The Securities and Exchange Commission’s Regulation D has set certain requirements that investors must meet to be regarded as “accredited” investors. An accredited individual investor is one with a net worth of more than $1 million (including spouse), and who earned more than $200,000 annually in the last two years. A non-accredited investor, on the other hand, is one who has a net worth of less than $1 million (including spouse) and who earned less than $200,000 annually in the last two years.
Note that there are no formal qualifications or certifications for accredited investors. Anyone with the minimum net worth automatically gets “accredited”. So, the only distinction between accredited and non-accredited investors is personal wealth.
In the , only accredited investors are graced with investment opportunities that aren’t available to the rest of the population. So, if you are non-accredited, it’s illegal for you to be presented with investment offerings in private businesses unless you already know the founder. Even when non-accredited investors are allowed to invest, there are restrictions.
For example, a company looking to raise private equity for an investment, such as a new company or a hedge fund is free to receive investments from as many accredited investors as possible. But according to Regulation D, it can only receive funding from no more than 35 non-accredited investors.
In short, Regulation D has succeeded only in shutting out over 80 percent of Americans (non-accredited) from investment opportunities. So, only the wealthy Americans enjoy exclusive access to participate in the wealth creation cycle of early-stage investment.
How to Invest Without Being an Accredited Investor
Some US states have made it possible for non-accredited investors to begin attaining equity in startups. These states include Alabama, Colorado, Georgia, Idaho, Indiana, Wisconsin, Washington, Tennessee, Kansas, Maine, Maryland, and Michigan. So, if you are based in any of these states, you now have the ability to invest in high-growth, early stage firms through a model known as crowdfunding.
In case you don’t know how crowdfunding works, here’s a simple explanation: Imagine that you know a talented chef in your neighborhood who is looking to open her own restaurant but cannot provide the required startup funds. And unfortunately, she doesn’t know any wealthy angel investors and doesn’t have wealth friends or relative. She will most likely remain dormant with her idea for a long period because it’s unlikely that she will raise the money she needs.
However, with crowdfunding to the rescue, the same chef might still not know wealth investors, but she does have a large community of colleagues, friends and family, and other people who like her. She takes her business and financial plan to a crowdfunding platform and calls for investors. Then people within her network and local community start to put forward their individual investments into her proposed business.
Within a few weeks, the chef has successfully raised one-fifth of the funding required for her restaurant business. She used that to create a strong signal for others that this is an interesting opportunity that they should consider investing in. When more and more people opt to invest in her restaurant business, she eventually gets all the funding she needs.
With her business, the chef has created an investing opportunity for many non-accredited investors. Since such an arrangement can and will often take place within existing relationships and communities of people who know, respect, and trust one another, it results in stronger communities and stronger local economies.
So, as a non-accredited investor, you can still invest in promising businesses provided your state’s laws permit it and you can find a good crowdfunding platform.
Crowdfunding websites started becoming popular in the United States fairly recently, and now many non-accredited investors now hold profitable investments of their own through these websites. This development has also fostered the birth of many successful small and medium businesses that would have otherwise remained in the idea stage. Crowdfunder.com is an example of a crowdfunding websites. Many other reliable ones abound on the web. A simple web search will reveal them to you.
Simply register with a crowdfunding website, search for promising investment opportunities and go for whichever pleases you. And that’s it. You are now an investor. Just sit back and follow the business you’ve invested in. And when it’s time to share the profits (or loss), take your share, and either re-invest or run!
Don’t forget about the 35 slots for non-accredited investors in companies seeking private equity. If you know the founder of any private business, you can snag up a slot and become an investor that way.