
Ask HN: Why do you have to be an accredited investor? - mixmax
I just saw the submission <i>Ask HN: Bypassing "Accredited investor" (http://news.ycombinator.com/item?id=1020613)</i> and wondered why this restriction is in place. I googled around a bit, and it seems that the main difference is that if you take money from a non-accredited investor you have to fill out a lot more paperwork.<p>It seems like a strange arrangement, why can't my dad or my friends invest in my startup on the same terms as Mark Andreesen or Paul Graham? Isn't this terribly counterproductive for startups that need money, and often start with money from friends and family?<p>Or am I missing something? I'm from a country where the term doesn't exist, so it may be a stupid question.
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grellas
When a startup issues stock to investors, it is critical to keep the offering
within the limits of recognized securities law exemptions. Otherwise, it is an
illegal offering and any investor who purchased stock can rescind and demand
his money back from the issuer or its promoters. Thus, securities laws are not
to be taken lightly.

That said, it is an extremely simple proposition to structure early-stage
offerings in a way that meets exemption requirements and this can and does
very often involve stock sold to relatives and friends. In California, for
example, there is something known as the "limited offering exemption" (Cal.
Corp. Code section 25102(f)) that permits issuances of stock to up to 35 non-
accredited investors who have a pre-existing relationship with the company or
its founders and who represent that they are purchasing for bona-fide
investment purposes and not for immediate resale. The disclosure requirements
for this, and the accompanying paperwork, are very easy to comply with.

Most states have something comparable, as do the federal rules as interpreted
under Section 4(2) of the 1933 securities act and under Regulation D (which
sets out "safe harbor" provisions for private placements).

The main advantage of using accredited investors lies in the tremendous
reduction in compliance risk when issuers are doing more complex offerings. In
the early-stage context, I recommend to my startups that they attempt if
possible to limit their offerings to accredited investors simply because this
keeps things things safest for compliance purposes but I also tell them that
limited sales to non-accredited investors are usually fine. I have done a
brief write-up on this at <http://grellas.com/faq_business_startup_012.html>.

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mixmax
Thanks!

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gojomo
It's leftover government paternalism from the scams and bubbles of previous
eras.

Viewed charitably, it protects less-sophisticated citizens from losing money
they can't afford to lose in areas where the risks and legal structures are
too complicated for them to properly evaluate.

Viewed less charitably, it's just one of many traditional arrangements that
discriminate against the non-wealthy, somewhat sustained (even if below the
level of conscious intent) because they happen to protect the interests of
those already wealthy.

Sound paranoid? Observe that there's no law or paperwork which blocks a poor
person from gambling away all their money -- plus all the money credit cards
will loan them! -- on rigged games of chance, including some run by the
government itself (state lotteries).

But can that same person invest a few thousand to ten thousand in a private
company? No, or not without costly paperwork which makes many ventures
uninterested in taking such money. And that answer applies even if it's a
small proportion of the investor's total savings, or in an area where they
have first-hand expertise.

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dasht
I am a satisfied customer of and recommend Nolo Press. They publish books
about "How to start a corporation" that answer questions like yours here, and
also guide you through incorporating properly without paying excessive lawyer
fees.

One way to understand restrictions requiring qualified or registered investors
for public offerings is to look at examples of who has been busted for
breaking such laws. An example I recall from a Nolo publication is the "movie
deal". You pick up a copy of Variety (back in the day) and there's an ad:
"Invest in a new motion picture. Major director. Outstanding cast. Guaranteed
returns. Call 555-1212". Then, a few weeks later, the check has cleared,
grandpa is out $50K but owns a useless stock "certificate", and the grifters
have disappeared into the woodwork and broken the lease on the fancy office
they rented for the "Unbelievable Films" 'company'.

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grellas
Even as a business lawyer, I can heartily recommend self-help resources, of
which Nolo is a good example. They use highly qualified lawyers as authors to
distill legal issues for use by lay people.

During the fever pitch reached in the bubble era, I bumped into a situation
where a startup had raised $7M from so-called "accredited investors" by
advertising the opportunity on the web. Large numbers of the investments were
in the $5K range from, e.g., a small town in Texas, and it is clear that the
investors were merely clicking through a screen by which they confirmed they
were "accredited" without really being so.

By the way, the SEC does allow companies to use the web in certain restricted
circumstances in connection with their offerings (the above case obviously did
not comply with these restrictions) and, with the several thousand investors
involved, stood a good chance of being characterized as an improper public
offering of securities.

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ibsulon
It's government looking out for "your interests." That said...

It is not as risky to go into business as it is to loan someone else money to
go into business. You lose so much control, and people often gamble with
retirement money because of a personal connection. When it goes well, all
celebrate. However, it can tear family and friendships apart if it doesn't.

The government assumes that if you have the money to lose, you are also wise
enough to avoid such issues, as well as those of fraud, etc, and that you
won't lose your shirt because of it.

(People did lose a lot of money with higher risk investments in the market
crash, leading to the 1933 reforms.)

~~~
mixmax
Seems pretty awkward, especially for a country that prides itself on
innovation and starting companies.

So can "normal" people invest in startups?

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Scott_MacGregor
United States individual state and also federal securities laws make a
determination as to who is considered an accredited investor and who is not.
(Federal Securities Laws and state Blue Sky Laws.)

Accredited investors are deemed to need less protection under the law than un-
accredited investors. Basically accredited investors are deemed more able to
take losses and/or more able to analyze which investments are better for their
money. In certain instances un-accredited investors may have rights to a
return of their invested money in the event of a financial loss, where an
accredited investor must take the loss.

In the United States, investment is heavily regulated on both the state and
the federal level.

