The Need for Accredited Investors in the Small Cap Private Placement Market

If you run a small cap company or represent a small cap in an executive capacity, then you already know the need for accredited investors, but if you are a casual investor in the risky sector of securities, you may not.

Small cap companies spend millions a year on small cap investor relations to make sure that the retail investor knows about the company.  These investor relations companies not only spread the word to retail investors, but they try to reach the institutional investors a.k.a. the accredited investor.

This is partly because they have more money then the retail investor but more because the S.E.C. rules and regulations prohibit the casual retail investor from investing in pre-public shares unless they meet certain criteria.  Small cap companies as well as small cap investor relations firms should know how to seek out the accredited investor.   To keep it simple, most accredited investors are up-front and state their accreditation upon introduction.  A search for accredited investors will lead to many small investment banking firms which provide bridge financing and the like.

The complete legal definition of an Accredited Investor is laid out in Rule 501 of the Securities Exchange Act. (see below)

Any questions just comment below and we will respond.  Hope this was helpful.

The SmallCaps.me Team
---------------------------------------------------------------------------------------------------------------------------------------
Rule 501 of Regulation D

As used in Regulation D, the following terms shall have the meaning indicated:

A. Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:

1)Any bank as defined in section 3(a)(2) of the Act, or any savings and loan association or other institution as defined in section 3(a)(5)(A) of the Act whether acting in its individual or fiduciary capacity; any broker or dealer registered pursuant to section 15 of the Securities Exchange Act of 1934; any insurance company as defined in section 2(a)(13) of the Act; any investment company registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of that Act; any Small Business Investment Company licensed by the U.S. Small Business Administration under section 301(c) or (d) of the Small Business Investment Act of 1958; any plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has total assets in excess of $5,000,000; any employee benefit plan within the meaning of the Employee Retirement Income Security Act of 1974 if the investment decision is made by a plan fiduciary, as defined in section 3(21) of such act, which is either a bank, savings and loan association, insurance company, or registered investment adviser, or if the employee benefit plan has total assets in excess of $5,000,000 or, if a self-directed plan, with investment decisions made solely by persons that are accredited investors;

2)Any private business development company as defined in section 202(a)(22) of the Investment Advisers Act of 1940;

3)Any organization described in section 501(c)(3) of the Internal Revenue Code, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000;

4)Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer;

5)Any natural person whose individual net worth, or joint net worth with that person's spouse, at the time of his purchase exceeds $1,000,000 excluding the value of the primary residence of such natural person;

6)Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year;

7)Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in Rule 506(b)(2)(ii) and

8)Any entity in which all of the equity owners are accredited investors.

A Note About Small Cap Stocks

Small cap stocks are considered larger in market cap then a micro cap stock, but smaller then a mid cap.  In general, small cap stocks are companies trading on a public exchange with a market cap between $300 Million USD and $2 Billion according to investopedia.  Note: definitions of small cap stocks differ depending on who or what agency is defining the term, a $2 billion market cap company may not sound small, but remember what you are comparing it to, a lot bigger companies on wall street.

The small cap company may not want to define themselves as a small cap stock because of the negative connotations associated with the definition, most considered speculative plays, meaning there is not adequate information about the stock or company, so one must speculate about which direction the stock will move.

Stocks that are considered small cap usually trade on different exchanges or mediums than their larger (mid-cap/large-cap) counter parts.  Most small cap stocks trade on the Nasdaq exchange and the smaller they get the smaller the exchange.  For a long time, the AMEX was the place to look for small cap stocks, now, the OTCBB (a division of Finra) and OTC Markets Inc. (OTCQX: OTCM) dominate smaller cap stocks.  So what's the difference?  The OTCBB and OTC Markets Inc. are over-the-counter exchanges, while AMEX and Nasdaq are considered stock exchanges.  There is less liquidity, among other things, in the OTC markets.

In general, you must be very careful investing in small cap stocks.