May 2, 2013 Leave a comment
An accredited investor is a person that the SEC deems is sophisticated enough to protect themselves in making investment decisions and therefore does not require certain additional protections under certain securities laws. There are several ways to qualify as an accredited investor with the most common being having either (1) $200,000 (or $300,000 jointly with your spouse) in income over the last 2 years or (2) $1 million in net worth (excluding home value).
Historically, accredited investor status has been very important to startups because securities laws make it is prohibitively expensive and burdensome to take investments from unaccredited investors. If a company sold securities to a non-accredited investor, it would effectively have to make disclosures on par with those required in an IPO.
Now, with passage of the JOBS Act, accredited investor status will take on even greater importance, primarily for two reasons:
Advertising for Angel Investments (General Solicitation in Reg D Offerings)
Soon (once the SEC finalizes the regulations under the JOBS Act) startups will be able to publicly advertise, or generally solicit, investments in their companies so long as all of the ultimate investors are accredited.
This means that companies would be able to publicize information about its financing round and the opportunity on television, radio, twitter, LinkedIn, Google ads, email blasts and any other method you could conceive of. This represents a sea change in both securities regulation and startup financing.
Currently only 10-15% of accredited investors in the country make any type of angel investments. By allowing advertising to these accredited investors, that number could dramatically increase with the other 85% becoming aware of investment opportunities and finding it much easier to participate (e.g. through an accredited investor funding portals like Gust, AngelList or FundersClub).
There is a catch, however, as to utilize general solicitation companies will now have to take “reasonable steps to verify” that every single one of the participating investors is accredited. In the past, this usually meant simply signing a questionnaire or agreeing to reps and warranties in a purchase agreement, or “self-certifying.” The SEC has specifically said that now, in many cases, this self-certification will not be enough where general solicitation has been used.
Failure to appropriately verify accredited investor status could result in blowing the entire securities exemption with dire consequences, including giving each investor an option to rescind their investment (e.g. get their money back).
Investment Limits in Crowdfunding Offerings (under Title III of the JOBS Act)
Under JOBS Act, individual investors are subject to limits on the amount they can invest in a year through crowdfunding. For an investor with annual income or net worth less than $100,000, the investor may not invest more than the greater of $2,000 or 5% of their annual income or net worth. For an investor with annual income or net worth more than $100,000, the investor may not invest more than the greater of 10% of their annual income or net worth, not to exceed $100,000
What else? How else will accredited investor status become more important?