Qualifications of an Accredited Investor
When the company is starting, or when you need more money to grow or to pay off a debt, there is a need to get people who’ll invest or lend you money. Despite the urgent need, the SEC requires us to be cautious. Does this mean we should not ask all people who are potentially able to finance us? Why is that so?
When you’re in business, it’s a normal part of your operation to seek out people who’ll cash in on your company.
That’s how companies are funded; it is rare for a company to be wholly funded by just one person. There are always investors behind a company, who are considered co-owners of the company.
But watch out, though. You cannot just consider any investor; the Securities and Exchange Commission has laid down groundwork for you to follow when you are looking for people to invest in your business. There are requirements or criteria that you have to compare their qualifications against in order to comply with the rules.
In fact, these rules are meant to define accredited investors. We all know what accreditation means; in this sense, it means that the investor must be considered qualified by the SEC itself to invest in your business. Take note, these rules are meant for your safety as an entrepreneur and theirs as investors. These rules are created not to slow you down. If you think the SEC is trying to stop you from building up a huge amount of capital, don’t.
According to Regulation D of the 1933 Securities Exchange Act, entrepreneurs should place more emphasis on recruiting investors that have proven income of at least US$200,000 for the past two years. Not only that, you have to make sure that you are not disrupting their lifestyle by soliciting their investment. In other words, you have to see that even though they have met that requirement, there is enough proof that the same amount will still be earned by your potential investor from sources outside your business.
This makes sense now, doesn’t it? The SEC strongly requires that companies shy away from non-accredited investors and seek more accredited investors, which include businessmen, banks and financial investors. This is to make sure that none of you run into trouble because of the said investment; the last thing you’d want as an entrepreneur is someone who’s out for your blood because you lost his investment.
In the event that you do believe someone has earned enough to become an accredited investor, one last requirement you should find out is that he or she should understand the risks of investing. Business is a gamble, after all. You win some, you lose some. That’s the fact that you should make sure your potential investor understands. Do not just accept a debt extended to you out of goodwill without finding out if the person understands that he might not get his money back at all.
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