What is the difference between accredited investors vs. non-accredited investors when it comes to fundraising for your startup?
This can still be a very confusing part of the process of fundraising for startup entrepreneurs. Yet, it is a critical differentiation. One which not only means different processes, but also has serious, and very expensive consequences if you get it wrong.
It is always wise to seek the customized advice of a professional fundraising consultant with legal experience, and a law firm that can protect you.
Startup founders must understand the difference between these types of prospective investors, where they fit into their financial stack, the pros and cons of each, and how to go about raising from them.
The Ultimate Guide To Pitch Decks
Here is the content that we will cover in this post. Let’s get started.
- 1. Why It’s Vital For Startup Entrepreneurs To Understand Accredited Vs. Non Accredited Investors
- 2. What Is An Accredited Investor?
- 3. Individuals
- 4. Entities
- 5. What Are the Advantages Of Being An Accredited Investor?
- 6. Why Is Accredited Investor Status A Thing?
- 7. How To Know If Your Investors Are Accredited
- 8. Fundraising From Non Accredited Investors
- 9. Be Open to Accepted Funding from Non-Accredited Investors
- 10. Raising Money From Accredited Investors
- 11. Know Your Target Market
- 12. Create Your Pitch Deck & Fundraising Materials
- 13. Make Connections
- 14. Get Busy Pitching
- 15. Follow Up
- 16. Summary
Why It’s Vital For Startup Entrepreneurs To Understand Accredited Vs. Non Accredited Investors
These are two types of individual investors and entities which may invest in startups.
The more optionality that startups have, the more flexibility, and better terms that can be negotiated, the lower the risk of running out of money, and the more optimized the financial stack can be.
Every source of financing can have its place in a startup’s journey. This includes loans and credit fasciitis, business credit cards, non-accredited investors, accredited investors, grants and competitions, venture capital, convertible debt, private equity, and strategic corporate capital, as well as the public markets through stock exchanges.
More than access and finding the right fit at the right time, or alternatives when traditional funding is tight, there are legal and financial regulations around raising money and selling stock in your company.
See How I Can Help You With Your Fundraising Efforts
See How I Can Help You With Your Fundraising Efforts
If you are not aware of these differences and qualifications, and the proper rules and laws around soliciting and accepting funds from these different types of investors, it can become a huge problem.
You may end up with criminal or civil investigations and lawsuits. Have the SEC, FTC, or other agencies breathing down your neck unnecessarily, or face many fines. If the financial penalties don’t break your company, then the bad PR certainly can on its own.
Not to mention no one is going to want to work with you. So, be informed, have great counsel to advise you and act on your behalf, and raise and grow your company legally and swiftly with the best capitalization arrangements.
Before you read ahead on how to understand investors, you may need more information about the different types of investors for startups. Check out this video I have created that will provide all the details you need.
What Is An Accredited Investor?
When understanding the differences between accredited investors vs. non-accredited investors, know that both individuals and legal entities can be accredited or unaccredited investors.
Financial criteria for individuals offer two options for qualifying:
- Having a net worth of more than $1M, not counting any personal residence (either individually, or with a spouse or partner)
- Having an income of more than $200k in each of the previous two years, and reasonable expectations of the same for the current year, or $300k with a spouse or partner
Professionals also qualify if they hold certain securities licenses, are executives or officers of a company selling securities, are a client of a qualifying family office, or the knowledgeable employee of a private fund.
According to the SEC website, the following are the criteria for entities to qualify as accredited investors.
- Entities owning more than $5M in investments
- 501c3, employee benefit plans, family offices and clients, LLCs, trusts, partnerships, and corporations with over $5M in assets
- An entity where all equity owners are accredited investors
- Registered or exempt investment advisors, and broker-dealers
- Financial companies, including banks, insurance companies, investment companies, business development companies, and saving and loan associations.
What Are the Advantages Of Being An Accredited Investor?
Being an accredited investor certainly opens up more investment opportunities for an individual or entity.
Many investment opportunities and participation in many assets are restricted only to accredited investors.
One main reason for that is the costs, paperwork, and risk of letting in nonaccredited investors. As well as the amount they can invest. Many companies simply don’t want financial and legal liability. Or don’t see the additional labor and management as being profitable.
So, as an accredited investor, you’ll have a more diversified menu of investment options, can invest more in them, and also have fewer restrictions on when you can exit, and who to.
Being accredited especially opens the doors to investing in startups, private equity funds, and participating in other private investments.
Why Is Accredited Investor Status A Thing?
Why is there a need for differentiation and laws regulating this status for investors and financial transactions?
Of course, there are financial revenues for regulating agencies. Though this is primarily about protecting consumers from losing their money. Especially, being fooled into poor investments, or investing in things that they really do not understand.
More so that they do not lose all of their life savings and retirement money. Which would then leave the government and other taxpayers on the hook to take care of them.
So, it protects investors. Yet, also protects companies accepting their capital by ensuring their investors are savvy enough, less likely to complain they didn’t understand it, and won’t sue because they put in their last dime.
Similarly, in the middle, it protects broker-dealers, fund managers, and other conduits of this money and the securities they are selling participation in.
How To Know If Your Investors Are Accredited
In some cases, it has been acceptable to have investors and buyers sign affidavits self-certifying that they are accredited investors.
It also makes a lot of sense to verify this for your own legal and financial protection. There are third-party platforms that offer certification.
You can also get an idea, from the other investments they have been a part of recently.
Do not assume.
Fundraising From Non Accredited Investors
The big difference between accredited investors vs. non-accredited investors for startup fundraising is who you can solicit for investments.
In most cases and circumstances, you cannot publicly solicit and market to non-accredited investors to buy anything which may appear as securities in your company. If you do, you can expect a cease and desist order from the SEC. Which may then live online forever, tarnishing your online reputation.
Obviously, public markets are an exception to this. Public companies sell and trade their shares with non-accredited investors all day, every day.
Since the JOBS Act, non-accredited investors have been able to find more investment opportunities, like startups. While enabling more startups to raise from a far larger pool of potential investors.
There are huge benefits to including non-accredited investors in your financial stack. There are far more of them, for a start. Everyone is chasing accredited investors. Which makes it very competitive. Yet, the vast majority of the population is nowhere near accredited investor status.
Be Open to Accepted Funding from Non-Accredited Investors
You may also really want to give non-accredited investors access to this great opportunity which they are finding hard to participate in elsewhere.
Through certain SEC regulations and filings, you may solicit unaccredited investors. The SEC approves third-party investment platforms for this purpose. These crowdfunding platforms do a lot of the heavy lifting to enable this.
However, some startups can find this time-consuming and financially prohibitive. It is not uncommon for lawyers to charge six figures to help with these filings. Then you have all of the other marketing, promotion, and pitching to budget for and handle.
You are also limited to $1M per cycle and have to provide substantial amounts of disclosures and education to meet regulations.
Donation-based crowdfunding is another option. In either case, this can help with visibility, credibility, and customer engagement.
The other option can be to stick with your personal network, friends, and family, and get them to ask you about investing with you. You can accept their money.
Raising Money From Accredited Investors
Given a choice between accredited investors vs. non-accredited investors, accredited investors are the most common target for startups.
This may be partially just because it is the way it is normally done. Though, there are also the cost, time, and liability considerations that are involved in the decision.
Perhaps the most significant, which makes accredited investors the go-to for startups, is that accredited investors have a lot more money to invest at a time and may be a lot less management intensive.
This can include:
- Angel investors
- Venture capital firms
- Startup accelerators
- Family offices
- Private equity funds
- Corporate strategies
So, what are the steps to raising equity funding from accredited investors?
Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.
Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.
Know Your Target Market
The first step to raising any financing, whether debt or equity or from accredited or non-accredited investors, is to get clarity on who your target prospects will be. This will change with each round of funding too.
Get to know your investor profile and avatar. Who are they? What is it they want? Where are they looking for it? What matters in the process for them? How can you check the boxes, and streamline this process, while making it a no-brainer for them to participate?
Begin making a list of potential investors and channels.
Create Your Pitch Deck & Fundraising Materials
Now that you know who your audience of prospective investors are, you can create a well-curated pitch deck that meets their needs and wants.
Begin with a proven pitch deck template. Get in the right data points, in a visually appealing, simple, and compelling way.
Create your supporting materials for your fundraising campaign. This can include all of the additional documentation that will go into your virtual data room for depth and due diligence. As well as your marketing and PR content to raise your visibility and credibility through this period, and drive better business performance. Keep the differences between accredited investors vs. non-accredited investors in mind when crafting the deck.
Connections and relationships are a very important part of fundraising. This can include further shortlisting your target investors, and connecting with them in some way, on or offline. As well as generally getting out there and networking in the right circles. Plus getting introductions from those who specifically know your ideal investors, and fundraising consultants who know who the best investors for you are, and have relationships with them.
Get Busy Pitching
Now get out there and take action. You can submit your pitch deck to investment firms and startup accelerators online. You can get on TV shows, and into live pitching events. As well as conducting outbound pitching and messaging to your ideal investors.
This process will often involve several investor meetings, term sheets, and due diligence before you get through the closing and put money in the bank.
Investor updates are very powerful for nurturing potential investors, as well as for maximizing your current ones. Leverage their expertise, get feedback, keep them engaged, show your progress and how well you are using their money, and keep them in the loop about how they can help with your next round of fundraising.
What is the difference between accredited vs. non-accredited investors for your startup?
There is a difference in qualification. Both for accredited individual investors, and entities.
Then there is the difference between the processes and rules for raising from each type of potential investor, the rules regarding the selling of their stocks afterward, and how you can and cannot solicit investments.
Understanding these differences and the rules can make all the difference in your survival as a startup, and the ability to thrive. Know where each fits into your financing, then work the steps to engaging them and successfully pitching and bringing them on board.
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