Accredited Investors – Suitability & Risks of Startup Investing
SeedInvest
Under today’s federal securities laws, only individuals and entities that qualify as an accredited investor can legally take advantage of startup investing opportunities under minimal limitations. Because of accredited investors’ presumed wealth, they are deemed more able to bear the high financial risk of investments in private companies.
As a result of recent changes to securities laws, companies may now decide whether to raise from everyone or just from accredited investors. Under recent developments such as Title III and Title IV of the JOBS Act, non-accredited investors are allowed to legally invest alongside accredited investors under certain guidelines. Title III and Title IV of the JOBS Act permit what is known as “equity crowdfunding”, whereby companies can openly advertise their offerings and accept investments from non-accredited investors – the 98% of Americans who do not meet the definition of an accredited investor.
In this guide, we will discuss how one can confirm their status as an accredited investor and the requirements needed to take part in investing in this asset class.
Accredited Investor
In order for an individual to be an accredited investor, he or she must meet at least one of the following criteria:
Individual income exceeding $200K for each of the past two years with a reasonable expectation that the $200K threshold will be reached in the current year.
Joint income with spouse exceeding $300K for each of the past two years with a reasonable expectation that the $300K threshold will be reached in the current year.
Lastly, an individual is an accredited investor if his or her net worth (excluding the value of a primary residence) exceeds $1M.
An entity that is not a natural person (e.g., Fund, Corporation) generally qualifies as an accredited investor if it has at least $5M in assets or if all of the owners of that entity are themselves accredited investors.
Suitability
In addition to meeting the requirements as an accredited investor, investors must be made aware of and acknowledge the high financial risks of startup investing when investing through some intermediaries. When investing, investors should keep in mind that the majority of startups fail and those that do provide a return to their investors may take five to seven years (or more) to do so. Therefore, investors who would like to invest in startups should take the following precautions:
Do not allocate more than 5-10% of your overall portfolio into alternative assets, including startup investment opportunities.
Build a diversified portfolio of at least 10-15 startup investments.
Do not invest any capital which you are not comfortable having locked up for at least 5-7 years.