Through the JOBS Act exemptions, private companies can access a wider pool of potential investors to fund their business ventures. With many diverse investor types available, it is essential to know who they are and how they work to reap their benefits. Here is our breakdown of the different investment types and their fit into the market.
Non-Accredited Investors: A non-accredited investor is anyone who does not meet income or net worth requirements stipulated by the SEC. These investors have a net worth of less than $1 million and make less than $200,000 annually. The term is also usually used interchangeably with “retail investor.” These investors are the majority of Americans, meaning that far more non-accredited investors exist than accredited ones. Non-accredited investors can participate in private markets, but there are some restrictions. Private companies can only have 35 non-accredited investors who can provide funding under Regulation D, for example. In addition, raises through RegA+ and RegCF limit the amount non-accredited investors can invest within a 12-month period.
Accredited Investors: An accredited investor is an individual or business that can invest in private securities not registered with the SEC. These individuals or entities must meet net worth guidelines to qualify, allowing accredited investors to invest in unregistered securities because they have been deemed to have the financial knowledge (and can take on the financial risk) to do so without SEC protection. In 2020 it was estimated there were 13,665,475 accredited investor households in America.
Angel Investors: These investors fund private startup companies in exchange for a piece of their business, often royalties or equity. Angel investors can be accredited or non-accredited if they have a high enough net worth or income. Angel investors can be business professionals, company executives, or even retail investors. Angel investors often invest while a company is still in its seed phase and contribution levels can vary significantly based on the company. There were around 334,680 angel investors and $25.3 billion funded by them in 2020.
Venture Capital: Venture capital investors, often known as VC, provide a large amount of capital to private companies in exchange for an equity stake in the venture. They often target companies with high growth potential. Typically, venture capital firms manage investments into companies in their early stages in exchange for equity and say in company decisions. In 2020, more than 10,000 companies received funding from nearly 2,000 VC firms that manage $548 billion in assets.
Family Office: A family office is an advisory firm that caters to high-net-worth individuals and can be either single or multi-family. Family offices provide wealth management, planning, and other comprehensive services, providing a broad spectrum of options. Because they are unregistered, data on family offices is often challenging to come by. Still, trends suggest that they have a growing ability to make substantial investments on par with large companies and private equity.
Qualified Institutional Buyer: Sometimes called a QIB, a qualified institutional investor is a security purchaser that regulators legally recognize as requiring less protection than most public investors. Large QIBs own a minimum of $100 million of securities, not counting those issued by affiliates. This threshold is less for registered broker-dealers at $10 million, and banks need $25 million to be considered a QIB. The SEC allows only QIBs to trade restricted and controlled securities under rule 144A.
Institutional Investors: Often organizations or companies, institutional investors buy and sell with others money in blocks of bonds, stocks, and other securities. Mutual funds, hedge funds, and endowments are examples of institutional investors in the market. Because of their ability to invest the money of others in large quantities, institutional investors are one of the primary funders of private companies. The only type of investor that can officially call itself institutional files a 13F with SEC.
Private Equity: Private equity is an alternative investment class consisting of capital not listed on public markets. Investing funds directly into private companies, these private equity funds consist of limited partners who own 99% of fund shares and general partners who own 1%. Private equity can come in several forms, like venture capital and leveraged buyouts.