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I have some money that I would like to invest. I have some money invested in the stock market and I have found some other places I'd like to invest as well, but it seems that many places require that you be an accredited investor.

I've looked at FundersClub and Lending Club, but both require that you be an accredited investor (with the latter being because I live in the state of Kentucky).

I've looked up the qualifications for being an accredited investor and found the following:

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  1. a bank, insurance company, registered investment company, business development company, or small business investment company;
  2. an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
  4. a director, executive officer, or general partner of the company selling the securities;
  5. a business in which all the equity owners are accredited investors;
  6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
  7. a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes. Source

Though I make an all right amount of money, I do not make enough to qualify under option 7, nor do I qualify under any of the other options.

Is there any way for someone who does not qualify for any of those options to still invest?

Create a registered investment company, provide the company with funds, and invest via it?

UPDATE (10/29/2013)

The SEC has recently voted to allow non-accredited investors to invest a portion of their income into start-ups (Source). It's not finalized yet, but it is definitely something to keep an eye on:

Investors, over the course of a 12-month period, would be permitted to invest up to:

$2,000 or 5 percent of their annual income or net worth, whichever is greater, if both their annual income and net worth are less than $100,000.

10 percent of their annual income or net worth, whichever is greater, if either their annual income or net worth is equal to or more than $100,000. During the 12-month period, these investors would not be able to purchase more than $100,000 of securities through crowdfunding.

Bob Baerker
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Ryan
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1 Answers1

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Unfortunately, it is not possible for an ordinary person to become an accredited investor without a career change. Gaining any legal certification in investments typically requires sponsorship from an investment company (which you would be working for). There are reasons why these kinds of investments are not available to ordinary people directly, and you should definitely consult an RIA (registered investment adviser) before investing in something that isn't extremely standardized (traded on a major exchange).

The issue with these kinds of investments is that they are not particularly standardized (in terms of legal structure/settlement terms). Registered investment advisers and other people who manage investments professionally are (theoretically) given specific training to understand these kinds of non-standard investments and are (theoretically) qualified to analyze the legal documentation of these, make well-informed investment decisions, and make sure that their investors are not falling into any kind of pyramid scheme or unknowingly accepting unfavorable terms.

There are many many kinds of issues that can arise when investing in startups. What % of the company/ the company's profits are you entitled to? How long can the company go without paying you a dividend? Do they have to pay you a dividend at all? How liquid will your investment in the company be? Unfortunately, it is common for startups to accept investment but have legal restrictions on their investors' ability to sell their stake in the business and other non-standard contract clauses.

For example, some investment agreements have a clause that states that you can only sell your stake in the business to a person who already owns a stake in the business. This makes your investment essentially worthless - the company could run for an unlimited amount of time without paying you a dividend. If you are not able to sell your stake in the company you will not be able to earn any capital gains either. The probability of a startup eventually going public is extremely small.. so in this scenario it is likely you will end up gaining no return investment (though you can be happy to know you helped a company grow!)

Overall, the restrictions for these kinds of investments exist to protect ordinary folks from investing their savings into things that could get them burned. If you want to invest in companies on FundersClub build a relationship with an RIA and work with that person to invest your money. It is easier, less risky, and not all that more expensive :)

WillGetItDunn
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