What Are Accredited Investors And Why Should I Only Raise Money From Them For My Startup Company?

As I get questions from readers from my Ask The Chief ImpleMentor Campaign, I will take some of the questions that I think might have a broad audience and post them here on the blog.

This one is filed under “Fundraising: What Are Accredited Investors And Why Should I Only Raise Money From Them For My StartUp Company?”

Question:

I’m getting ready to raise $2 million for my startup real estate company. I’ve finished my business plan but a friend of mine said I should only talk to accredited investors. I’m not exactly sure what an accredited investor is and I don’t understand why I can’t talk to anybody I want to about investing in my company?

Thanks,

Mark

Answer:

Thank you for submitting your question at www.CompanyQuestions.com. There are several critically important implications and potential dragons I gathered from your question. Since I want to keep you from battling some very vicious dragons as a result of your upcoming actions, I am answering it now so you don’t have to wait for an answer.

The term, accredited investors, has to do with securities laws – both federal and state – and making sure you comply with the very onerous restrictions that go with the fundraising for your start up company. I’ll give you both the short and long answer to what an accredited investor is in a minute. But the first thing you need to know is that if you raising capital from angel (AKA private) investors, you will almost certainly need more than just a business plan. You need what’s known as a Reg D Private Placement Memorandum – PPM – in order to comply with federal and state securities laws.

If you plan on pitching your deal JUST to traditional venture capital, you do not need a PPM. However, well over 95% of start up companies are too small, too embryonic, to hit the threshold funding levels, growth levels and potential market caps to attract VC funding. Hence, over 95% of start up companies will seek their funding from private investors. Hence, over 95% will need a Reg D PPM.

Reg D is a securities law exemption for private placements that allows companies to raise investor funds without all the costly and overwhelmingly onerous legal and accounting requirements of a public offering of stock. To qualify for the Reg D exemption, you have to follow VERY stringent rules. One is having the PPM. Another is not soliciting the general public (this is a biggie.) Another is only pitching the deal to those investors who can really afford to take the risk and lose their money. Hence, they need to be accredited. It actually gets more complicated in that you can usually offer your deal to up to 35 unaccredited investors with most offerings, depending on how they are structured – but trust me when I say that you are better off sticking with the more sophisticated accredited investors.

If you want more detail on it, check out my web site at www.FindingYourFunding.com – there you can see why you want to do this, some of the onerous penalties for not doing this (e.g. possible but not probable jail time), and the full listing of Reg D I got from the SEC. Also, from that same page, you can jump to the definition of an accredited investor.

Also, you might check out my new Audio E-book Coaching Series, “Funding Foreplay – Getting Ready to Romance the Money For Your Start Up Company.” In addition to the multiple-module audio, you will get a dozen real life sample documents (over 390 pages) that you can use as guides to develop your own “must have” dozen documents – that you NEED before you are REALLY ready to romance the money. You can use these ten documents as templates for your own documentation base to help ensure that you competently and legally raise the funds for your new company.

Ask YOUR Question

Go to www.CompanyQuestions.com and ask your own question. You might see it answered here!

Robert Lee Goodman, MBA
Ceo & Chief ImpleMentor

PS: I am NOT an attorney…I am not an accountant…I am an MBA and strictly a business adviser and coach. All my advice and recommendations are strictly from a general business perspective…and I strongly advise you hire competent professionals for all of your legal, tax and accounting questions.

1 Comment

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  Johnny Nied September 1, 2010 at 11:27 PM

  I had to read your post three times to get the full meaning of it. I enjoy reading what you have to say. It’s unfortunate that more people do not understand the benefits of coaching. Keep up the good work.