Can a private company take investment money from anyone?
Unfortunately, a private company in the US may not take investment money from “anyone”. The only people who are legally eligible to purchase an equity interest in a private company without a great deal of special paperwork are, as you noted, Accredited Investors. These are defined as a person with net assets of over $1 million (not including the value of his or her primary residence), or an income of $200,000 (not $250,000) annually for the past two years and a reasonable expectation of that for the next year. (In the case of a married couple, the amount is $300,000 together.) This is an absolute rule. There is no except for “friends”, “family”, “another guy” or anything else. It’s binary: you either are, or are not, an Accredited Investor.
Note, however, the weasel words above: “without a great deal of special paperwork”. That means a company can take an investment from people who are not Accredited Investors, however it adds so many requirements and potential issues to the arrangement, that most corporate lawyers will strongly urge you to not do it if at all possible. Among the considerations you need to take into account if you go this route are: (1) the rules for this differ from state to state, and every state needs to be handled separately; (2) there is a very limited number of such investors in total from whom you can accept an investment (the number varies by state); (3) you are required to prepare and file a Private Placement Memorandum, which is almost the same thing you would file for a public offering, extensively listing absolutely everything about the business, including pages and pages of warnings about all the things that could go wrong, and why it is a risky investment; (4) professional investors such as angels and venture capitalists are often allergic to having any non-Accredited Investors with an ownership interest; and (5) several other things.
The section of the JOBS Act of 2012 that modifies this part of the law is known as Title III. The problems are that (a) it is not close to becoming available yet for companies because the SEC has not yet written rules for it (and shows no inclination to do so any time soon), and (b) when the rules are eventually written, they will be very, very specific about exactly what both the company and the investor need to do.
So if your goal is to take in money from “just guys”, you will likely need to wait until the Title III regulations are adopted, likely in 2013.
*original post can be found on Quora @ http://www.quora.com/David-S-Rose/answers *(No tags for this post.)
Written by David S. Rose
You might also be interested in
Canada has not tapped its female angel investor potential – yet.
The female angel investor conversation has been discussed inside and out. From TechCrunch, BetaKit to the Financial Post, there have been more than a few arguments made about the lack of female representation in Canada’s early-stage investment community and the benefits of tapping into this financial resource.
One of the most common questions we get is: What are the biggest challenges and rewards of angel investing? High net worth individuals become angel investors for a number of reasons, but the opportunity to work with entrepreneurs and provide guidance to founders is typically high on the list. In this video, angel investor Chenoa Farnsworth explains why, interestingly, both the biggest
At Hyde Park Angels, we evaluate startups based on quantifiable metrics related to traction, market size, and more. But that’s not all we consider. In fact, sometimes the most important factors in determining whether we should invest are qualitative. While these can vary from deal to deal, there are a few that remain the same.
Entrepreneurs seem genuinely surprised to find that investors in Peoria or Little Rock are not willing to invest in startup companies at Silicon Valley prices. After all, they just read in TechCrunch that investors funded a company similar to theirs at an $8 million pre-money valuation!
The valuation of startup companies shouldn’t be impacted by location, should they? Guess again!
Crowdfunding is the practice of raising money for a project or venture from a large number of people utilizing an Internet website or platform. Funding from each individual can be quite small, $10 or less, although some projects have much higher minimums. Projects include films, musical recordings, new companies, products, inventions, personal causes and many others.