The most likely avenue for raising private investment capital is often from Angel Investors. This is especially in the earlier stages of a private company (the start-up company phase), Because of securities laws, private companies are strongly advised to raise money mainly or only from Accredited Investors. As defined by Rule 501 of Regulation D of the Securities Act of 1933, these private investors need to meet one of the following requirements:
A bank, insurance company, registered investment company, business development company, or small business investment company An employee benefit plan, if the plan has total assets in excess of $5 million A charitable organization, corporation, or partnership with assets exceeding $5 million A director, executive officer, or general partner of the company selling the securities An individual who has a net worth (by himself or with the person’s spouse), of more than $1 million at the time of the private investment (excluding the value of their primary residence) An individual with income of more than $200,000 a year in each of the two most recent years, (or have joint income with a spouse of more than $300,000 in each of the two most recent years), AND expect to have similar income in the current year of the investment; or have a trust with assets of more than $5 million (not formed for the sole purpose of making the private investment) A business or other entity in which all the equity owners are accredited investors Securities laws strictly limit the number of non-sophisticated investors participating in the investment round (depending on the size of the investment). Raising money from non-Accredited Investors can result in exposure of the private company to lawsuits from them demanding the return of their investment, especially if things go wrong. So doing so is like giving these investors a free option: in a nutshell, heads they win, tails they break even by simply demanding their money back. So it’s most advisable for a private company to only raise angel or other private investment capital from Accredited Investors.