That’s a great question…
If you’re not an accredited investor, you might be wondering if you can still invest in private equity offerings. The short answer is: it depends on the exemption being used, but your options are limited.
Under SEC Rule 506(b) of Regulation D, there is a narrow pathway for non-accredited investors to participate in private equity offerings. This exemption allows up to 35 non-accredited investors to invest alongside an unlimited number of accredited investors [1][5]. However, there’s a catch – these non-accredited investors must be considered “sophisticated,” meaning they have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment [7].
It’s important to note that while 506(b) allows for this possibility, many private equity firms choose not to include non-accredited investors due to the additional disclosure requirements and potential complications [5]. When non-accredited investors are involved, the issuer must provide extensive disclosure documents similar to those used in registered offerings, which can be costly and time-consuming [7].
On the other hand, Rule 506(c) offerings are strictly limited to accredited investors only [1][6]. If you’re not accredited, you cannot participate in these offerings, which may and often do involve general solicitation and advertising.
So practically speaking, if you are not accredited and saw an advertisement for a private equity investment, it is by definition a 506(c) offering for accredited investors only. A 506(b) offering is a sort of “friends and family” investment and cannot be advertised per SEC regulations. Those investors must have a substantial relationship with the Sponsor. There are other exemptions too but these are the most common.
In practice, most private equity opportunities remain closed to non-accredited investors. If you’re not accredited but still interested in private equity exposure, you might consider:
- Working towards becoming an accredited investor
- Exploring publicly traded private equity firms
- Investigating crowdfunding platforms that offer some private equity-like investments to non-accredited investors
Remember, private equity investments carry significant risks and are typically illiquid. Always consult with a financial advisor before making investment decisions, especially in the complex world of private equity.
Citations:
[1] https://carta.com/learn/private-funds/regulations/regulation-d/506b-vs-506c/
[2] https://www.sec.gov/education/smallbusiness/exemptofferings/exemptofferingschart
[3] https://www.americanprogress.org/article/how-exemptions-from-securities-laws-put-investors-and-the-economy-at-risk/
[4] https://www.sec.gov/resources-small-businesses/exempt-offerings/general-solicitation-rule-506c
[5] https://www.raaslaw.com/exemptofferings506band506c
[6] https://www.yieldstreet.com/blog/article/506c-vs-506b/
[7] https://www.investor.gov/introduction-investing/investing-basics/glossary/rule-506-regulation-d
