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Ask HN: Why do you have to be an accredited investor?

• ibsulon 17y ago
  It's government looking out for "your interests." That said... It is not as risky to go into business as it is to loan someone else money to go into business. You lose so much control, and people often gamble with retirement money because of a personal connection. When it goes well, all celebrate. However, it can tear family and friendships apart if it doesn't. The government assumes that if you have the money to lose, you are also wise enough to avoid such issues, as well as those of fraud, etc, and that you won't lose your shirt because of it. (People did lose a lot of money with higher risk investments in the market crash, leading to the 1933 reforms.)
  • mixmax 17y ago
    Seems pretty awkward, especially for a country that prides itself on innovation and starting companies. So can "normal" people invest in startups?
• grellas 17y ago
  When a startup issues stock to investors, it is critical to keep the offering within the limits of recognized securities law exemptions. Otherwise, it is an illegal offering and any investor who purchased stock can rescind and demand his money back from the issuer or its promoters. Thus, securities laws are not to be taken lightly. That said, it is an extremely simple proposition to structure early-stage offerings in a way that meets exemption requirements and this can and does very often involve stock sold to relatives and friends. In California, for example, there is something known as the "limited offering exemption" (Cal. Corp. Code section 25102(f)) that permits issuances of stock to up to 35 non-accredited investors who have a pre-existing relationship with the company or its founders and who represent that they are purchasing for bona-fide investment purposes and not for immediate resale. The disclosure requirements for this, and the accompanying paperwork, are very easy to comply with. Most states have something comparable, as do the federal rules as interpreted under Section 4(2) of the 1933 securities act and under Regulation D (which sets out "safe harbor" provisions for private placements). The main advantage of using accredited investors lies in the tremendous reduction in compliance risk when issuers are doing more complex offerings. In the early-stage context, I recommend to my startups that they attempt if possible to limit their offerings to accredited investors simply because this keeps things things safest for compliance purposes but I also tell them that limited sales to non-accredited investors are usually fine. I have done a brief write-up on this at http://grellas.com/faq_business_startup_012.html http://grellas.com/faq_business_startup_012.html.
  • mixmax 17y ago
    Thanks!
• dasht 17y ago
  I am a satisfied customer of and recommend Nolo Press. They publish books about "How to start a corporation" that answer questions like yours here, and also guide you through incorporating properly without paying excessive lawyer fees. One way to understand restrictions requiring qualified or registered investors for public offerings is to look at examples of who has been busted for breaking such laws. An example I recall from a Nolo publication is the "movie deal". You pick up a copy of Variety (back in the day) and there's an ad: "Invest in a new motion picture. Major director. Outstanding cast. Guaranteed returns. Call 555-1212". Then, a few weeks later, the check has cleared, grandpa is out $50K but owns a useless stock "certificate", and the grifters have disappeared into the woodwork and broken the lease on the fancy office they rented for the "Unbelievable Films" 'company'.
  • grellas 17y ago
    Even as a business lawyer, I can heartily recommend self-help resources, of which Nolo is a good example. They use highly qualified lawyers as authors to distill legal issues for use by lay people. During the fever pitch reached in the bubble era, I bumped into a situation where a startup had raised $7M from so-called "accredited investors" by advertising the opportunity on the web. Large numbers of the investments were in the $5K range from, e.g., a small town in Texas, and it is clear that the investors were merely clicking through a screen by which they confirmed they were "accredited" without really being so. By the way, the SEC does allow companies to use the web in certain restricted circumstances in connection with their offerings (the above case obviously did not comply with these restrictions) and, with the several thousand investors involved, stood a good chance of being characterized as an improper public offering of securities.
• gojomo 17y ago
  It's leftover government paternalism from the scams and bubbles of previous eras. Viewed charitably, it protects less-sophisticated citizens from losing money they can't afford to lose in areas where the risks and legal structures are too complicated for them to properly evaluate. Viewed less charitably, it's just one of many traditional arrangements that discriminate against the non-wealthy, somewhat sustained (even if below the level of conscious intent) because they happen to protect the interests of those already wealthy. Sound paranoid? Observe that there's no law or paperwork which blocks a poor person from gambling away all their money -- plus all the money credit cards will loan them! -- on rigged games of chance, including some run by the government itself (state lotteries). But can that same person invest a few thousand to ten thousand in a private company? No, or not without costly paperwork which makes many ventures uninterested in taking such money. And that answer applies even if it's a small proportion of the investor's total savings, or in an area where they have first-hand expertise.
• Scott_MacGregor 17y ago
  United States individual state and also federal securities laws make a determination as to who is considered an accredited investor and who is not. (Federal Securities Laws and state Blue Sky Laws.) Accredited investors are deemed to need less protection under the law than un-accredited investors. Basically accredited investors are deemed more able to take losses and/or more able to analyze which investments are better for their money. In certain instances un-accredited investors may have rights to a return of their invested money in the event of a financial loss, where an accredited investor must take the loss. In the United States, investment is heavily regulated on both the state and the federal level.