government seems to be struck in time warp fighting an old enemy while new enemies are creating bigger dangers.
Why is the Federal Government using SEC Rule 506 (c) to decide who is allowed to be a capitalist? Are the benefits worth the risks and the inconveniences?
Many people the new Rule ostensibly seeks to protect don't want this protection.
The new verification requirement is already annoying many investors. The Angel Capital Association announced a few days after the new rule was released that the new SEC rule could kill angel investing: http://www.angelcapitalassociation.org/blog/new-sec-rules-could-kill-angel-investing/
We'll discuss the accredited investor verification process SEC Rule 506 (c) imposes at length below and why many investors oppose the new verification requirements.