Among the reform recommendations of the Cameron Committee (the Capital Market Development Taskforce) was a proposal* to expand the availability of our accredited investor exemption. It enables companies to avoid prohibitively costly securities offering procedures if they confine the offering to wealthy or sophisticated investors.

An article this month in the Journal of the American Enterprise Institute says that a similar US  exemption is damaging and should be scrapped. The author, Prof Scott Shane of Case Western Reserve University argues:

The end result is a system that unfairly excludes those with less money from the best investments. Accredited investors may, in fact, be more at risk of being the target of investment fraud than non-accredited investors, given that many fraudsters adhere to the Willie Sutton school of target selection: go where the money is.  The accredited investor rule makes it harder for entrepreneurs to raise money for their businesses. Non-accredited investors are much more numerous than accredited investors.

The criticism chimes with my experience. There are many fewer listed companies in New Zealand now then when I became a securities law specialist in the mid 1980s. The costs and risks of being a public issuer and a director of a public issuer are much greater, all for reasons unrelated to the underlying business. And rich people are as free as they ever werre to invest. So our capital market will continue to reinforce our fast expanding class divide.

Shane's proposed alternative is:

Rather than restricting investment to accredited investors, the SEC should simply limit the amount of money an outside investor can put into a single private company to no more than 1 percent of the investor’s net worth. By basing the rule on the percentage of net worth invested per company, the SEC could facilitate investment by non-accredited investors, while simultaneously encouraging the diversification necessary to protect investors against the risk of investment failure. By setting the threshold at 1 percent of net worth, the SEC could ensure that any loss incurred would not be devastating to any investors.

Probably better than the current rule, on the theory that politicians will  not move to the best change – just dump the useless superstructure of securities law and put the money saved into ensuring that defrauded investors can implacably enforce laws of general application – against misleading and deceptive conduct, conflicts of interest and breach of fiduciary duties of loyalty. 

   *Review the Securities Act and revise current Securities Act exemptions to provide a set of clearer, broader exemptions to the Act. These exemptions should be for: ‘registered investors’; ‘those who invest money as a principal business activity’; other professional investors, with clear, quantified sets of criteria; investors who have obtained a recommendation from a conflict-free authorised financial adviser; a more clearly defined exemption for relatives and close business associates; wealthy investors; and small offers.

Where quantitative information is required, investors should be allowed to provide certification of this themselves (and the issuer should be legally able to rely on it), avoiding the need for certification by a third party, such as a chartered accountant.

Exclude from the Financial Advisers Act people advising investors who are outside the scope of the Securities Act.