Politicians have become big fundraising machines online. Can I go online and ask hundreds of individuals to invest small amounts (like $50) in my new company? I want to raise about $15,000 to $25,000.
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On the surface, your idea of securing a small amount of investment capital from 300 to 500 individuals seems harmless. But there are federal and state laws that stand in your way.
Unfortunately, there’s a long history of con artists selling shares of worthless stock to unsuspecting Americans. I know you intend to build a legitimate company, but not all “entrepreneurs” ever intend to operate a business or repay investors in an honest way.
To minimize fraud, entrepreneurs have to register the securities they intend to sell to large numbers of individual investors with the U.S. Securities Exchange Commission. As part of this process, companies prepare an extensive description of their businesses and the securities offered for sale. This legal document, called an “offering memorandum,” plus other requirements, can easily cost you more in legal fees to prepare than the $15,000 you want to raise for your business.
But don’t give up! There’s an alternative way to raise the money without having to prepare an offering memorandum or sidestep securities state and federal registration laws. The key is to target wealthy individuals who can conceivably “afford” to lose part or all of their investment in your company without causing extreme family hardship. These investors are called “accredited investors.”
The SEC defines accredited investors as individuals who have a net worth of $1 million. The annual income requirement for individuals is $200,000, and $300,000 for a joint family income.
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In late 2011, Congress tightened up the definition of an accredited investor, making it tougher for entrepreneurs to raise investment capital from wealthy individuals. Now, individuals can’t include the value of their primary residence in their net worth calculation. The value of any first or second mortgages on a primary residence are also excluded from the calculation, provided that the value of the home is not less than any indebtedness secured by the individual’s primary residence. Entrepreneurs have to obtain signed investor questionnaires warranting that the investor satisfies the financial criteria of an accredited investor.
There are other types of investors that qualify as “accredited investors” for privately held small-business investment purposes: Venture capital funds, banks, insurance companies, small-business investment companies (SBICs), and certain charities, corporations, partnerships, trusts with assets greater than $5 million, and even a director or executive of the entrepreneurial company selling securities.
I appreciate that asking wealthy strangers to invest in your business can seem intimidating. However, the exercise is really no different than targeting customers and business partners. Your future success depends on your determination to talk to potential business partners, customers and investors. If you don’t ask, you won’t get what you need to succeed.
— Susan Schreter