Family Offices And Their Clients
According to the SEC, family offices are entities established by wealthy families to manage their wealth and provide other services to family members, such as tax and estate planning services. Family offices will now be deemed to be accredited investors if they:
Learn How To Conduct Due Diligence
Before investing in any startup, thorough due diligence is advised.
Due diligence involves the investigation and evaluation of the startup and its founders before funding. It looks at the market size, use of funds, technology, intellectual property, founder experience and character, the risks involved in investing in a particular startup, plus much more. Angel investing groups conduct due diligence before they make any funding decisions. This work is typically done by a subset of the angel group.
To help you in your due diligence in deciding to fund an early-stage startup, .
How Does Angel Financing Work
As we said, angel investors make a startup investment in exchange for equity. So how much money can you expect to get? Well, the numbers can range from tens of thousands to millions. But according to the U.S. Small Business Administration , the average investment from an angel investor is $330,000not a bad chunk of change.2
Exciting as that sounds, we want to be clear that angel investors are not just throwing money at your business and hoping you do well. Angel investing is a type of equity financing. So while getting money is great, dont forget that youre giving up business equity to get it. How much equity will depend on your specific investment angel and the deal you make with them, but weve seen anywhere between 10% and 40%.
What the angel investor does with that equity will also depend on the individual, but its pretty common for angel investors to get heavily involved with the businesses they fund.
Youll see lots of active angel investors who see their investment as an opportunity to provide not just money but also advice, mentorship, and networking opportunities. That means you can benefit from the entrepreneurial experience of a seasoned investor, but it also means that youre giving up at least a little control.
So is the trade-off worth it?
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What Are The Benefits Of Being An Accredited Female Investor
The main benefit of being an accredited investor is that you become more attractive to companies looking for funding. The U.S. Securities and Exchange Commission doesnt make private funds and companies register certain investments as long as theyre selling their assets to accredited investors.
This means that, as an accredited investor, you can directly invest money into private equity, hedge funds, private placements, venture capital, and equity crowdfunding. Basically, being an accredited investor gives you a lot more investment opportunities than you would have otherwise.
Does Becoming Accredited Matter
That depends. Are you looking for the status? Or do you want to be a truly savvy investor?
Hedge funds and private equity may look like the pinnacle of investments, and while some of these investments can get you inside the gates, theyre not as golden ticket as you might think. In fact, many people have seen great financial success investing in funds as simple as the S& P 500.
For instance, Warren Buffet is a household name these days. His fortune is over $120 billion, and he amassed most of his wealth by investing in common stocks that even non-accredited investors can participate in. In fact, Buffet bought his first stock at the tender age of 11!
Obviously, Warren Buffet is an accredited investor, but he didnt start out that way his status today isnt thanks to accreditation.
Rather than focusing on accredited status alone, it’s smarter to consider becoming a savvy investor. You can grow financially sophisticated by applying some of the techniques that Buffet used. This isn’t to say that accreditation means nothing. It only means that accreditation isn’t everything if you don’t know what to do with this coveted status.
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How Do I Register As An Accredited Investor
There isnt a formal process for becoming an accredited investor. You dont need to pass a test or submit paperwork to earn the status. Companies will do their due diligence to determine whether or not you meet the status of an accredited investor. Expect to submit paperwork showing that you meet the SEC requirements, including:
- Financial documents showing your worth
- Tax returns for at least the last three years
- W-2 forms and other documents showing your earnings
What Do I Need To Provide To Prove That I’m An Accredited Investor
If you invest in a publicly fundraising fund, you will need to provide documentation to verify your status as an accredited investor under US securities law. The documentation you provide depends on the basis on which you are accredited. You can accredit based on either:
- Income: $200k in each of the last 2 years
- Assets: Net worth over $1M, individually or together with a spouse – excluding the value of your primary residence. If you meet both income and asset accreditation criteria, you can choose whichever one is most convenient for you to provide documentation for.
- Verification by Licensed Professional: Rather than providing specific documentation supporting your income or assets, you can provide a letter from one of the following licensed third-party verifiers: CPA, attorney, investment advisor, or an investment broker.
- Our accreditation verification process allows you to trigger an automated email to your verifier that is pre-populated with the required confirmation language for them to complete the verification.
Income-Based Accreditation Documentation
If you are accredited based on income, you will need to provide documentation in the form of tax returns, W-2s, or other official documents that show you meet the required income threshold for the prior two years.
Asset-Based Accreditation Documentation
Series 7, Series 65, or Series 82 License Documentation
All accreditation documents you submit will remain confidential and will be solely used for verification purposes.
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Example Of An Accredited Investor
For an individual to determine qualification as an accredited investor, they should create a personal balance sheet like the one below by subtracting the total number of liabilities against the total assets.
|$ 925,000||$ 925,000|
As noted in the example above, Allen qualifies as an accredited investor because his net worth is more than $1 million. However, both Brian and Carla do not qualify due to additional liabilities tied to their primary residence. In Brians case, he has a $100,000 home equity line that boosts his liabilities and drops his net worth below $1 million. Meanwhile, Carlas underwater mortgage increases her liabilities and limits her net worth.
What Platforms Exist For Accredited Investors
Are you scared to death of owning your own investment property and all the work involved with repairs and maintenance?
On the other hand, just the mere mention of real estate investments gets you excited. Its never been easier to stake a claim on a real estate deal or a fund thats focused on commercial deals.
The JOBS Act allowed crowdfunding companies to market this type of investment, and many platforms have popped up that bring the opportunities to you. These platforms strictly vet the opportunities as well as the investors seeking them.
But what if youd rather get in on the next big round of equity funding for a tech startup? Well, with equity crowdfunding, you can do just that.
The JOBS Act made it possible for accredited investors to invest in privately held companies for a piece of ownership. And the platforms that provide these types of opportunities arent offering a nice thank-you letter or token product in exchange for your contribution. You actually get part ownership in the company you invest in and the chance to share in their success. Dont be blinded, though. Investments are tricky, and not every opportunity leads to success.
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How To Become An Accredited Investor
An accredited investor is a person or entity with exclusive access to complex, loosely regulated and often opaque investments like hedge funds, leveraged buyouts and startups. To become an accredited investor the Securities and Exchange Commission requires certain wealth, income or knowledge requirements. Whether you qualify as an accredited investor or not, a financial advisor can help you manage your investments and meet your financial goals.
Can You Angel Invest Without Being An Accredited Investor
There are a few ways to still invest in early-stage companies without being accredited. Pursuant to certain exemptions, the SEC allows for up to 35 non-accredited investors to invest in a company without requiring additional disclosures. Many states also have the non-accredited investors capped at this number.
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Are You Qualified As An Accredited Investor According To Secs New Rules
The existing SEC rules for individual investors, which are based primarily on income and net worth, meant that approximately 85% of the U.S. population couldnt invest in private companies because they didnt meet the previous accredited investor rules. This included qualifying through one of the following definitions:
- A natural person who earned income that exceeded $200,000 USD in each of the prior two years and reasonably expects the same for the current year
- A natural person who has a net worth over $1 million by themselves alone or together with a spouse
While these two definitions of an accredited investor are the most well-known, there are additional categories of accredited investors including:
- Any trust with assets that exceed $5 million USD in total and has not been formed specifically to purchase the securities in question and whose purchase is directed by a sophisticated person
- Any entity in which all of the equity owners are accredited investors
In this context, a sophisticated person means this person must have sufficient knowledge and experience in finance and business to appropriately evaluate both the merits and risks of the prospective investment.
Under the old rules, not only are certain people denied investment opportunities, but high-growth private ventures are deprived of a rich source of capital.
Here are the changes that have the most impact on individual investors seeking to broaden their portfolios:
Significance Of Being An Accredited Investor
So why is it significant for an individual to be an accredited investor? Qualifying as an accredited investor opens up the opportunity to invest in asset classes such as, real estate syndications, real estate crowdfunding, venture capital and hedge funds.The SEC created the above criteria in an effort to protect new or inexperienced investors from buying into high risk projects. Also, there is less risk of an accredited investor having insufficient fund reserves, in the event of a loss.While the above criteria serves to protect non-accredited, or lower net worth investors from potentially losing big on riskier projects, it also excludes them from access to greater opportunities. The idea is, individuals who qualify as accredited investors have more money they can stand to lose on higher risk projects. However, higher risk can also equal higher reward potential.
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How Do Firms Determine If Youre An Accredited Investor
In 2013, the SEC put out some guidelines to help firms confirm an individuals accredited investor status. Those guidelines were expanded in 2020. So lets say you want to invest in an unregistered fund. The firm that manages it may put you through a screening process before it can decide if it can legally let you. It may start with handing you a questionnaire to see if you meet certain qualifications. You can also expect to provide one or more of the following for evaluation:
- Financial statements and details of other accounts
- Tax returns
- W-2 forms and other documents indicating earnings
- Knowledgeable employees of the issuing fund
- Professional certifications, designations or credentials administered by the Financial Industry Regulatory Authority .
Regarding that last bullet point, an investor holding FINRAs Series 7, Series 65 or Series 82 designations qualifies as an accredited investor.
What To Look For In A Worthy Investment
You absolutely have to have a copy of all the business financials, if its an established company. Look at it like youd look at a stock – reviewing their revenues, costs, and bottom-line margins. Are their revenues declining? Are costs increasing? Where are they fat – meaning, do they have too much overhead ? What would happen if you reduced staff or shut off pieces of the business that werent profitable?
Those are the types of questions you need to ask. You need to think like an investor, but also the CEO of a company–every move you make could have a profound impact on the business and its ability to generate revenues .
I would recommend looking at a business that has increased revenues over the past several quarters and years, while keeping the cost of sales and operations relatively flat , and margins above average for the industry. This will vary widely based on the industry, but a big margin allows you some room to make mistakes without losing the business.
I would also gravitate toward a business that had a lot of cash on hand and little to no debt. This is important since cash will help the business weather any storms without sinking their business into more debt.
Finally, get to know the business and the people running it. Is the business a good idea? Does it have long-term prospects? Can you grow it? Are there areas of opportunity that you can capitalize on? Ask those questions about the business to yourself, the owners, workers, and even customers.
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Is It A Safe Investment Option
Not exactly. Theres an inherent risk when you become an angel investor. In fact, data shows that at least 50% of angel investments lose some, if not all, of their money. On the flip side , angel investments can produce an extraordinary return.
This sounds bad, but its the best parallel I can give you. When I gamble , I never gamble money that I cant afford to lose. Meaning, I would never gamble money that, if I lost it, would put me in a bad position financially. Thats why you should stick to no more than 10% of your portfolio.
If you have $1 million in your portfolio, that gives you $100,000 to comfortably play around with. As an angel investment, you could lose all of that, but you could also hit an incredible return. So my advice is to look at it like gambling – in that you should never invest what youre not willing to completely lose.
Remember, angel investments are much different than investing in a stock. With stocks, you have historical returns, financials, you can assess the competence of the leadership team, you have analyst opinions, and a whole slew of other information at your fingertips .
With angel investing, you do have some of that, but its a lot harder to come by. In many cases, youll get to see and understand the business, meet the owners, and see the financials. But whats unpredictable is how itll turn out after you invest and start making decisions or changes.
What Is An Accredited Investor
Under SEC law, a company that offers its own securities must register these investments with the SEC before it can sell them unless it meets an exception. One of those exceptions is selling unregistered investments to accredited investors.
As you can see, accredited investors have legal access to invest in products not available to the general public. These securities include the following:
- Other private placements
So while the ordinary investor may have experience with investing in securities like stocks, bonds and mutual funds, the SEC sees products like hedge funds as entirely different animals. So investors need to demonstrate they can understand the risks involved with these types of investments.
Firms selling unregistered products engage in their own screening process to verify an individuals accredited investor status.
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Whats An Accredited Investor
An accredited investor is an individual or a business entity thats allowed to invest in private market securities offerings. Accredited investors are entitled to this privileged access by satisfying at least one requirement on income, net worth, asset size, governance status, or professional experience.
In the U.S., the term is used by the SEC to refer to investors who are financially sophisticated and have a reduced need for the protection provided by the liquidity in the public securities markets. They can include individuals with high net worth, banks, insurance companies, brokers, and trusts, and, now, certain individuals with certain professional experience and those who choose to invest through an LLC or other entity structure.
How Did The Jobs Act Affect Investments
Rules for investors were rigid prior to the Jumpstart Our Business Startups Act of 2016. The Securities and Exchange Commission a financial industry regulatory authority opened new investment opportunities to everyday Americans when their new rules for equity crowdfunding took effect. This meant the average American could get in on more valuable trades, even if they didn’t have the financial valuation to back up their investments.
No longer were investors required to be accredited according to Title III of JOBS. Title III widened the options available to entrepreneurs seeking operating capital. The Act allowed them to reach out to anyone via an online platform crowdfunding.
Legislation for the Act was signed during President Obamas first term in office, in April 2012. The SEC then had to rewrite many of its rules, specifically the ones that stated only accredited investors could invest using crowdfunding. This addendum to the JOBS Act went into effect in May 2016.
Title III gave small businesses and startups in their early stages a different means of obtaining capital. Non-accredited investors now had access to equity crowdfunding sites.
But with securities investment comes great responsibility. Many unaccredited investors don’t have the financial chops for the long haul. And this is one of the reasons why accreditation exists. Accreditation is vital in the world of high-dollar and high-risk investments.
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