Accredited investor private placement memorandum
Quartz has a piece up discussing the differences between accredited and non-accredited investors, which relates closely to the issue of accredited investor private placements. Turns out, only 3% of Americans are accredited investors. Quartz puts the facts pithily in their headline: “This is not a typo: Only 3% of Americans are legally allowed to invest in start-ups.” Does this pose a problem for your accredited investor private placement? Can you still raise the capital you need for your business from such a small pool?
Let’s start with what is an accredited investor. The definition varies slightly by country, but in the US accredited investors are defined as having a net worth of at least $1 million (not including their primary residence) or as having earned at least $200,000 for two years in a row (or $300,000 for households). We’re talking really well off people here. This is according to SEC’s Regulation D (Reg D), rules 505 and 506, established as part of the Securities Act of 1933. Financial institutions can also be accredited investors, but let’s hold off on that. If you’re looking to raise money with an accredited investor private placement memorandum, you’re probably raising funds from individuals.
An accredited investor private placement memorandum is the essential business document that lays out your investment for these accredited investors. The private placement memorandum (PPM) should detail your business plan, give background on you and your management team, and disclose all relevant risks pertaining to the investment. Finally, the PPM outlines the structure of the investment offering, with all the relevant legal and tax information as well.
Raising money using an accredited investor private placement memorandum is the proper, professional way to raise capital fast. Whether you are contemplating a debt offering (such as 144A offering, or bonds) or equity investment – PPMs are used for both equity securities and debt securities – the PPM document ensures you are presenting your investment in the best light. It also can protect you against liability should the investment go south for whatever reason, as you have covered your bases by disclosing all the risks in the accredited investor PPM. In that sense, it operates as an insurance, as well.
Targeting accredited investors, even though there are so few of them, is a powerful way to raise the funds you need. Friends and family type investment can only take you so far, targeting that 3% of Americans might be a good idea.