Venture Capital Guide: Who Gets to Invest in Startups? by Jason Rowley

Buying securities during a company’s private offerings is restricted to some investors who are legally qualified to do so. Historically these investors have been “accredited investors.” “Qualified clients and “qualified purchasers” were introduced under Exemption 3(c)(7) of the Investment Company Act

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5.

  • Topic Tags

Accredited investors, startup investors, private equity investors, private offerings

  • Relevant questions addressed

Who can invest in startups?

What are the legal requirements to be qualified investors?

  • Summary bullet points
  • Accredited investors can invest in private offerings
  • Accredited investors are considered sophisticated investors who can withstand the high risks inherent to private equity startup investments
  • To qualify one must satisfy at least one of three requirements
    • Annual income exceeding $200k ($300k with a spouse) for previous two years and same or higher in the following year
    • Net worth of over $1 million
    • Be an investment professional who is designated as such
  • Qualified clients and purchasers usually represent institutions or funds which are considered large and sophisticated enough to bear the same risks as accredited investors
  • Nonaccredited investors can participate in private offerings in a limited number (35) and must prove a high degree of knowledge and understanding of potential risks
  • In 2014 Regulation CF of the JOBS Act addressed nonaccredited investors involvement
    • Established guidelines for private stock offerings through crowdfunding platforms (“equity crowdfunding”). Still, there are several restrictions that can make this path inefficient
  • Follow-up links

Why You Can’t Really Include Non-accredited Investors in Rule 506 Offerings -

https://www.strictlybusinesslawblog.com/2015/08/31/why-you-cant-really-include-non-accredited-investors-in-rule-506-offerings/

Qualified Purchasers under the Investment Company Act - https://www.compliancebuilding.com/2010/04/21/qualified-purchasers-under-the-investment-company-act/

Private Fund Exemptions under the Investment Company Act - https://www.compliancebuilding.com/2010/04/20/private-fund-exemptions-under-the-investment-company-act/