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Frequently Asked Questions

What is Pre-IPO?

Pre-IPO investing is when you invest in a private company before its initial public offering (IPO). An IPO is when a company’s shares trade on a public market for the first time. Pre-IPO shares are not available to everyone. In the past, pre-IPO investing was limited to accredited investors, private equity firms, hedge funds and a few other groups. But that’s no longer true. In 2012, Barack Obama signed the Jumpstart Our Business Startups Act, or JOBS Act. The bill makes it easier for companies to go public or to raise private capital and stay private longer. There are a few more additional benefits for private companies:

  • The bill increases to 2,000 the number of shareholders a company can have before it’s required to register common stock with the SEC.

  • It allows up to 500 unaccredited shareholders

  • It allows different forms of equity crowdfunding.

  • The bill also raises the limit for securities offerings under Regulation A from $5 million to $50 million.

In 2015, the SEC adopted all titles under the JOBS Act. The rules went into effect in May 2016. Since then, unaccredited investors have been able to invest with as little as $100.


What does it mean to be an accredited investor?

Under the federal securities laws, only persons who are accredited investors may participate in certain securities offerings.  One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered offering. 

Unlike offerings registered with the SEC in which certain information is required to be disclosed, companies and private funds, such as a hedge fund or venture capital fund, engaging in these exempt offerings do not have to make prescribed disclosures to accredited investors. These offerings involve unique risks and you should be aware that you could lose your entire investment.

Who is an accredited investor?

An accredited investor, in the context of a natural person, includes anyone who:

  • earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, OR

  • has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). 

There are other categories of accredited investors, including the following, which may be relevant to you:

  • any trust, with total assets in excess of $5 million, not formed specifically to purchase the subject securities, whose purchase is directed by a sophisticated person, or

  • any entity in which all of the equity owners are accredited investors.

In this context, a sophisticated person means the person must have, or the company or private fund offering the securities reasonably believes that this person has, sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment.

How do I calculate my net worth?

To qualify as an accredited investor under the net worth test, you must have a net worth that exceeds  $1 million, either alone or with a spouse.  If calculating joint net worth with a spouse, it is not necessary that property be held jointly.  Calculating net worth involves adding up all your assets and subtracting all your liabilities.  The resulting sum is your net worth. 

The value of your primary residence is not included in your net worth calculation.  In addition, any mortgage or other loan on the residence does not count as a liability up to the fair market value of the residence.  If the loan is for more than the fair market value of the residence (i.e., if your mortgage is underwater), then the loan amount that is over the fair market value counts as a liability under the net worth test.

Further, any increase in the loan amount in the 60 days prior to your purchase of the securities (even if the loan amount does not exceed the value of the residence) will count as a liability as well.  The reason for this is to prevent net worth from being artificially inflated through converting home equity into cash or other assets.

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