How to Become and Accredited Investor

A company can broadly solicit and generally advertise selling securities in order to raise capital for their company as long as the investors in the offering are all accredited investors. That brings us to the title of this post; what in the world is an accredited investor, and how does one become “accredited?”

As of September 23rd, 2013 the Securities and Exchange Commission amended their long standing rule of prohibiting private companies from using general solicitation in the purchase of securities to raise capital as denoted in the 506 (c) rule of Regulation D. This was a part of the Jumpstart Our Business Startups Act or JOBS act of 2012. If you’re anything like me, your eyes probably glazed over a bit during those first two sentences.  What does this actually mean? Well, under this new rule a company can broadly solicit and generally advertise selling securities in order to raise capital for their company as long as the investors in the offering are all accredited investors. That brings us to the title of this post; what in the world is an accredited investor, and how does one become “accredited?”

According to Investor.gov an accredited investor is anyone who:

  1.      Earned income that exceeded $200,000 (or $300,000 with a spouse) in each of the prior two years and reasonably expects the same for current year, OR
  2.      Has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).

Well, that’s it. No seriously, if you are an investor that meets either of the two requirements then you are by definition, accredited. However, this then puts the burden on the company that is making the offering to verify that all of the investors in their round are accredited. This comes in the form of performing “reasonable steps” to ensure that those in their rounds meet these requirements. These steps are relatively simple, in fact Rule 506(c) mandates an objective principles-based verification process in lieu of rigid rules. While this is rather vague, it implies that simply identifying as an accredited investor is not sufficient when investing in Generally Solicited private securities. The SEC has offered a list of guidelines that would ensure that that company has its back covered. These include:

  • Reviewing copies of the IRS forms reporting a potential investor’s income for the two most-recent years and the investor’s written representation that he/she expects this level of income to continue.
  • Reviewing one or more of the following documents to verify an investor’s assets and liabilities.
    • Assets: bank Statements, brokerage statements, or other statements of personal holdings.
    • Liabilities: A credit report from a nationwide reporting agency
  • A written confirmation from one of the following profession entities: a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA.

Source

Collecting this information can quickly become an incredible burden on the entrepreneur and a security risk for the investor. Remember, the company is raising money to accelerate growth and eventually return capital to the investors, so the more time that is spent growing instead of collecting documents the better.

That is where angel groups come in. With the rapid proliferation of these groups (the number has tripled since 1999!) many have begun to certify that their members are indeed accredited in order to comply with the SEC regulations and take the burden off of entrepreneurs.

So, what if you want to become an accredited investor with Rockies Venture Club? Our recommended solution would be to go through the platform EarlyIQ. This $35 online solution securely captures one of the qualifications detailed above and provides RVC or the company with an Accredited Investor Certificate that is “secure, dynamically generated, and encrypted.” However, if this option does not appeal to you, documents can be submitted directly to RVC. Please contact Operations Director, Dave Harris (dave@rockiesventureclub.org) or Executive Director, Peter Adams (peter@rockiesventureclub.org) for more information.

So why should you become an accredited investor with RVC? Recently we have created high quality deal packages that allow investors to view a video of a company’s pitch and two hour deep dive session, read the Due Diligence Report that is compiled by RVC’s professional Venture Capital Analytics team, and participate in continued investor discussion around a particular deal.

While RVC does prepare these deal packages, investment is in no way endorsed by the club and Rockies Venture Club does not accept any responsibility regarding these deals.

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