So, what IS an accredited investor, and why SHOULD you care?

At an event a few weeks ago put on by the Utah Tech Council and Utah's Division of Securities, I learned a few things about non-accredited investors that I didn't know (and that made it even more important NOT to take non-accredited money!)

The team from the Division of Securities assured the group that it is very hard to meet the Federal (and State) standards for appropriately accepting funds from non-accredited investors.  One reason is that non-accredited investors must be presented with AUDITED financials (not just company produced financials). I doubled back with the team to make sure I understood this correctly, and asked them how many startups actually have audited financials - we looked at each other and, almost at once, said "none!" 

In addition, they warned us that if any of the money in a round of funding is tainted by inappropriate or incomplete disclosures to non-accredited investors, the ENTIRE round (even from accredited investors) is also tainted. 

In short, it's not clear to me that there is such a thing as a 'safe harbor; when it comes to taking non-accredited money.  That's why credible and experienced corporate attorneys will tell you that the time and trouble it takes to accept non-accredited money is not worth the little bit that you will get! 

One interesting tidbit is that there seems to be effort afoot at the Federal level ot RAISE the levels of eligiblity for accredited investors - apparently the current levels are several decades old and have not been indexed for inflation.  We may see $2 million or so as the threshold for an accredited investor, instead of just $ 1million.  Something your experienced corporate attorney will help you monitor.

Here's a look at a common accredited investor questionnaire to give you some more flavor.  Note, I have edited down many of the definitions to just summarize the main qualifications or concepts (elipses and summaries denote deleted or edited portions).  DO NOT use this version as YOUR version - please consult your highly qualified corporate attorney for a complete questionnaire (see the Advisors category for more on the importance of qualified legal counsel). 

A potential investor should be asked to fill out a complete accredited investor questionnaire and should correctly identify "how" they are accredited.  Note that the most frequently relevant categories are the last three - which are for natural persons, and include officers and directors of the company, as well as individuals the SEC has decided have the expertise and wherewithal to make an independent determination of the risks of your potential investment opportunity

Determination of Whether Proposed Investor is an “Accredited Investor” under Regulation D Promulgated pursuant to the Securities act of 1933, as amended (the “Act”). 

Initial each Box True or False: