Hiking hedge fund investor qualifications probably won’t help anyone, according to Dow Jones Columnist Thomas Kostigen.That’s because even with the present requirements—that investors have at least $1 million in assets, or income s over $200,000 annually—the Securities and Exchange Commission never really checks to see whether investors are really worth what they say.
“In my 20 years of practice, I’ve never seen the SEC go back and look at investor qualifications,” said Ted Cohen, a securities lawyer at Spolin Silverman & Cohen in Santa Monica, Calif.
Last week, the SEC voted to raise those requirements to $2.5 million in liquid assets, severely trimming the proportion of the population that could qualify from more than 8% to less than 1.5%.
Investors who apply to qualify do have to attest to the veracity of their claims, and those caught lying could face jail.
Kostigen asked several brokers whether they asked for documents supporting investors’ claims, and most said no.
“Issuers who chose to sell directly probably aren’t as concerned as much about the history and sophistication of investors as they are about getting money from them,” Kostigen wrote.
Rather than qualify investors based on assets, which can be easily obfuscated, regulators should require that investors be subject to written exams, Kostigen suggested.
“This would do what the SEC is trying to do: protect investors,” he wrote. “Otherwise, all the agency is proving by increasing the net-worth minimums for accredited investors is that the rich are afforded more opportunities in the capital markets. And that may give enough reason for some people to lie to get in on the game.”
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