Can You Raise Money from Investors Who Are Not “Accredited Investors”?
One common question from founders is whether they can include non-accredited investors—like friends or family—when raising capital. The quick answers are: “It’s possible, but complicated,” and “You generally shouldn’t unless you’re prepared for the added compliance burden.” Let’s dive into why raising funds from non-accredited investors can be challenging and what regulations apply.
Why Are Accredited Investors Preferred?
In the U.S., any sale of stock is either subject to SEC registration, which is costly and time-consuming, or must fit an exemption. Most startups rely on SEC exemptions from registration, which are simpler but come with their own restrictions, particularly around limiting investors to those classified as “accredited.”
The SEC has strict standards defining who qualifies as an accredited investor. This generally includes individuals or entities that meet specific income, net worth, or professional certification criteria, such as:
Net Worth: Individuals with a net worth exceeding $1 million (excluding primary residence).
Income: Individuals with an annual income over $200,000 (or $300,000 jointly with a spouse) for the past two years, with an expectation of similar income in the current year.
Professional Standing: Individuals with certain financial credentials, executive officers of the company, or “knowledgeable employees” of private funds.
Accredited investors are assumed to have the resources and knowledge to assess the risks of private investments without the need for the extensive disclosures required in public offerings.
Can You Include Non-Accredited Investors?
Technically, you can raise funds from non-accredited investors under certain exemptions. However, including them significantly complicates compliance. If your investors are non-accredited, the SEC mandates detailed disclosure documents similar to those in registered offerings. Preparing these documents is prohibitively costly for most startups, as they require legal and financial resources that can rival the amount raised.
For raises below $10 million, SEC Rule 504 allows companies to include non-accredited investors without full disclosure obligations. However, this rule doesn’t override state securities laws (blue sky laws), meaning your offering must comply with each applicable state’s regulations. This requires researching each state’s requirements, which can add substantial legal fees. Note that the $10 million cap applies to all sales within a 12-month period, so all issuances in that timeframe must be considered.
What About Regulation Crowdfunding?
Regulation Crowdfunding provides another option for including non-accredited investors, but it’s not without conditions. This rule allows companies to raise funds from the public in small amounts, but it involves caps on how much each investor can contribute and requires filings with the SEC. Additionally, crowdfunding campaigns must be conducted through an approved funding portal.
Anti-Fraud Considerations
Regardless of whether investors are accredited, all securities offerings are subject to anti-fraud rules under the Exchange Act of 1934. This means any documents or communications provided to potential investors must be accurate, complete, and free of misleading statements. Any material omission could expose the company to legal liability.
Bottom Line
Due to the complex requirements, most early-stage startups find that the legal costs of raising capital from non-accredited investors outweigh the benefits. It’s typically more efficient to limit fundraising to accredited investors and avoid the extra compliance burden, allowing your company to focus resources on growth.
As always, consult with legal counsel to understand the full implications before proceeding with any fundraising involving non-accredited investors.
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