Your new startup business is going well, but you need that little kick to really get you going. You’ve entertained the idea of getting an influx of cash and you need investors. But, not everyone is an investor you need and for them, there needs to be some allocation, and depending on when you’re getting financing and how you are pitching your offering it is paramount to get it from certain people.
For instance, what’s needed when you are publicly advertising an offering for an investment of a certain size is an “accredited investor." An accredited investor is a term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Accredited investors include individuals, banks, insurance companies, employee benefit plans, and trusts.
In order for an individual to qualify as an accredited investor, he or she must accomplish at least one of the following:
1) earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
2) have a net worth exceeding $1 million, either individually or jointly with his or her spouse.
3) be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.
These investors are considered to be fully functional without all the restrictions of the SEC.
An employee benefit plan or a trust can be qualified as an accredited investor if total assets are in excess of $5 million.
So, while it's easy to ask for financing, it's important to note that there are investors out there who qualify, and whom can be isolated in agreements for their advantage and yours. Because of their assets, they are more qualified. Just remember, your lawyer, your accountant, and you have an obligation of due diligence in making sure that the investor is really qualified as an accredited investor.