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As a privately held corporation, your company isn’t subject to all the regulations and oversight of the U.S. Securities and Exchange Commission (SEC) that a publicly traded company is. But in their mission to protect investors and maintain fair and orderly financial markets, the SEC still has rules that govern the sale of your company’s securities and restrict who can invest in your company. One such restriction commonly results in your investment offering going only or predominantly to “accredited investors”.

Startups are risky endeavors with a high chance of failure. (Oh! Not yours, of course. Yours is a sure thing.) The accredited investor limitation attempts to ensure that only investors with the sufficient means to absorb a complete loss and the sophistication to understand that risk are allowed to invest.

Who is an Accredited Investor?

Investors just have to meet the criteria described in Rule 501(a) of Regulation D of the Securities Act of 1933 to be considered an accredited investor. There’s no application process, rite of passage, certificate of accreditation, secret handshake, or anything like that.

A natural person must meet one or more of these qualifications:

  1. Income – His/her income must exceed $200,000 per year (or joint income with spouse of more than $300,000 per year) for the past two years with the realistic expectation of the same for the current year.
  2. Net Worth – His/her net worth exceeds $1 million (either alone or together with a spouse) excluding their primary residence.
  3. Company Insider – He/she is a director, executive officer, or general partner of the company.

For an entity to qualify, it must have assets exceeding $5 million, be comprised only of equity owners that are themselves accredited investors, or be a qualifying institutional investor (like a bank, insurance company, investment company, or private business development company).

Confirming Accredited Investor Status

When shares are sold in a private company, the sale should be structured so it fits under an exemption from SEC registration. Speak with your attorney about which exemptions apply in your case. The most commonly used exemptions involve sales to accredited investors, but the steps you are required to take to confirm the status of your investors can vary based on the specific exemption you intend to use.

At a minimum, your investors should certify to you that they are accredited investors. Typically this is done by asking your investor to respond to a questionnaire at the time of the investment (within 30 days). Shoobx has made a sample accredited investor questionnaire template available for you to use with your investors.

If the accredited investor exemption being used for the financing requires further verification of the investor’s status, i.e., a Rule 506(c) offering where you can broadly solicit and generally advertise an offering, you’ll need to do more then simply have the questionnaire completed. In such a scenario you will also be required to obtain supporting documentation from your investors.

Government Filings

If you are raising capital through the sale of securities to accredited investors, you probably also need to file paperwork related to your exemption. This is likely to involve a Form D filing with the SEC (required within 15 days of your first sale) and a review of state regulations in each state the offering is made. Requirements vary from state to state. Check with your attorney to see what filings are required for your company and to make sure you don’t run afoul of the SEC!


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 Tags: Fundraising

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The content and opinions expressed in these posts do not necessarily reflect the views of Shoobx. The content and opinions of Guest Contributors in no way reflect those of Shoobx, nor do they constitute an endorsement of our Guest or of any companies with which they may be affiliated. Blog posts are not legal advice and must not be construed as such. Readers are encouraged to seek professional counsel to address questions specific to their situation.