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Most individual investors cannot invest in private companies that have issued shares of stock without registering the shares with the Securities and Exchange Commission. The exception is someone who meets the income, net worth or financial sophistication requirements to be an accredited investor. Many financial advisors qualify as accredited investors because of their professional training, so they are able to invest their own funds in unregistered securities from private companies. However, advisors can only invest client money in unregistered shares of private companies if their client is also an accredited investor. Despite these limitations, investors can still invest in private companies using a variety of techniques, and a financial advisor who is an accredited investor can help them navigate the world of private company investing.
If you\’re considering investing in private companies, talk to a financial advisor about your objectives and how to prepare a plan to reach them.
Companies that sell shares to the public are required first to go through an expensive and extensive registration process that involves preparing and disseminating detailed information about their finances, operations, prospects, risks and other factors. The Securities and Exchange Commission (SEC) does this to protect ordinary investors from unknowingly risking their money in shaky or shady schemes.
Companies that don\’t sell shares to the public can sell unregistered securities, but they can only sell them to certain investors, including a category the SEC calls accredited investors. Hedge funds, venture capital funds and private equity funds are examples of businesses that may sell unregistered securities to accredited investors. Many non-financial companies including startups do likewise, such as SpaceX or Stripe.
There are three requirements relating to income, net worth and professional licensing. Fulfilling any of these qualifies an investor as an accredited investor. The requirements are:
Net worth, not including your primary residence, of more than $1 million
Earned income of more than $200,000 or, if combined with a spouse or partner, $300,000 for each of the last two years, plus the ability to maintain that level in the current year
Have a valid current securities license including Series 7, 65 or 82.
No regulatory body certifies someone as an accredited investor. It is up to the companies that sell unregistered securities to make sure that their investors can legally invest. The securities seller will normally request documentation that someone qualifies as accredited. If a non-accredited investor is permitted to invest, the company selling the shares, not the investor, could face legal action.
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While most investors are not accredited, neither are they rare. Approximately 19.4 million households, or 14.8% of the total number of households, qualified as accredited investors in 2023 according to an estimate by investing website DQYDJ using Federal Reserve Data.
If you are an accredited investor, the right financial advisor can help you navigate and execute private investments strategies. While a financial advisor who is an accredited investor cannot invest in unregistered securities using funds from clients who are not accredited investors, there are a number of other ways to get exposure to private businesses. They include:
Buying a business. There are no similar financial regulatory requirements to buy a business other than having or being able to raise the money.
Investing in a startup. If a new or about-to-be-launched business has not issued unregistered securities, anyone can invest.
Private equity-focused mutual funds and exchange-traded funds (ETFs). Some publicly traded mutual funds and ETFs focus on private
Equity crowdfunding. Crowdfunding platforms allow non-accredited investors to invest in private equity deals.
Real estate crowdfunding. These industry-specific platforms connect investors to real estate developers and projects.
Investing in private businesses in any form comes with added risk. Disclosure requirements on companies seeking investors are designed to protect investors from getting hoodwinked or simply making a mistake through ignorance. Even when disclosure is adequate, private business investments also often have significant liquidity risk. It may take a long time to sell a private business investment, so these investments are only for funds that can be invested long term.
Having said that, the flip side of higher risk is higher potential reward. Venture capitalists, for example, can get returns on their investments that are far higher than the normal returns available in the public securities market. However, it can be hard to get into this investment scene. Many businesses that could sell shares to non-accredited investors limit their appeals to accredited investors. They do this in order to avoid having to make costly disclosures in order to avoid the possibility of legal issues down the road if they inadvertently take on a non-accredited investor.
The right financial advisor can help you navigate private investments and other strategies. Use this free tool to get matched with a fiduciary financial advisor.
Because private businesses don\’t have the same disclosure requirements as publicly traded firms, regulators allow only accredited investors to buy shares in private firms. Many financial advisors qualify as accredited investors due to their licensing, but they can\’t invest client funds in private businesses unless the clients are also accredited investors. Non-accredited investors can find other ways to invest in private businesses, including crowdfunding and startup investments, but the investments are inherently riskier than purchasing shares of publicly traded firms.
Finding a financial advisor doesn\’t have to be hard. SmartAsset\’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you\’re ready to find an advisor who can help you achieve your financial goals, get started now.
Asset allocation is a vital consideration when you\’re constructing your portfolio. Use SmartAsset\’s Asset Allocation Calculator to invest in asset classes that match your risk profile.
Keep an emergency fund on hand in case you run into unexpected expenses. An emergency fund should be liquid — in an account that isn’t at risk of significant fluctuation like the stock market. The tradeoff is that the value of liquid cash can be eroded by inflation. But a high-interest account allows you to earn compound interest. Compare savings accounts from these banks.
Are you a financial advisor looking to grow your business? SmartAsset AMP helps advisors connect with leads and offers marketing automation solutions so you can spend more time making conversions. Learn more about SmartAsset AMP.
Photo credit: ©iStock.com/Brandon Moser
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