Why Consider Accredited Investors When Raising Start-Up Capital?

Accredited Angel Investors as a Viable Alternative to Business Financing

By: Margarita Damianova

Many entrepreneurs today face the dilemma of finding feasible sources of capital to fund their start-up ventures. In today’s economy more and more people lose their jobs and look at entrepreneurship as a possible avenue to provide for their families. And, why not? We all learn at a young age that entrepreneurship is the key to true wealth.  We are taught that we can all come up with a big idea, become a business owner, build a successful business and live the American Dream. And we see this happening all around us where some ordinary people build empires at a young age: the folks at Google, You Tube, My Space, Mark Cuban etc. America certainly has many examples of young people becoming millionaires and they are not necessarily a movie star or a lucky musician. Most achieve their wealth through hard work in business and embracing the concept of entrepreneurship.

At the same time, we all know that to make it big in business and to build true wealth, we need to make significant cash investment in our business. So how do we come up with the cash? Do we save, use our credit cards, apply for a business loan, borrow from friends and family? Well, all of these are actually viable alternatives to get started. Yet, once we get started we learn that the business expenses could be overwhelming and at least double what we expected: we end up always having to purchase new equipment, our rent goes up, we end up needing more employees than expected, accidents happen, advertising money never seems to be enough and when it comes to expanding our business, remodel, open a new location and making it big, we learn that we are going to need an even larger infusion of capital. Some are lucky to get a business loan or a second mortgage on their home. Nowadays however, we are in a credit crunch and banks just don’t want to hear how great our business is. So what do we do? We start looking for angel investors that can help our business take off. In fact, according to the Small Business Administration (SBA) most start-up businesses (over 90%) are funded by angel investors.

So how do we find angel investors? Do we run an ad in the New York Times telling the world about our great investment opportunity available to angel investors who can act now? This could actually be highly effective in today’s environment where public stocks just keep crumbling with no recovery in sight. Private opportunities start getting more and more attention from angel investors. Unfortunately, the regulations set by the Securities and Exchange Commission (SEC) prohibit private businesses from advertising to the public using public media such as newspaper, TV, radio and even most internet sites. Private companies are actually required to qualify for a Private Offering Exemption in order to be able to legally approach angel investors. Finally, private companies are not allowed to accept the money of every single person interested in making an investment or if they did, they would lose their private offering exemption and respectively their ability to further seek capital from angel investors.

So what kind of angel investors can entrepreneurs approach? According to the SEC, private companies relying on the private offering exemption can only sell to "accredited investors". The objective of this rule is to make sure individuals who do not have sufficient experience in business, cannot afford to bare the potential loss of their investment or are simply not capable to evaluate the risks and merits of an investment would not end up investing in a private business opportunity that is associated with high risk. Therefore, accredited investors (individuals making over $200K per year or having a net worth exceeding $1M) are in high demand by entrepreneurs. These individuals are also highly experienced in financial and business matters so that entrepreneurs need to be well prepared when ready to approach accredited investors. Well developed business plan, good track record of likeability of the entrepreneur, proper filings with the SEC and possibly a business valuation by an accredited appraiser are a must. The good news is though that if the entrepreneur is ready to make a good impression, many accredited investors are ready to join the game and make money with you! Best of all, an accredited investor can be a very experienced counselor helping you to take your business to the next level and make it big! 

This article brought to you By BreadStreet Investors' Union at http://BreadStreet.com

"Bringing Investors and Entrepreneurs Together for Profit"

Also see http://www.PrivateBusinessInvestments.com