Private Placement Memorandums and Non-Accredited Investors

Written by Dave Lavinsky

As you research the requirements of a private placement memorandum (PPM), you will find a great deal written about the need to sell securities to accredited investors. However, there are allowances for selling private securities to non-accredited investors, although you should understand the drawbacks of doing so.

Who Are Accredited Investors?

There are a number of potential types of individuals or institutions who can be defined as accredited investors, according to the SEC. Rule 501 of Regulation D lays out eight possibilities. In brief, they include: 1) financial institutions (like banks and investment companies), 2) employee benefit plans, 3) businesses or non-profits with assets over $5 million, 4) directors or partners of the issuing company, 5) a business where all of its owners are accredited investors, 6) a person with net worth (between him/herself and a spouse) of over $1 million, 7) a person with annual income over $200,000 (or over $300,000 with a spouse) and 8) a trust with a sophisticated manager and assets over $ 5 million. The similarity between these many types of individuals and institutions is that they can be expected to be sophisticated and financially savvy enough to look out for their own interests in an investment deal.

Can I Issue Shares to Non-Accredited Investors?

Rules 505 and 506 of Regulation D (which establishes the basis for most private placement offerings to be exempt from SEC registration) allow for up to 35 non-accredited investors to take part in a round of funding.

What Drawbacks?

A major downside of seeking non-accredited investors in this case is the much greater disclosure requirements. The amount of paperwork you must complete approaches that of a full SEC registration, making the process and legal cost unwieldy for most private companies. Furthermore, the fact that these investors will have lower net worth or income than accredited investors means that the money they are investing makes up a greater percentage of their overall livelihood. They will tend to guard their investments more carefully and be more litigious in the case that the investment goes sour. Finally, having non-accredited investors can make acquisition of your company by another company more difficult. If this is a potential exit strategy for your business, think carefully before bringing any non-accredited investors on board.


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