Before accepting a check from an investor, you may want to make sure they are an accredited investor. What's an accredited investor? Great question.
Investors are a great source of capital for small businesses.
But a deep pocketbook isn't the only qualification of a good investor. In fact, your best move might actually be to turn down investment capital - especially if it isn't coming from an accredited investor.
The idea of turning down investment income, regardless of its source, is difficult for most small business owners to accept. But over the years, many entrepreneurs have learned the hard way that the practice of qualifying their investors is worth the effort. "Accredited investor" is a term defined by the SEC to describe a type of investor that is qualified to invest in certain types of investments including high risk investments, limited partnerships, hedge funds and angel investor networks.
Why accredited investors?
Typically, accredited investors are professionals rather than friends and family members. The reason they are preferred is because the have they have the financial resources to maintain their investment for the long haul. Unaccredited investors are more likely to withdraw their investment at any time, requesting the return of their investment at a moment that may or may not be beneficial to your business. Also, since unaccredited investors often have a personal connection to the business owner, accredited investors eliminate the possibility of problems that could potentially complicate personal relationships.
What are the qualifications of an accredited investor?
There is no formal license, exam, or certification required to qualify as an accredited investor. Instead, an accredited investor is considered to be someone who has a net worth in excess of $1 million or has earned at least $200,000 in income for the past two years ($300,000 if married and both spouses earn income). Although this is the definition used for individuals who invest in securities, small business investors should likewise be able to demonstrate a strong net worth or earnings position, even if they don't meet the standards for securities. As a small business owner, the important thing is to make sure your investors are financially secure enough to maintain their investment for the entire investment term.
What are some common types of accredited investors for small businesses?
Accredited investors can appear in a variety of forms. As a small business owner, that means you have a lot of options to explore before you hit your friends and relatives up for investment capital. These options include the following:
- Banks, insurance companies, registered investment companies and other institutions eager to lend to small businesses.
- Business development corporations and angel investment networks who specialize in small business investment..
- A charity, corporation, or partnership with significant assets.
- A business in which all the owners qualify as accredited investors.
- An individual or couple who has joint net worth capable of carrying the risk of investment.
- An individual or couple with a strong earnings history and similarly strong earnings potential for the term of the investment.
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