Accredited Investors: Who Qualifies & How to Target Accredited Investors

There has been a great deal of speculation whether or not the JOBS Act (Jumpstart Our Business Startups) has been the raging success everyone had hoped.

Until the law changed, no general solicitation for the sale of securities could be made to any group or individual and state laws had their own jurisdiction and additional rules.

Exempt offerings are no joke and the is a reason the law exists: to protect people.

However, what we outline here should provide some detail on what an accredited investor is, how that definition has changed over time and how to appropriately target accredited investors.

Accredited Investor Defined

For starters, these exempt offerings made to accredited investors don’t have to endure the type of full disclosures required by offerings registered with the SEC. As a result, these offerings often carry a unique risk, because the investor isn’t provided certain data that could help him or her make a more informed decision.

As such, an accredited investor has to be able to bear the economic risk of investing in these risky, unregistered securities.

Investment Companies and Banks

Any bank or investment company, including private equity groups and venture capital firms are available to tap when seeking funding for a specific deal. Such groups could also include venture capital funds whose monies are part of a pooled investment fund, preparatory to making deals in businesses in various life-cycle stages.

Private Development Companies

Private development companies, including business working in real estate and asset growth are also available for funding solicitation. Such groups can be extremely varied in their approach and investment-style, but all represent places from which funds can be garnered.

Corporations and Partnerships with Assets North of $5,000,000

Any private or public company, corporation or partnership with total assets greater than $5 million are legally allowed to invest in securities offered for sale.

Promoters, Officers and Directors of the Issuer

Such persons are often referred to as “The Insiders.” They’re the investment bankers, the lawyers, the deal makers and the consultants. They could include officers in the company, but are most generally the retained representatives of the issuing company.

“Natural Persons” with Net Worth North of $1,000,000

This is one of the most well known qualifications for being an accredited investor. In legal speak, a natural person is simply a single living human being and not some legal entity. Natural persons are, in most cases, not the people to tap for large sums, unless you’re friends with some large donors, but they can be part of a larger strategy.

“Natural Persons” with Single Annual Income Over $200,000

This could also include married “natural persons” with annual income north of $300,000 (in each of the two most recent years prior to securities purchase). Such persons could be any single or married couple with a semi-substantial salary stretching back at least a couple of years previous to the current investment.

Any Form of Trust with Assets North of $5,000,000

Family, pension and charitable trusts are all included in the types of trusts that can easily invest their funds in securities offered in the private market for sale. The managers of such funds can be solicited for investment in any private deal.

Raising capital is only one of the difficulties inherent in getting a startup off the ground. Finding capital from the the aforementioned groups is one arrow in the quiver of a strategy for raising capital for your company.

Securities that are offered or sold by a company or private equity fund must register the transaction with the SEC, unless an exemption is made available. One example of how a securities offering can be exempt from registration is when that security is offered to – or bought by – an accredited investor.

Calculating your net worth

If your net worth exceeds $1 million, then you are an accredited investor. Thus, it comes down to how you calculate your net worth.

If you’re calculating joint net worth with a spouse, it’s not required that all property be jointly held.

In order to calculate your net worth, you have to add up all of your assets (aside from your primary residence), and subtract your liabilities. The result is your net worth.

In addition to excluding your primary residence from the equation, you also benefit from not having to count any mortgage tied to that home as a liability … with a couple of exceptions.

  1. If the loan is for more than the fair market value of your home, then that amount over the fair market value does count as a liability.
  2. If there’s an increase in the loan amount in the 60 days prior to the purchase of any securities, then that amount counts as a liability as well (this is to prevent someone from falsely inflating their net worth by converting home equity into cash or other assets).

What changed after July 20, 2010?

The Dodd-Frank Act changed the rules of what it takes to become an accredited investor by excluding primary residences from the net worth test.

As a result some folks who were considered accredited investors prior to July 20, 2010 no longer meet the criteria. However, any purchase rights (preemptive rights or rights of first offer) related to securities they invested in prior to this date are grandfathered in.

What Changed in August 2020? 

In August 2020, the SEC modernized the definition of an Accredited Investor:

When an accredited investor isn’t a person

An accredited investor does not need to be an individual person, either. Banks, corporations, nonprofits, trusts, and partnerships all can become accredited investors, if they meet either of these requirements:

1. It is a trust with total assets in excess of $5 million; the trust wasn’t formed for the purpose of purchasing the subject securities, and the purchase is directed by a sophisticated person (meaning they have sufficient knowledge and experience in financial and business matters), OR
2. Any entity where all of the equity owners are accredited investors.

Knowing the definition of an accredited investor, becoming one and/or finding one to invest in your business are three very different things.

How to Find Accredited Investors 

Despite much of the buzz surrounding Jobs Acts 1 and 2, I’m suspicious of things actually changing much. The risk of allowing general solicitation and “crowdfunding” investments is still high, regardless of what the law says (or will say once Title III is here). Neither altered laws or public opinion polls can change finance ethics or personality issues. Personally, I would never crowdfund, even if it were legal. I prefer working with the sophisticated, educated and understanding investor. I can’t imagine how frustrating it would be to have to handhold an investor through the process. Of course, it is enticing knowing that the less sophisticated may be easier to gull into a capital raise. It still holds true that, A fool and his money are soon parted.

There are certainly arguments for and against raising money. We’ve discussed them at length before, but the impetus–the catalyst–to business success is knowing the right people. The right people will mean something different for every potential business. Not all angels, PE groups or venture capitalists invest in the same market sectors or with the same types of people. They all have different strategies. So, having a killer idea, the right team and access to the right people at precisely the right time all combine to make for success. Let’s discuss the options available to the latter in that list: the right people.

Building the List

Timing and team are usually serendipitous when you’ve got the right people on board. Knowing the names, addresses, phone numbers and other contact information for groups of accredited investors is sometimes the easy part. You can buy accredited investor lists, but do they “know you from Adam”? Have they heard of your firm? Would they trust your ideas, the information you share with them or the other like-minded people you bring there way? Like contemplating mergers & acquisitions, building an accredited investors list is often the question of “build vs. buy.” In my personal experience, buying a list is easier, but the real work is in massaging the list.

Working an investors list can be a bit easier if the list has been built organically. This is partly because half of the effort involved in working a list comes from building the relationships. Such relationships are like plants in a garden, they need regular nurture if they’re to bring forth any fruit. Properly nurtured, you can–over time–begin to scale your outreach for specific deals. I’ve found Linkedin–and Linkedin Premium in particular to be an invaluable tool in networking and gaining access to the right niches and groups.

Appropriate Targeting

A good list can take years. The best lists are built over a lifetime of relationships. Fortunately, most accredited investors are savvy enough that you don’t have to date them for five years before they’ll do a deal with you. The educated and experienced are looking for a home for their capital. It’s waiting for the right deal that can sometimes be the sticking point.

When the right deal does come along, scaling your outreach is easy especially if your database is up to snuff. CRM technologies combined with appropriate outreach should be paramount. Many of these investors must screen large numbers of candidates they trash stuff that doesn’t pass the gut check before they even dive into the details. If your database of investors is good enough, you’ll know the appropriate markets, SIC codes, etc. where the individual may have keen interest. If your CRM or marketing automation is really good, you can streamline the entire process. If your list is big enough, implementing a scaled solution is a must. It’s can also streamline the process, save time and ultimately provide you with better metrics.

Make it Personal

True investing is like any other quality business: it’s all about relationships and people. A truly scaled approach is okay for tier 1 outreach, but as the investor list is whittled-down, the true relationship work is what separates deals done and deals lost.

In fact, the best accredited investor lists are the short ones. Less mouths at the trough can mean the control is held in the hands of the few. Frankly, that’s not always a bad thing. It’s easier to manage a short list and when decisions need to be made, the skids are greased much more quickly when investors are few, pockets are deep and control is concentrated. Furthermore, if you do it right, the right deals can cause an investor to come back to the table for second helpings.

The Downsides

Confucius said it best:

The superior man knows what is right; the inferior man knows what will sell.

From my personal experience there is a fine line between the two. In most cases, the truly successful have a little bit of both. Unfortunately, there is a tendency in the capital raising arena to oversell. The conundrum of over-promise and under-deliver is not good, especially if it means bridges of investment that could be crossed in the future are burned in the present.

Sure, accredited investors are typically more sophisticated and tend to understand the risks, but if they’re sold a deal that goes even the slightest bit south, it could mean you’ve lost an investor for future potentially safer and more lucrative deals.

Be Cautious on Representation

Becoming a person of trust in private ventures often requires having the keen eye to filter garbage even before you see it. Some of the best investment advice is to save and avoid the crippling effects of the downsides of a bad investment. The best advisers are able to successfully shelter their clients, but not pitching them garbage.

So, turn up your garbage filter hustle to find the opportunities and get to work procuring the right strategic private investors. Of course, that’s more easily said than done.

Nate Nead
Nate Nead
Nate Nead is a licensed investment banker with Four Points Capital Partners, LLC and Principal at Nead, LLC. Nate works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. Four Points Capital Partners, LLC is a member of FINRA and SIPC and registered with the SEC.