As people reduced their discretionary spending and much of the country almost eliminated their commuting costs as a result of the nationwide shutdowns over the past 13 months, an unexpected thing happened: Americans decided to invest in the capital markets more than ever. 2020 saw the highest number of private brokerage accounts opened in a single year. This is great news because it means more people are appreciating the power of multiple revenue streams and passive wealth generation. The private equity markets, however – those which aren’t listed on a public exchange, and to which only wealthy and sophisticated investors have access – are still mostly off-limits to non-accredited investors.


Why Can’t I Purchase Shares in Private Companies?

Actually, you can…as long as you’re an accredited investor. New platforms like CartaX (run by popular cap table management software company Carta) have sought to streamline and make more accessible the private equity markets by allowing the trading of shares in privately held companies. Historically, access to shares of privately held companies was available only to those who knew the company owners personally or had close connections through friends or colleagues. In these instances, purchasing private company shares is almost as easy as buying shares on the publicly-traded exchange, such as the NYSE or NASDAQ. But what if you’re not an accredited investor? While barriers to entry in the private equity markets are still high, they are getting less so. In fact, this month marks the five-year anniversary of the introduction of Regulation Crowdfunding, more commonly known as Reg CF. Reg CF allows non-accredited investors to invest their money into companies which are seeking to raise funds under the SEC-promulgated exemption. This has been a big year for Reg CF: in addition to turning five years old, it also received a revamp of the investment rules. Among the major changes are that: (i) investment limits are now based on the greater of either net worth or annual income for non-accredited investors, and (ii) the total amount that can be raised in a 12-month period was increased from $1.07 million to $5 million.  


Am I an Accredited Investor?

If you haven’t purchased privately-held securities in the past, this is a question that might not occur to you. There’s a simple test which has been the standard for many years: if you earned at least $200,000 for the two years prior to the offering, or your net worth is at least $1mm, not including your home, then you are considered an accredited investor. As of December 2020, the definition of accredited investor also includes anyone who has a Series 7, Series 65, or Series 82 license issued by the Financial Industry Regulatory Authority (FINRA) – in other words, people who have received professional certifications which indicate they have a high degree of sophistication in the financial markets.

The underlying principle of defining an accredited investor and limiting private equity to those who qualify is that they are, in theory anyway, more likely to understand and / or withstand the risks of investment in companies which may not publicly disclose information about the company. If you purchase shares of stock in Apple, which is publicly traded on NASDAQ, you can research the company’s earnings until you’re satisfied that your investment is a good decision. With privately held companies, such information may not be available. The risk of losing your entire investment is therefore – in the eyes of the SEC – much more likely.


Are Non-Accredited Investors Stuck with Public Companies Only?

With the exception of possibly investing in companies through Reg CF as mentioned above, the practical answer is yes, they are. Although companies may use certain federal securities laws to sell to non-accredited investors, they seldom do. The reason for this is that in order to do so, the company would have to disclose certain information in a way that complies with securities laws. This can a time-intensive and expensive process, especially when the company needs to pay attorneys to help prepare and review the disclosures.


What does the Future Hold for Non-Accredited Investors?

At Peak, we think the private equity markets should be more open and accessible than they currently are, even with the expansion of Reg CF and the accredited investor definitions. Although such changes happen more slowly than we would like, the SEC has shown signs of carefully widening access for people currently considered non-accredited investors. We welcome these moves and hope to see more of them in the near future.


Bob Baker is a founding partner of Peak Corporate Counsel. He has worked with numerous founders on a variety of issues specific to startups. When he’s not advising innovators, he can be found at networking events, playing rugby, or hiking with his kids.

This article is for informational purposes only, and may not be considered legal advice.