Since late May non-accredited investors can invest in startups
Raising capital from non-accredited investors has finally become a reality in the US. In March of this year, regulations on Title IV of JOBS Act allowed extended versions of Registration A (called A+), called Tier 1 and Tier 2, providing rules for raising money via equity crowdfunding.
Under Tier 1, entrepreneurs can raise up to $20 million in securities (equity, debt or convertible debt) per year, from both accredited and non-accredit investors. Affiliates of the issuer cannot sell more than $6 million annually as well.
Tier 1 is somewhat simpler, as issuers are not required to provide audited annual reports, nor events, but are subject to Blue Sky state laws nonetheless. Those laws depend on the state where the issuer resides.
Most startups fit Tier 1 regulations, which does not limit the amount raised from non-accredited investors.
Tier 2 allows larger values to be raised: up to $50 million annually and up to $15 million from affiliates of the issuer.
The advantage of Tier 2 is that SEC regulations have preemption over Blue Sky laws, which means they are mostly regulated in the federal level.
However, companies have some obligations that can significantly raise their costs, like reporting events and filing audited annual reports and even semiannual reports.
Also, there is a limit for how much can be raised from each individual non-accredited investor: 10% of their yearly income or their total assets, whichever is bigger. Therefore, just like with crowdfunding for accredited investors, the company must verify investor’s paperwork.
JOBS Act Title IV effectively opens the possibility for non-accredited investors to buy startup securities and, therefore, to profit in this process. That had been a long time demand from both crowdfunding portals and startups entrepreneurs.
While those tiers provide some exemptions to companies, raising money from accredited-only investors can be cheaper though. Be advised, however, to properly check investors’ paperwork so you don’t bring a non-accredited investor erroneously into your investors pool.