Having investors in your business is one of the great necessities needed to grow your business. One of the most common ways of doing this is through the sale of securities to investors in the form of common stocks, preferred stocks, or any other form of equity in the company. However before you do so it is a good idea to become familiar with the applicable securities laws regarding accredited investors.
What is an accredited investor?
Accredited investors are organizations, companies, and even individuals who the Federal Securities and Exchange Commission considers to have the ability to responsibly take on high risk securities, such as those of a start-up business. Accredited investors have specific qualities that reduce their need of protection from SEC regulations on purchasing securities. Therefore a business is exempt from registering its securities when selling to an accredited investor. This protects your business from lawsuits and rescission claims later on if your business should fail to meet the financial expectations of investors. The full qualifications for who can be an accredited investor are set out by the Securities Act of 1933 and can easily be referenced on the Securities and Exchange Commission’s website. It is recommended that your business consult legal counsel in regards to securities law issues before taking any action.
What do I need to do to sell to an accredited investor?
In order to understand how this process works, you have to understand the role of the Federal Securities and Exchange Commission, this federal organization oversees the regulations on the exchange of securities between businesses, organizations and individuals, as well as establishing securities law. Any company that wants to sell securities needs to register its securities and the required financial information about their business with the SEC under a public filing. Unless, the seller can apply one of the exemptions to the registration requirement. The exemption that applies here is to privately sell unregistered securities to an accredited investor. The full listing of required financial information by the SEC can be found on its website and it is recommended to consult legal counsel to insure full compliance.
What are the benefits of selling to an accredited investor?
- If the information about your company meets federal requirements of disclosure, then an investor can accurately assess the situation of your business and make a responsible decision on whether or not to invest.
- Private investment in securities is generally considered to be more profitable by investors and therefore makes your business a more attractive choice for investment.
- Insure that the organizations in the market that are allowed to make investments do so responsibly and can mitigate the risk.
- Decrease the chance of fraud or unexpected risk that can damage your business and the market as a whole.
- Make private sales of investments much safer through protection against rescission claims if your business performs poorly.
- Creates specific disclosures of financial information which invalidate later claims that you withheld key financial information that would have altered the investor’s decision.
With a complete understanding of the advantages of selling securities you can better assess the risk and reward that your business will undergo in the process of raising capital. Speak with an attorney about what you need to know before selling to an accredited investor.