Unaccredited Investor: Everything You Need to Know
A nonaccredited or unaccredited investor is an investor who does not meet the income or net worth requirements set by the Securities and Exchange Commission (SEC). 3 min read
2. Six Important Facts About the JOBS Act
3. Raising Money From Nonaccredited Investors
Updated November 6, 2020:
What Is a Nonaccredited Investor?
A nonaccredited or unaccredited investor is an investor who does not meet the income or net worth requirements set by the Securities and Exchange Commission (SEC). Currently, an accredited investor is an individual with a net worth of at least $1 million or an income of more than $200,000 annually, or $300,000 combined with a spouse.
Nonaccredited investors have less than $1 million in assets, outside of their primary residence, and an annual income below $200,000. They make up the clear majority of potential investors.
The SEC limits investment choices for unaccredited investors to protect people from getting into investments over their heads. Private funds and hedge funds for accredited investors have fewer SEC controls because it's assumed the parties know the risks involved.
Private investments can be offered to nonaccredited investors if they meet an exemption, such as being a company employee. Before the passage of the 2012 Jumpstart Our Business Startups (JOBS) Act, those wanting to raise capital were usually limited to 35 unaccredited investors in the pool.
The JOBS Act eliminated minimum income and net worth thresholds. That was designed to open crowdfund investing in private equities to a huge new market.
Six Important Facts About the JOBS Act
- On May 16, 2016, Title III of the JOBS Act expanded the capabilities of equity crowdfunding, allowing nonaccredited investors to privately invest in companies for the first time since the Great Depression. It allowed new opportunities for investors and a larger pool of potential funding for new companies. Transactions are handled by a broker-dealer or through a funding portal.
- Fundraising cycles are shorter. The SEC capped the amount a company can receive in a year. A company looking to raise more than $1 million through unaccredited investors will have to start the cycle every year.
- Investments are limited. The SEC allows investors to make less than $100,000 per year to invest $2,000, or 5 percent of their annual income, in equity crowdfunding. Investors making more than $100,000 can invest up to 10 percent of their income but no more than $100,000 per year.
- Portal offerings are patrolled. The investing platforms approved by the SEC are required to contain a variety of resources to help nonaccredited investors make informed decisions about their investments. That includes investment guides and all the documents a company is required to disclose.
- There are regulations on resales. Nonaccredited investors must wait at least a year to sell their shares unless they sell them to an accredited investor.
- Companies must disclose a great deal of information to seek crowdfunding, including:
- Price to the public of the securities
- The target offering amount
- The deadline to reach the target offering
- A discussion of the company's financial condition
- Detailed financial statements
Raising Money From Nonaccredited Investors
Registering shares of stock with the SEC can be too big of an undertaking in terms of time and resources for many young companies. Many rely on an exemption from SEC registration.
The challenge is that each state has its own rules about issuing stocks without registration, so the SEC allows companies to override state requirements under certain criteria. One is to restrict the offer to accredited investors. To include nonaccredited investors, companies have to offer detailed disclosure documents.
Many startups shy from this because the disclosure documents can be costly to prepare. The SEC has another workaround in this case. If the finance offering is less than $1 million, unaccredited investors can participate without the full offering-style disclosure.
The offering would still have to comply with state securities laws, often called blue sky laws. It must be within the state of residence of the investors, not the company. So legal research is necessary to determine the requirements in each potential state of every nonaccredited investor.
Also, all documents provided to prospective investors must be accurate and not misleading, or they could be subject to the anti-fraud provisions of the Exchange Act of 1934.
The result is that many companies find the professional fees required to raise money from nonaccredited investors prohibitive. Most early-stage companies exclude nonaccredited investors from fundraising.
If you need help securing financing from non-accredited and accredited investors, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.