Can Non-Accredited Investors Invest in Startups?
Explore how non-accredited investors can participate in startup funding. Understand the regulations and platforms making it possible.
Investing in startups has often been perceived as an exclusive opportunity, primarily accessible to wealthy individuals or large financial institutions. However, this perception does not fully capture the evolving landscape of startup finance. The regulatory environment has broadened participation, creating avenues for a wider range of investors to engage with emerging businesses.
Changes in securities regulations have opened doors, allowing individuals who do not meet strict wealth criteria to contribute capital to promising new ventures. Understanding these pathways is crucial for anyone interested in supporting and potentially benefiting from the growth of early-stage companies.
What is a Non-Accredited Investor
The U.S. Securities and Exchange Commission (SEC) establishes specific criteria to categorize investors, distinguishing between “accredited” and “non-accredited” individuals. This distinction is based on financial thresholds designed to protect investors who may have less experience or capacity to absorb significant losses. A non-accredited investor is an individual who does not meet the SEC’s definition of an accredited investor.
For an individual to be deemed an accredited investor, they must satisfy certain financial requirements. This includes having an annual income exceeding $200,000 for the past two years, with the expectation of earning the same in the current year. Alternatively, if combined with a spouse, their joint income must exceed $300,000 for the same period. Another pathway to accredited status involves possessing a net worth over $1 million, either individually or jointly with a spouse, excluding the value of their primary residence. Individuals who do not meet these income or net worth thresholds are classified as non-accredited investors.
Primary Investment Pathways
Non-accredited investors can access startup investment opportunities through specific regulatory exemptions. Regulation Crowdfunding (Reg CF) and Regulation A (Reg A+) are two frameworks that enable companies to raise capital from a wider pool of investors, including non-accredited individuals. These regulations allow everyday individuals to participate in early-stage company funding.
Regulation Crowdfunding, enacted under the JOBS Act, permits companies to raise up to $5 million within a 12-month period through online platforms. This regulation requires all transactions to occur through SEC-registered intermediaries, such as funding portals or broker-dealers. Companies utilizing Reg CF must provide certain disclosures, including financial information, to the SEC and potential investors, with the level of disclosure depending on the capital sought.
Regulation A, often referred to as a “mini-IPO,” offers companies two tiers for raising capital, allowing for larger fundraising amounts than Reg CF. Tier 1 permits offerings up to $20 million in a 12-month period, while Tier 2 allows for offerings up to $75 million within the same timeframe. Regulation A offerings can be open to both accredited and non-accredited investors, with different investment limits applying depending on the tier and investor status. Companies must file an offering statement with the SEC, which includes an offering circular, providing comprehensive information to prospective investors.
Navigating Investment Platforms and Limits
Investing in startups under Regulation Crowdfunding and Regulation A occurs through specialized online platforms. These platforms serve as intermediaries between companies seeking capital and potential investors, and include SEC-registered funding portals and broker-dealers. Funding portals are designed for Regulation Crowdfunding offerings and operate with restrictions, such as not offering investment advice or handling investor funds directly. Broker-dealers can facilitate a broader range of offerings, including both Reg CF and Reg A+, and may offer more extensive services.
To begin investing, individuals create an account on one of these regulated platforms, which involves a verification process. Investors can then browse various startup offerings, access detailed company information, and review offering circulars or other disclosure documents. These documents provide insights into the company’s business model, financials, and the specific terms of the investment. Reviewing these materials thoroughly is an important step in making informed investment decisions.
Specific investment limits are imposed on non-accredited investors to mitigate risk, particularly under Regulation Crowdfunding and Tier 2 of Regulation A. For Regulation Crowdfunding, if a non-accredited investor’s annual income or net worth is less than $124,000, they are limited to investing the greater of $2,500 or 5% of the greater of their annual income or net worth within any 12-month period. If both their annual income and net worth are equal to or exceed $124,000, the investment limit is 10% of the greater of their annual income or net worth, with an overall cap of $124,000 across all Reg CF offerings in a 12-month period.
For Regulation A offerings, investment limits for non-accredited investors apply only to Tier 2 offerings, unless the securities will be listed on a national securities exchange. In a Tier 2 offering where securities are not exchange-listed, a non-accredited investor may invest no more than 10% of the greater of their annual income or net worth. Tier 1 Regulation A offerings do not impose investment limitations on non-accredited investors. These limits are designed to protect investors from over-committing capital to potentially high-risk, illiquid startup investments.