Monday, 16 March 2015

What is a sophisticated investor?


If you have been at all interested in the development of ECF in the UK, you will know that the UK's FCA has declared that only sophisticated investors should take part. Its a problem that the SEC has been wrestling with in America, since the JOBS Act - to regulate or not to regulate.

So just what does the FCA mean by 'sophisticated investors' and how have the platforms here coped with this level of regulation?

We have to say we havent a clue what they mean. We havent found a single platform that vets its investors in any meaningful way. Most of them have tick boxes that declare ''you are a sophisticated investor''. Page footers give wordy details about how only 'SI's will be allowed to invest on this platform and then they give you the option to self certify. Its a similar situation to the old self certified mortgage market. We have failed to learn the lessons that the  Americans have.

Most platforms are very simple to join. It's possible to have multiple anonymous memberships for a single person. Fake email address, a couple of clicks and you are in. This is in keeping with ECF and our modern drive for immediacy  - ease of access is essential to grasp and hold people's interest. Imagine if you had to go through a verification process that worked - people would simply switch off.

So what was the point of the FCA ruling? Again we havent a clue. Perhaps they feel that by giving this guidance, they absolve themselves and the Ministers in charge of them of any guilt should it all go tits up.

One of the FCA's main errors was instigating an enquiry process which was largely populated by ECF platforms and their supporters. Take the UKCFA as just one such example. It is hardly surprising that the conclusion was extra extra-lite touch and shift the burden onto the public.

We believe the FCA are looking the wrong way. It's not the investors they should worry about, it's the platforms. Regulate the platforms so that the information they provide has to be properly vetted or they face a fine and they will soon mend their ways. Remove the game show promotions and the hyped PR. This would also thin out the real investment opportunities from the rest - as platforms would have to start charging pitches.

People or investors can look after themselves; given real information. If they cant then they deserve to lose their money. Caveat emptor only works if the playing fields are level.

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