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Most individual investors cannot invest in private companies that have issued shares of stock without registering the shares with the Securities and Exchange Commission. The exception is someone who meets the income, net worth or financial sophistication requirements to be an accredited investor. Many financial advisors qualify as accredited investors because of their professional training, so they are able to invest their own funds in unregistered securities from private companies. However, advisors can only invest client money in unregistered shares of private companies if their client is also an accredited investor. Despite these limitations, investors can still invest in private companies using a variety of techniques, and a financial advisor who is an accredited investor can help them navigate the world of private company investing.
If you’re considering investing in private companies, talk to a financial advisor about your objectives and how to prepare a plan to reach them.
Companies that sell shares to the public are required first to go through an expensive and extensive registration process that involves preparing and disseminating detailed information about their finances, operations, prospects, risks and other factors. The Securities and Exchange Commission (SEC) does this to protect ordinary investors from unknowingly risking their money in shaky or shady schemes.
Companies that don’t sell shares to the public can sell unregistered securities, but they can only sell them to certain investors, including a category the SEC calls accredited investors. Hedge funds, venture capital funds and private equity funds are examples of businesses that may sell unregistered securities to accredited investors. Many non-financial companies including startups do likewise, such as SpaceX or Stripe.
There are three requirements relating to income, net worth and professional licensing. Fulfilling any of these qualifies an investor as an accredited investor. The requirements are:
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Net worth, not including your primary residence, of more than $1 million
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Earned income of more than $200,000 or, if combined with a spouse or partner, $300,000 for each of the last two years, plus the ability to maintain that level in the current year
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Have a valid current securities license including Series 7, 65 or 82.
No regulatory body certifies someone as an accredited investor. It is up to the companies that sell unregistered securities to make sure that their investors can legally invest. The securities seller will normally request documentation that someone qualifies as accredited. If a non-accredited investor is permitted to invest, the company selling the shares, not the investor, could face legal action.