Can’t I Let Non-Accredited Investors In My Round?

non-accredited investorI was recently pressed by someone, “Can’t I let non-accredited investors in my Rule 506(b) round? The rule says that I can have up to 35 non-accredited investors.”

While it is true that Rule 506(b) says you can have up to 35 non-accredited investors, it goes on to say that if you allow even 1 non-accredited investor in your round you have to comply with very detailed and comprehensive disclosure obligations. In contrast, if you are raising money from only accredited investors, there are no specific disclosure obligations required.

Rule 502(b) states, “The issuer is not required to furnish the specified information to purchasers when it sells . . .to any accredited investor.” Whereas non-accredited investors require “disclosure documents that are generally the same as those used in registered offerings.” (See Rule 502 and a reference to the second quote, Rule 506)

[C]ompanies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings.

When you read, “disclosure documents that are generally the same as those used in registered offerings”–read, you are going to have to incur a lot of expense. More than you will typically desire to incur based on the amount of investment from non-accredited investors that you will receive. This is one of the reasons why startups in my experience almost always limit their fundraising to all accredited investor offerings.

Another reason, a new one, is that if you generally solicit your offering under Rule 506(c), you can’t accept funds from any non-accredited investors. The potential trouble is this–if you are conducting what you plan to be a Rule 506(b) offering, you might change your mind mid-stream and decide that you want to generally solicit and generally advertise your offering. If you had accepted any non-accredited investors in your round, you would not be able to do this. Thus, accepting any non-accredited investors will inhibit your flexibility going forward.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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