Regulation D

Direct Mail Investor Lists and How to Use Them

Direct mail lists can help investment managers target people who may have an interest in expanding their investment opportunities.

Direct mail lists have several benefits that can work in favor of investment managers and investors. Businesses can even use accredited investor lists to target wealthy individuals and organizations that can participate in equity funding without excessive regulations.

While some industries struggle to make the most of direct mail lists, investment managers often find that they get better results from direct mail than other types of solicitation. It’s a cost-effective method that helps them save time by targeting accredited investors.

Legal Ways You Can Market Investment Opportunities to Accredited Investors

According to the Securities and Exchange Commission (SEC) Rule 504 of Regulation D, companies can use general advertising and solicitation to find potential investors. The rule, however, states that companies must only sell to accredited investors. Even though companies can use general solicitation and advertising, they cannot recruit everyone who responds. Instead, they must make an effort to verify each person’s accredited investor status.

This means that companies cannot sell to anyone who does not make at least $200,000 per year (and has made that amount for at least two consecutive years) or has $1 million in assets, not including the value of the person’s primary residence. These laws are intended to keep risky investment opportunities away from individuals who cannot afford to lose their money. People who meet the standards of accredited investors, however, have enough money to absorb a loss. They are also expected to understand how investment vehicles function.

This law makes it legal for companies to advertise investment opportunities in several ways.

Television Advertisements

According to the website Statistic Brain, 99% of homes in the United States have televisions. In fact, the average household has more than two televisions. This creates an excellent opportunity for companies that want to find investors.

Television advertisements benefit companies by helping them reach a wider audience of potential investors. Unfortunately, companies that choose this option usually have to turn away a significant percentage of responders. Since they can only sell to accredited investors, the companies will spend a lot of time reviewing documents that ultimately prove an investor unable to participate.

Website Solicitations

Websites offer similar pros and cons as television advertisements. With an online solicitation, companies can reach a wide audience of potential investors from all over the country. Many of the responders, however, will not meet accredited investor qualifications.

Interactive websites offer an extra benefit. By having interested investors answer a few questions, companies can screen for those who obviously do not meet the necessary qualifications.

Direct Mail

There are at least two options when it comes to recruiting investors through direct mail. Companies can purchase leads from other businesses, or they can generate their own leads and send information to those prospects.

According to FindAListBroker.info, buyers should take care when buying a lead list from an unfamiliar lead broker. Certain lead aggregators can offer legitimate, broker-surveyed accredited investor lists, but many others are selling false data for some easy money. While unscrupulous brokers will use modeled data and poorly-surveyed prospects that won’t actually qualify for the SEC criteria, legitimate accredited investor lists will include only the contact information of accredited investors who can legally take advantage of your investment opportunities. That doesn’t necessarily mean that they will choose to do so, but at least you know everyone receiving information has the ability to participate, which can save a significant amount of time and energy.

Generating leads independently can yield terrific results, especially when investment managers get their leads by presenting information to investment groups that include several accredited investors. Generating your own leads, however, is time intensive and will not produce immediate results. Investment managers may spend a considerable amount researching and networking with potential investors. This can make lead generation a relatively expensive recruitment tool.

To get the best results, direct mail sent to accredited investors needs to include crucial information about investment opportunities. These savvy investors are unlikely to respond to general solicitations that make wild promises. Without comprehensive reports with supporting data showing how investors can benefit from dedicating their money to a specific opportunity, it’s unlikely that sophisticated investors will spend much time considering the offer.

The Bottom Line

Forbes contributer Tanya Prive acknowledges that Title II of the JOBS Act allows companies to use general solicitation strategies to find investors. It’s crucial, though, that companies realize they cannot accept everyone who responds to their solicitation. As long as you only sell to accredited investors, it’s easy to stay within the rules. Failing to verify an investor’s status, however, can lead to severe penalties including fines, loss of license, and even jail time.

The Influence of Regulation D Rules

Regulation D makes it easier for companies to solicit investors immediately instead of waiting through an introductory period. This benefit comes with some stipulations, though. According to the SEC, Rule 504 of Regulation D provides exemptions that let companies skip registration requirements. They can begin soliciting investors immediately, but they can only sell to accredited investors. This lets small companies avoid the hassle and expense of registering with the SEC. Companies have long complained that SEC regulations made it difficult for new companies to enter the industry. Rule 504 changes that.

The Advantages of Approaching Investors Via Mail

Houston Chronicle writer Rick Suttle acknowledges several advantages to using direct mail. According to Suttle, direct mail:

  • Lets businesses target specific types of consumers
  • Is easily customized to appeal to specific recipients
  • Is a cost-effective way to reach a large number of people
  • Offers measurable results

Aside from these technical benefits of approaching investors via direct mail, there are some soft benefits that many investment managers don’t realize.

One benefit is that people are more receptive to direct mail solicitations than phone solicitation. According to Diana Mey, a writer who has been featured on USA Today, Dateline, and People Magazine, 98% of people who responded to an online survey about telemarketing said that getting calls made them angry. About half of Californians even say they dislike telemarketing more than traffic, doing taxes, and waiting at the DMV.

People simply do not like getting unsolicited phone calls, even when the person calling has a unique investment opportunity. The calls feel like a burden and an interruption to daily life.

Direct mail that targets people on an accredited investor list can also work better than approaching people in person.

This often feels like a major interruption, no matter what time of day an investment manager approaches someone about an opportunity. Scheduling an appointment during business hours prevents successful people from concentrating on their work. They may want to grow their wealth through investments, but they’re more concerned about meeting their professional goals. Only the most serious investors are interested in scheduling meetings after business hours, when they would rather relax with their families or hobbies.

At best, an in-person solicitation gives you an opportunity to hand prospective investors information. Putting that information in a well-crafted direct mailer is just as effective, and it doesn’t take nearly as much time.

How Other Industries Can Benefit from Quality Mailing Lists

Several industries can benefit from using mailing lists that target some of the wealthiest people in the United States.

Some of these industries include:

  • Luxury magazines
  • Financial newsletters
  • High-end retailers
  • Luxury travel

Companies that work in these industries need to attract wealthy individuals and families to sell their products and services. The average person simply does not have enough money to purchase, for instance, a luxury car that costs over $100,000. It’s also unlikely that the average consumer has enough money to afford luxurious travel accommodations.

When these companies use accredited investor lists, though, they get to target people who either earn over $200,000 per year or have at least $1 million in assets. Purchasing quality mailing lists makes it easier for them to target an audience that can afford to take advantage of their offers.

Direct mail investor lists are a boon to the investment industry, especially for companies that can qualify for Reg D exemptions. To get the most out of an accredit investor list, though, companies need to provide detailed information about investment opportunities. Companies also need to verify the accredited status of potential investors. Failing to verify the status is a violation with stiff penalties.

As long as companies follow the rules and target accredited investors, direct mail and accredited investor lists can help them take big steps towards success.

What Is An Accredited Investor?

At the most basic level, accredited investors are people and institutions that meet qualifications to invest in venture capital, private placements, hedge funds and private equity. By purchasing securities from a business, they give that business a better opportunity to expand its reach, develop new technology, and invest in other forms of growth. Ideally, accredited investors receive a portion of the company’s profits in return for purchasing securities.

Accredited investors, however, must meet at least one of several qualifications established by the Security Exchange Commission (SEC). The average person will not meet these qualifications. Individuals, families, and institutions that have significant assets are more likely to meet accreditation qualifications.

Qualifications for Accredited Investors

Companies that aren’t sure how to define accredited investor status should turn to Rule 501 of Regulation D. There are also some amendments in the Dodd-Frank Wall Street Reform and Consumer Protection Act that adjust the definition of what is an accredited investor. While the details can get somewhat complicated, most accredited investors fall into one of eight categories.

Some of the most popular types of accredited investors include:

  • Financial companies, such as banks, registered investment companies, small business investment companies, business development companies, and even insurance companies.
  • Employee benefit plans. There are a couple caveats to this type of accredited investor, though. Either the employee benefit plan must have over $5 million in assets, or it must be managed by a registered investment adviser, insurance company, or banking institution.
  • Corporations, partnerships, and charitable organizations that have over $5 million in assets.
  • Manage personnel of the company selling the securities, including the company’s director, executive officer, and general partners.
  • Any business exclusively owned by accredited investors.
  • A person with a net worth of $1 million or more. This can also include spouses with a combined net worth over $1 million or anyone with managed assets worth $1 million or more. Only natural persons can qualify. That means no organizations, including corporations, can qualify as this type of accredited investor.
  • A person who has earned at least $200,000 of income for the last two consecutive years. Spouses must earn a combined income of $300,000 or more. Organizations cannot qualify as this type of accredited investor.
  • A trust that includes assets of at least $5 million. The trust cannot be formed specifically to purchase securities from the company. It must exist independently.

These qualifications can seem a bit confusing to some. The simplest way to answer what is accredited investor qualifications is to state the minimum requirements. Individuals must either have $1 million or earn $200,000 per year. Organizations and trusts typically need to have at least $5 million in assets.

If someone doesn’t fit those requirements, it’s unlikely that they can qualify as accredited investors.

How Companies Can Benefit From Accredited Investors

Companies are required to verify that their accredited investors meet SEC qualifications. Companies that fail to verify accredit investor status can face serious penalties that may include jail time, fines, and losing licenses.

Considering the hassle of verification and the penalties for not following the rules, many companies might wonder whether they even need accredited investors, especially since Rule 506 of Regulation D lets companies recruit up to 35 non-accredited investors.

That might seem like a smart idea at first, but there are several reasons successful companies usually focus on accredited investors.

The primary reason is that companies have to disclose large amounts of information to non-accredited investors. In an attempt to protect inexperienced investors who might get duped by unscrupulous companies, the SEC requires companies to give non-accredited investors discloser documents that inform them of how securities work and the risks they face by purchasing them. Providing and explaining these documents to inexperienced investors can take more time than verifying an accredited investor. By only choosing accredited investors, businesses have to disclose far less information. That helps businesses save time.

Accredited investors are also likely to spend larger amounts of money. At the very least, an accredited investor has $1 million in assets. That gives companies an opportunity to sell large securities to the investor. By accessing that money, companies can accumulate the funds they need to expand their services, products, and stores.

Non-accredited investors, by definition, do not have $1 million. That means they can’t invest as much money. A business could simply sell more securities to a larger number of non-accredited investors, but this is a hassle that few owners or managers want to undertake. When it comes to increasing the business’s capital as quickly as possible, accredited investors offer advantages that non-accredited investors simply cannot.

Accredited Investors Have More Flexibility Than Non-Accredited Investors

From a financial perspective, accredited investors can offer more benefits to the companies they invest in. Since these individuals, families, and organizations have access to significant wealth, they may choose to purchase more securities from companies they believe will grow and produce healthy profits.

Accredited investors also have the opportunity to invest in securities that have not been officially registered with the SEC. As long as a company only sells securities to accredited investors, it does not need to disclose as much information to them. According to the SEC, accredited investors are presumably savvy enough to understand the risks of investing in companies, private funds, hedge funds, and similar opportunities. This lets accredited investors and the companies they invest in act more quickly.

Companies that meet certain specifics under Regulation D can also advertise directly to accredited investors without providing extensive disclosure forms. This helps businesses attract more money that can make them successful while earning profits that increase the wealth of investors.

Creating a Criteria That Regulates Securities and Accredited Investors

The SEC created investor accreditation under authority of the Securities Act of 1933, which was passed by the U.S. Congress after a stock market crash led to the Great Depression. By creating the SEC to oversee securities regulations, Congress hoped to avoid future economic depressions. The strategy has been largely effective, although the country’s economy has experienced several recessions since 1933, often after periods of deregulation that weaken the SEC’s ability to control the industry.

Regulation D, which details requirements for organizations that sell securities, includes several rules that protect potential investors while encouraging the industry to follow responsible guidelines. When creating Regulation D, lawmakers considered how much money investors needed to have before they were considered experienced investors. While having $1 million doesn’t qualify every person as an experienced investor, it does indicate that the investor is likely to have this experience. The Supreme Court of the United States upheld the perspective that investors with $1 million or more are probably sophisticated enough to choose their own investment strategies. Investors with $1 million can also absorb losses more easily than investors who have less money. The regulations remained untouched for over 80 years.

Regulation D was revised in April 2012, when President Obama signed the Jumpstart Our Business Startups Act (JOBS) into law. The JOBS Act relaxes some regulatory requirements so companies have more opportunities to sell securities to accredited and non-accredited investors. Since Regulation D sets different requirements for selling securities to accredited and non-accredited investors, though, many businesses find that it is easier to focus on accredited investors who have more money and require fewer disclosures.

According to Forbes contributor Devin Thorpe, the SEC may alter regulations in the near future to make crowdfunding a more attractive option for businesses and small investors. These changes would likely let people qualify as accredited investors according to how much education and experience they have in finance and related subjects. This would let people without $1 million or $200,000 per year incomes qualify as accredited investors who can make sophisticated decisions without requiring businesses to give disclose excessive information. In other words, the changes would let people become accredited according to skill rather than wealth.

Accredited investors are a real boon to companies that sell securities. Current regulations make it relatively easy for businesses to find investors who have enough assets to make a lasting difference in their success. Without accredited investors, it’s unlikely that today’s small to medium businesses could find the capital they need to expand operations or introduce new products and services to the world without jeopardizing their own financial stability. Of course, buying securities from companies with successful strategies also gives people an opportunity to make more money from their investments. If you need a list of accredited investors to expand your business or fund your private investment offering, contact us and we would be happy to build you a collection of qualified prospects.

Private Placements

Private placement (private investment capital), are funds invested in a company from private investors in the form of stocks or bonds.  Private placement is a convenient way to gain capital.

Pro’s:

  • Do not require the assistance of brokers or underwriters
  • Considerably less expensive and time consuming, than a public offering
  • Makes gaining capital possible for more risky ventures or start-up firms
  • Enables small business owners to hand0-pick investors with common interests
  • Common interest investors can use their experience to assist the venture in gaining success
  • In the United States, private placements do not have to be registered with the SEC

Con’s:

  • Suitable investors can be difficult to find, especially in multiple states
  • Privately placed securities are often sold way below their market value
  • Companies using a private placement may have to hand over more equity because of the greater risk being taken on by their investors.

There are rules and regulations about who can invest in a private placement, how much an investor can earn through a private placement, and in how many private placements an investor may be involved. These rules are specified in the 1933 Securities Act, Section 4(2) & Regulation D.

Section 4(2) exempts companies wishing to sell under $5 million in securities to a small number of accredited investors from registering with the SEC.  Businesses taking advantage of private placements are required to:

  • Only seek investments from current company managers or accredited investors who have a pre-existing relationship with the company
  • Provide potential investors with recent financial statements
  • Provide potential investors with a list of risk factors associated with the investment
  • Invite potential investors to inspect their facilities

Regulation D of the 1933 Securities act was adopted in 1982 and has been revised several times since then.  It consists of six rules (numbered 501 through 506).

Rule 501 – 503: Define an Accredited Investor, Explain the conditions of a private placement, and establish other conditions that apply throughout the bill.

Rule 504: provides an exemption from the registration requirements of the federal securities laws for some companies when they offer and sell up to $1,000,000 of their securities in any 12-month period.

Rule 505: allows some companies offering their securities to have those securities exempted from the registration requirements of the federal securities laws. To qualify for this exemption, a company:

  • Can only offer and sell up to $5 million of its securities in any 12-month period;
  • May sell to an unlimited number of “accredited investors” and up to 35 other persons who do not need to satisfy the sophistication or wealth standards associated with other exemptions;
  • Must inform purchasers that they receive “restricted” securities, meaning that the securities cannot be sold for six months or longer without registering them; and
  • Cannot use general solicitation or advertising to sell the securities.

Rule 506: is considered a “safe harbor” for the private offering exemption of Section 4(2) of the Securities Act. Companies using the Rule 506 exemption can raise an unlimited amount of money. A company can be assured it is within the Section 4(2) exemption by satisfying the following standards:

– The company cannot use general solicitation or advertising to market the securities;

– The company may sell its securities to an unlimited number of “accredited investors” and up to 35 other purchases. Unlike Rule 505, all non-accredited investors, either alone or with a purchaser representative, must be sophisticated—that is, they must have sufficient knowledge and experience in financial and business matters to make them capable of evaluating the merits and risks of the prospective investment;

– Companies must decide what information to give to accredited investors, so long as it does not violate the anti-fraud prohibitions of the federal securities laws. But companies must give non-accredited investors disclosure documents that are generally the same as those used in registered offerings. If a company provides information to accredited investors, it must make this information available to non-accredited investors as well;

– The company must be available to answer questions by prospective purchasers;

– Financial statement requirements are the same as for Rule 505; and

– Purchasers receive “restricted” securities, meaning that the securities cannot be sold for at least a year without registering them.

At Salesleads.tv, we can provide leads to accredited investors, many who have a proven history of private placement investments.  Private placement is a very effective way to acquire the capital you need to start a company, but be sure to mind your P’s and Q’s so the end result is positive for everyone involved!