Whether raising money for a private placement or building your portfolio of investment clients, working with a qualified investor will help to improve your success. By working with a premier group of investors, you will be able to accomplish more in less time. The key is understanding what makes a qualified investor and how to find them.
The definition of a qualified investor is determined by the type of investment vehicle they are investing in. For example, anyone can invest in the stock market where accredited investors can invest in private offerings. If you are targeting investors to expand your client portfolio, the key is to look at how much they have to invest and what their future earning potential looks like. As a general rule of thumb, most investment brokers prefer to work with people that have at least $50,000 available to invest.
The best qualified investor is one that is an accredited investor with cash to invest. An accredited investor is someone that makes $200,000 a year as an individual or $300,000 with their spouse. They are required to have made this amount in the previous two years and be likely to continue earning at that level. Investors can also qualify using their total net worth, which must be greater than $1 million, excluding their primary residence. These are excellent investors to work with because they are able to participate in private offerings by investing in private placement memorandums. Since they make a higher than average amount, they are likely to have capital they can invest on an annual basis. Once you have a pool of investors to work with, you will be able to present them with opportunities that are tailored to their investment appetite.
The SEC has another classification of investors, “sophisticated investors”. Qualified investors with this designation may participate in Regulation D Rule 506b offerings. This has been the most common type of private placement. In order to be considered sophisticated an investor must have outside knowledge of financial matters that make them qualified to evaluate investment opportunities and to make informed decisions about them. A good example would be a business banker, investment broker, CPA, attorney, or someone with a degree in finance. Their education and on the job experience gives them valuable information and resources without necessarily paying them the amount required to be considered accredited. This rule is slightly ambiguous so before working with sophisticated investors you should create a checklist or policy document that clarifies your internal standards. This way, when you say someone is a qualified investor because they are sophisticated, you can prove how you arrived at that conclusion.
When raising capital for a Reg D private offering make sure to work with qualified investors and to document what makes them qualified. For Regulation D Rule 504, 505, and 506b, investors can self-certify. This means that if you give them a document, they can check the applicable boxes, write in their income and net worth, and sign the form stating they are accredited. If you are raising money for a Reg D Rule 506c offering, you must have outside verification of their accreditation status. Keep track of how you arrived at your conclusions for compliance purposes.