A Welcome Expansion of ‘Accredited Investor’ on the Horizon
By a somewhat surprising margin (347 – 8), the US House of Representatives overwhelming approved legislation that would expand the definition of an accredited investor. Under current rules, a person must have a net worth of $1 million, not including the value of a home, or make $200,000 or more annually.
Recently, Investment News reported, “The legislation would allow anyone who has a securities license or who has professional knowledge and experience related to a specific security to participate in private placements [even if they don’t meet the current definition of an accredited investor]. The latter description would apply, for instance, to a doctor who wants to invest in a medical-device manufacturing startup. The bill’s author, Rep. David Schweikert, R-Ariz., cast the measure as an effort to democratize investing in emerging companies. “In America today, some of the greatest investment opportunities are available only to those who meet a certain wealth threshold,” Mr. Schweikert said on the House floor. “With passage [of his bill], Congress took a step towards expanding investment opportunity to include hard-working Americans with sophisticated professional experience. In today’s hyper-efficient economy, that expansion opportunity is a key part of driving economic growth.” The lawmaker hopes the decisive House action will encourage his Senate colleagues to take up the bill or a similar measure. Mr. Schweikert is talking to members of the Senate Banking Committee.”
At Advanced CFO, we believe that this is a good first step to provide more people the opportunity to invest directly in private business creation, however, we also remain cautious and will advise our clients to be very careful about accepting money from this new cadre of investors (assuming the legislation passes its final legislative hurdles) just as we have advised them to be careful and well informed before jumping into crowd-funding. We also believe that this is a trend that started with the new rules around crowd-funding and isn’t likely to end so as an entrepreneur who needs to get sufficient capital to fully develop your product and scale your business, you can’t afford to ignore or be ignorant of the opportunity or the current legal and regulatory developments in this area.
As more people are legally able to invest in private businesses without the cost and effort of preparing and filing volumes of disclosures and forms for a private placement in which you are able to sell to non-accredited investors, we believe that the businesses accepting the money will become more and more exposed to liability and lawsuits if things don’t go as well as they plan. We are not attempting to provide legal advice or opinions, just the best advice we can based on our years of experience in private, financing transactions.
In summary, we recommend that you: 1) get informed; 2) seek and listen to qualified advisors and; 3) proceed with caution. If you have questions or wish to discuss how these new developments may apply to your business, please reach out for a free consultation!