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Should I Take Money From Unaccredited Investors?

One question that we’ve gotten fairly frequently is whether or not an entrepreneur should take money from unaccredited investors.  It’s tempting – you have friends and family that want to help you out, in many cases don’t want debt and want a piece of the action.

Brad and I aren’t your lawyers.  If you take money from unaccredited folks, consult one – this can get tricky sometimes.  If you decide to take money from these types of investors, consider some of the risks and balance against the rewards of getting funded a bit more easily.

1.  You are normally limited to 35 unaccredited investors.  After that number is surpassed, you are committing securities violations;

2.  If anything isn’t done “just right” in the offering (in other words, make sure you lawyer is on board), unaccredited investors will normally have rescission rights to rescind their investment as if it never happened;

3.  Unaccredited investors are normally less risk tolerant and if things with your company don’t go as you planned, it would not be surprising to for you to have more problems managing your shareholder base than you would with accredited investors; and

4.  If you sell your company in a stock deal, it’s likely that the acquirer will not want to take on your unaccredited investors as shareholders.  You will need to find cash to cash them out, normally.

Again, this is a complicated area of securities law and this blog does not focus on the legal intricacies.  Plenty of startups take money from unaccredited folks, just know what you are getting into before you do.  

June 10th, 2007 by     Categories: Fundraising    
  • Anonymous

    I would advise against taking on amateur investors, no matter how badly you need the money.
    I took a small investment from an amateur angel. Later that year, we discovered that the fundraiser we had hired to bring in a larger round had not made a single call, which put us in a difficult position with almost no cash, with the product not yet in revenue service.
    While we were busy trying to keep the company afloat, and keep development moving forward, this angel investor was threatening to sue us. He had no basis to sue, his contract clearly stated that he knew he was risking a 100% loss, etc. His behavior was very unprofessional, and offensive, as we had as much of our own money at stake as he did.
    We got through all of this ok, but I regret taking investment from someone like this. If he had been a professional investor he would have understood our situation and would have most likely helped us find other investors or debt to get us through to launch.

  • http://www.whygosolo.blogspot.com Ann Bernard

    Thank you. This is a very timely post…since I just posted about the blue sky law on my blog. Of course, my information is coming from being an entrepreneur. I’m going to go add you link to my post!
    We’re currently dealing with unaccredited investors and like you mentioned in your post, we are keeping our lawyer involved. We are also aware of the risks.

  • http://www.zaid360.com Zaid

    Next question: do all/most angels fall under the unaccredited category?

  • Jason

    In my experience, most angels are accredited investors. If they didn’t have financial strength, they wouldn’t have the assets to invest in high risk start up companies.

  • Scott M.

    I’ve raised nearly $8 million from angels in career and I have never taken money from an unaccredited investor. My rule of thumb is that the angel writing the check must have the assets to be able to either light the check on fire or invest in my company and not feel bad about either. This is simplistic, but my point is that the angel should not miss the money after they invest. His or her net worth should be such that they could easily write a check for $50K or $100K or $250K and not blink. High risk investments should only be 5% or so of a person’s portfolio.

  • HDCreations llc

    Hello Scott, are you still in business? Are you willing to pay some of your capital success forward to help another start up that was in your position 3 years ago?