Accredited investors: who can join your round, and why it matters.
Most private startup rounds in the US are sold only to accredited investors. The definition decides who can write you a check and how you can find them.
The short answer
An accredited investor meets an SEC test based on income, net worth excluding a primary residence, or certain professional credentials. Under Rule 506(b) you cannot publicly advertise your round. Under 506(c) you can, but you must take reasonable steps to verify every investor is accredited.
Compare the options
Public advertising
Rule 506(b): Not allowed
Rule 506(c): Allowed
Who can invest
Rule 506(b): Accredited, plus limited non-accredited
Rule 506(c): Accredited only
Checking status
Rule 506(b): Investor certifies; you must not know otherwise
Rule 506(c): You must take reasonable steps to verify
Typical outreach
Rule 506(b): People you already know or are introduced to
Rule 506(c): Public posts, events and broad outreach
Form D
Rule 506(b): Required
Rule 506(c): Required
The tests, in plain terms
An individual can qualify on income, if they earned above an SEC threshold in recent years and expect to again. They can qualify on net worth above a threshold, not counting their primary residence. Holders of certain securities licenses qualify too. Some entities qualify on assets. The SEC sets the thresholds and can change them, so check the current rule.
Why 506(b) or 506(c) matters
Under 506(b), announcing your raise publicly can count as general solicitation and put the exemption at risk. Under 506(c), you may talk about your round openly, but every investor must be verified, for example through documents or a letter from a qualified professional. Pick the rule with your lawyer before you start outreach.
Before you take a check
- Which rule is this round relying on?
- Has every investor confirmed accredited status in writing?
- If 506(c), what verification method will we use?
- Have we said anything publicly that could count as general solicitation?
Terms to know
Accredited investor
A person or entity that meets the SEC's financial or professional test.
General solicitation
Offering securities through public advertising or broad outreach.
Verification
Reasonable steps a company takes to confirm an investor is accredited.
Is your deck ready for a public pitch?
Under 506(c), more people can see your deck. Upload it and we tell you what a first-time reader will question.
Questions founders ask
Can friends and family invest if they are not accredited?
Possibly under 506(b), which allows a limited number of non-accredited investors who are financially sophisticated, but it brings extra disclosure duties. Ask a lawyer before accepting their money.
Does posting about my raise online break 506(b)?
It can. Public statements that offer the round may count as general solicitation. Talk to your lawyer before posting about an open round.
Sources
Sources: SEC Rule 501 accredited investor definition; SEC Rule 506(b) and 506(c). Thresholds and guidance can change. Not legal advice.
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