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important As a general rule, you cannot be an angel invesrtor unless you are accredited.
Startups raise money from accredited investors: either individuals or entities who meet the qualifications set by the Securities and Exchange Commission. According to the SEC, investors must meet a minimum level of income or assets (either high net worth or high income) in order to be accredited. The SEC rules make it challenging for companies to raise money from non-accredited investors who do not meet these standards.
For individuals, an accredited investor is someone who falls into one of the following categories:*
income of at least $200K a year for the two years prior to the year of investment with the expectation of the same in the the year of investment, or $300K with spouse; or
net worth of at least $1M (excluding equity in primary residence, but taking into account debt on that residence to the extent that the debt exceeds the fair market value of the residence); or
any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer.
In addition, a family trust or family partnership may invest in a private company as an accredited investor so long as that family trust or family partnership qualifies as an accredited investor. However, entities such as these must meet different tests to qualify as accredited investors. For an entity to be an accredited investor, it must fit within one of the following categories:
an entity of which all of the equity owners are individual accredited investors (per the qualifications above)
a trust, with total assets in excess of $5M, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in 230.506(b)(2)(ii), or
any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts* or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5M.
By definition, therefore, one cannot form a limited liability company or another type of business entity to make an angel investment as a means of avoiding the “accredited investor” requirement.
founderIn general, under federal law, if a startup accepts even one non-accredited investor in their round, they have to provide what is essentially an IPO-level of disclosure to all investors, which is very costly. In contrast, if a private company limits its securities offering solely to accredited investors, there is no specific information the company has to provide to investors.
You can find an explanation of this dramatic dichotomy in the law on the SEC’s website, which provides:
Companies must decide what information to give to accredited investors, so long as it does not violate the antifraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings.
The Securities Act (also known as the Truth in Securities Act) states that “every offer and sale of securities be registered with the Securities and Exchange Commission (the ‘Commission’), unless an exemption from registration is available.”
An exemption (or exempt offering) is an offer and sale of securities that does not have to be registered with the SEC because the SEC has adopted an exemption from registration that you can qualify to use.
The two most common ways for private companies to sell securities are through the following exemptions:
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