I’m getting ready to invest my first real money into a company and a team I believe in a lot. I’ve dabbled in venture capital with Republic and with ICOs, but up until now my tickets have been small, like money you would spend on a trip or a nicer dinner.
I wanted to share my learnings from this process and show, in simple words, that non-accredited investors can get in on early stage ventures.
For those who don’t know, the US is probably one of the most protective countries when it comes to capital and investment. The Securities and Exchange Commission (SEC) regulates very strictly what investors and entrepreneurs can and can’t do when it comes to raising money, offering investment opportunities and funding.
Here’s the Investopedia definition of an accredited investor:
An accredited investor is a person or a business entity who is allowed to deal in securities that may not be registered with financial authorities. They are entitled to such privileged access if they satisfy one (or more) requirements regarding income, net worth, asset size, governance status or professional experience. The term is used by the SEC to refer to investors who are financially sophisticated and have a reduced need for the protection provided by regulatory disclosure filings.
Sometimes, these regulations feel like they are too strict.
For example, if you’re a high earning individual, with ample savings, a diversified portfolio of assets – stock, SAFE notes, real estate, REITs, private equity via JOBS act, that’s not enough to be qualified as an accredited investor.
To become accredited, you have to do one of the following:
- have an income of more than $200,000/year (single) or $300,000 (married, filing jointly) for two years in a row
- have a net worth of over $1M (excluding your primary residence)
While I understand some people might need to be protected from themselves, and be stopped from investing in scams / con artists, I can’t understand why the thresholds are so strict. If you make $190,000 / $290,000 or are worth $900,000, you still don’t qualify, even though by all means you can be as sophisticated, or even more sophisticated than someone who, for example, inherited most of their net worth that’s over $1M. That’s not really fair, is it?
Fortunately, the JOBS Act, more specifically Rule 506(b), allows companies to raise money from non-accredited investors, under special conditions, and with, in my opinion, normal disclosures, per the SEC:
If non-accredited investors are participating in the offering, the company conducting the offering:
– must give any non-accredited investors disclosure documents that generally contain the same type of information as provided in registered offerings
– must give any non-accredited investors financial statement information specified in Rule 506 and
– should be available to answer questions from prospective purchasers who are non-accredited investors
Lawyers and inexperienced entrepreneurs will be reluctant to include non-accredited investors in funding rounds, but you can push back using these facts. The website I linked under the Rule 506(b) has more information on the type of offerings that companies can put forward and accept non-accredited investors on their cap table. It’s not impossible now, it’s just hard (still) to understand the rules.
So next time you want to invest and you get push back, instead of saying I’m sorry I’m not rich enough, refer people to the JOBS Act and the Rule 506(b). This way you can access early stage ventures and potentially make 100x returns. Or you can lose all your money, since early stage investing is extremely risky. But at least you have the freedom to choose.