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TRENDS IN RAISING CAPITAL: 2020


Matt Scott - January 31, 2020 - 0 comments

The JOBS Act was a game-changer for both capital raisers and investors.  Passed in 2012 and launched in 2016, the JOBS Act was passed to help businesses of all sizes raise capital by easing the advertising rules and allowing for widespread crowdfunding.

Before the JOBS Act, the sale of securities in private companies was typically only accessible to the well-connected since advertising was prohibited.  Now through advertising and crowdfunding, private investment opportunities are available to qualified investors like never before.

The JOBS Act opened the floodgates by introducing private investment opportunities to more qualified investors through advertising and the new crowdfunding rules, and it doesn’t look like the SEC is done making waves.  On December 18, 2019, the SEC proposed amendments to the definition of “Accredited Investor” under the Securities Act of 1933, which would expand the category of investors eligible to participate in private offerings under Regulation D.

Under current regulations, an individual investor qualifies as an Accredited Investor if he/she meets any of the following criteria:
a) he/she earns over $200,000 in annual income
b) he/she, together with his/her spouse earns over $300,000 in joint annual income, c) he/she has a net worth, exceeding $1,000,000 (excluding the value of his/her primary residence), individually or together with his/her spouse

Without getting into too much detail, the SEC proposes to expand the definition of an Accredited Investor for individuals to include the following new designations:

Professional Certifications, Designations, or Credentials
Under a new category in the proposed definition, natural persons would be able to qualify as accredited investors based on certain professional certifications, designations, or credentials from an accredited educational institution that the SEC designates as qualifying an individual for accredited investor status.

Knowledgeable Employees
The proposed amendments would allow individuals who are “knowledgeable employees,” as defined in Rule 3c-5 under the Investment Company Act of 1940 (the “Investment Company Act”), of an issuer to qualify as accredited investors of that issuer.

Family Offices and Family Client
The proposed amendments would create a new category of accredited investors for certain “family offices” and their “family clients,” each as defined in rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940.

Registered Investment Advisers and Rural Business Investment Companies
The proposed amendments would add SEC- and state-registered investment advisers to the list of entities that qualify as accredited investors based on their status alone.

These amendments may not be a big game-changer, but they do show a trend by the SEC to opening up private investment opportunities to more and more investors.  Of the different categories of investors that now qualify as Accredited Investors, the most significant is the “Professional Certification, Designations …” category of investors.  This would include a big pool of licensed lawyers, doctors, CPA’s, etc. who wouldn’t otherwise qualify as Accredited Investors under the financial criteria but because of their professional certifications would now be eligible to invest in certain private investment opportunities.

Expect the SEC to continue to incrementally expand the definition of Accredited Investor to make private investment opportunities available to a bigger and bigger pool of eligible investors.

What I’ve learned about capital raising is that it’s best to stay ahead of the trends.

As the definition of Accredited Investor expands, expect an increase in the number and sophistication of investors.  However, most of these competitors won’t dive in until statutory changes are actually made.  There will be significant advantages for early adopters to implement specific processes and systems now in anticipation of these changes with little risk if the changes don’t materialize.

So what can you do now to reach more investors in your current prospect pool as well as future prospects?

  • Start early.
  • Establish a deep presence through multiple channels with strong, evergreen content.
  • Avoid the middle. Choose a position to promote and one to go against.
  • Build a list of investors early and be patient.
  • Stay in front of them. Give them a reason to keep their attention.
  • Know that educating the new market and delivering content to it…consistently, will prove highly beneficial.
  • If your outreach isn’t working, change it. We generate leads everyday for clients across the globe. You just have to get it right.

In the end, if the Accredited Investor designation is revised to allow more investors to participate in private investment opportunities like yours, be prepared for not only a wider pool of investors to attract but also more competition for those investors.

Start planning today. Be an early adopter and play the long game because the winners will be those entrepreneurs with the patience to adapt with the market.  In the history of private investments, the market for attracting capital has never seen anything like these recent changes to the rules.

With these new opportunities also come new challenges, but with the right strategies and mindset, you’ll be able to meet your fundraising goals to accomplish your investment objectives.