Access to early-stage deals has always been tied to the wealth of the investor. Startups typically look for investments from angel investors and VCs, who write larger cheques and are permitted to invest in private company deals because they meet the legal definition of “Accredited Investors.” If the investor does not meet the technical financial thresholds of an accredited investor, meaning high income or significant assets, the startup cannot take this money, even if the investor otherwise understands startups or has years of experience in the relevant industry.
The new self-certified investor exemption changes that. Instead of focusing on how much capital the investor has, the emphasis shifts to what the investor knows. Startups are now able to accept investment from non-accredited investors who otherwise qualify through credentials or education, whether by holding a recognized degree or designation, or qualifying through experience. Think of the MBA graduate, the corporate lawyer, or the engineer who has built products in the same space.
However, there are still guardrails. Investments are capped at $50,000 per year, whether as a single investment or a series of diversified investments.
While the self-certified exemption creates a new category of potential investor, it does not solve a practical problem: will the startup accept a small $5,000 or $10,000 investment from a self-certified investor, or will the startup push for an angel-size cheque of $25,000 or $50,000? In this regard, with a little creativity, this new exemption could be used to open the door for like-minded friends to invest alongside one another, pooling capital through a single investment vehicle, giving them greater buying power, access, and diversification. Five friends could pool $10,000 each into a special purpose vehicle and use that entity to buy a $50,000 allocation in a startup’s competitive seed round. From the startup’s perspective, if the startup has access to a network of self-certified investors who want to invest, but it does not want to accept small cheques from many small investors (who would each sit separately on the cap table), the startup could take the initiative to set up the special purpose vehicle for the purpose of pooling the investors. See our articles on SPVs.
Reach out to us if you want to learn more about how to use the self-certified investor exemption or a special purpose vehicle for startup investing.
If you have any questions about this article or wish to learn more, please contact our firm. Oziel Law communications and legal articles are intended for informational purposes only and do not constitute legal advice or an opinion on any issue. To obtain additional details or advice about a specific matter, please contact our lawyers.