The Real "Truth in Securities"
How the 1933 law is used to block ordinary citizens from profitable investments while keeping speculative trading wide open, all in the name of protection.
The Securities Act of 1933 presents a fascinating case study in regulatory contradiction. Initially designed to protect unsophisticated investors from financial predators, it has evolved into something far more malevolent: a system that systematically blocks access to stable, cash-flowing investments while maintaining wide-open access to speculative gambling.
Consider this: A retail investor cannot legally invest $1,000 in a professionally managed real estate syndicate—a cash-flowing apartment building that they could drive past themselves—with audited financials, experienced operators, and tangible collateral. Yet that same investor can, without restriction, purchase leveraged ETFs, trade naked options, or YOLO on penny stocks.
This, in the name of investor protection.
The Accredited Investor Artifice
The accredited investor standard reveals the system's core intellectual dishonesty. Federal law decrees the high-earning dentist a financial savant. The lowly-paid economics PhD: a plebeian rube. In this, we've inverted the definition of sophistication from competent to simply: rich.
This creates a remarkable regulatory structure: those who already possess capital gain access to the highest-quality investment opportunities, while those seeking to build capital are relegated to whatever remains after institutions and high-net-worth individuals have captured the alpha.
The results are predictable. High-growth startups, real estate syndications, and private equity opportunities flow to those who already possess substantial assets. Retail investors only receive access once these initial investments realize their growth potential. The IPO represents the ultimate regulatory predation: sophisticated investors sell assets once peak growth has passed, to retail investors who were unqualified to buy them when they were actually lucrative. Do you think retail investors today can't make rational decisions about whether they'd prefer to invest in OpenAI or SpaceX, before or after the IPO?
Meanwhile, these same companies know exactly how valuable the pre-IPO access is. And so do their employees and job applicants. Which is why a material component of employee compensation in high-growth public companies comes in the form of stock options and Restricted Stock Units. Apparently, retail investors are too unsophisticated to invest in this stock, but are absolutely sophisticated enough to value it as part of a salary negotiation.
The Innovation Constraint
The trouble extends far deeper than the public-private equity dichotomy. It feeds directly into the capital formation mechanics of the economy. Entire categories of potentially profitable ventures remain unfunded and unrealized because they don't fit venture capital's scale requirements or timeline expectations. The neighborhood restaurant, the local development project, the specialized software tool—all might generate solid returns for community investors, yet none can legally access that capital under current regulations.
Entrepreneurs who would otherwise form businesses and create additional demand for workers, instead join the same job queue, a double-whammy against the prosperity of both the economy and households. These dynamics work perfectly well for investors who are already inside the red-velvet ropes of regulatory access, but that's short-sighted for an economy fundamentally based on innovation.
The creator economy offers a vivid example. A YouTuber with 100,000 engaged subscribers cannot legally raise capital by selling equity to their audience. They can, however, extract money through subscription services, merchandise sales, and donation platforms—all mechanisms that provide supporters with consumption opportunities but no ownership participation.
The supposed democratization of crowdfunding belies the system's fundamental inadequacy. Regulation CF allows companies to raise a maximum of $5 million annually from retail investors. This sounds progressive until you realize that serious real estate syndications typically require $15-30 million in equity, and technology companies often burn through $5 million in their first year of operation.
Meanwhile, the compliance burden for these miniaturized raises frequently consumes 15-25% of capital raised. Companies spend more on securities lawyers than many profitable businesses earn in their first year. The result is not democratized capital formation but bureaucratic theater that provides the appearance of access while maintaining the substance of exclusion.
One might wonder what such a system actually optimizes for.
The Systemic Contradiction
The regulatory treatment of direct versus indirect risk reveals a key insight. Current law prevents retail investors from directly owning fractional interests in familiar, income-producing assets, like real estate groups. Yet it places no restrictions on their ability to purchase exotic financial products, which even financial experts would struggle to understand.
This suggests that the true concern is not risk management but control of capital allocation. The system doesn't prevent retail investors from bearing risk—it prevents them from bearing risk directly, instead requiring that they funnel capital through intermediaries who convert regulatory barriers into fee extraction, while retaining control over investment decisions.
The system's selective concern for investor welfare becomes particularly apparent when contrasted with its tolerance for genuinely predatory financial products. Payday lending, multilevel marketing schemes, and lottery systems operate with minimal regulatory interference. The protective instincts that throttle productive investment opportunities seem to activate only when ordinary citizens might gain meaningful, direct equity participation.
The Democratic Deficit
The Securities Act of 1933 has created something unprecedented in American economic history: a legal framework that systematically excludes the majority of Americans from participating in the economy they help create. Workers cannot own or trade equity in their employers unless those employers choose to go public. Consumers cannot own stakes in the brands they help build. Communities cannot invest in the local projects they support and would patronize.
This represents a fundamental departure from the ownership-democracy that characterized much of American economic development. The system increasingly resembles a two-tier structure: a small class of accredited investors who participate in value capture, and a large class of retail investors who participate only after the majority of value has been extracted.
The implications extend beyond individual financial outcomes. When the majority of citizens are excluded from ownership participation, they lose both the returns and the agency that ownership provides. They become economic subjects rather than economic actors, dependent on wages and government transfers rather than asset appreciation and investment returns.
The Path Forward
The solution requires recognizing that the Securities Act's foundational premise—that certain investments are categorically too dangerous for ordinary citizens—has become a barrier to the economic participation it was meant to protect. Modern capital markets are sufficiently mature to handle risk assessment and pricing without blanket exclusions based on wealth.
A reformed system would eliminate accredited investor requirements and allow unlimited private capital raises with appropriate disclosure. Instead of prophylactic regulation, it would rely on civil enforcement. This would not eliminate fraud prevention—it would shift the focus from preventing access to preventing deception.
Such reforms would enable innovative capital structures that align communities with the ventures they support. Fans could own equity in creators they follow. Neighborhoods could invest in local developments. Consumers could participate in the success of brands they help build.
The greatest financial risk facing most Americans is not the possibility of losing money on investments, but the near certainty of never having meaningful investment opportunities at all.
Overhauling the Securities Act would not eliminate investor protection—it would finally make protection serve investors rather than institutions. Until then, we will continue to witness the curious spectacle of a system that only seems to protect people from prosperity.