Startups raising money for the first time often ask us if it makes sense to raise capital from friends, relatives or other potential investors who are not considered an “accredited investors”.
Our short answer:
It’s not that you can’t take money from unaccredited investors, it’s just more difficult and expensive with all of the hoops you have to jump through. If you’re raising money for your Startup, always try to go through accredited investors first!
If you’re not an expert in securities law and are looking for a more in-depth answer to this question, we broke it down below.
The History
Up until recently, only accredited investors were able to invest in privately held companies. Privately held companies, or Startups, are companies that aren’t listed on a stock exchange like the New York stock exchange or the Nasdaq. This history of this law dates back to 1933 after the Great Depression when individual investors were consistently being taken advantage of through get-rich-quick schemes.
Because many of these scams involved unregulated private investments, the US government established the Securities and Exchange Commission (SEC) and put it in charge of creating and enforcing Securities Laws. One of their very first actions was to prevent non-accredited investors from investing in private deals.
This all changed with the Jobs Act, which passed under President Barack Obama in 2012, permitting companies to offer and sell securities through crowdfunding regardless of their income or net worth. However, many capital raises do not meet the requirements of Regulation Crowdfunding.
Who are Accredited Investors?
Accredited investors are people that can invest in your Startup with little to no issue with the Securities and Exchange Commission (SEC).
The only problem is they make up less than 10% of the US Economy. Out of the 127 million households in the US, only 12.4 million of those are Accredited Investors.
What makes an Accredited Investor?
- Someone who makes more than $200,000 a year for two consecutive years with the expectation that they’ll make it again the third year
- A couple who makes more than $300,000 for two consecutive years with the expectation they will make it again the third year
- An individual couple with a million dollars or more in net worth not including their primary residence
If you do want to include non-accredited investors in your funding, they must comply with detailed additional information requirements. These requirements are thorough, comprehensive, and too expensive for most Startups to prepare.
Most companies find that raising money from non-accredited investors can result in gradual fees that wind up being even higher than the amount of money they would raise from the investors. This is a good reason to exclude all non-accredited investors from your fundraising as an early-stage company!
If you still have questions about what type of investor is right for you, reaching out to a lawyer for advice is recommended. At Benemerito Attorneys at Law, we offer free consultations and would love to help guide you toward the right decision for your business.
Let’s talk >>> 212-785-1528
This blog is for informative purposes only. This information does not constitute legal advice. You should consult with a licensed attorney that can advise you according to your particular circumstances.
