By Dave Westburg, Ken Altena and Jim Penney, Partners, Billboard Loans, LLC.
One-eighth of Billboards Insider’s readers have used accredited investors to fund their out of home company. We have used accredited investors to form four separate out of home debt funds as well as an independent out of home advertising company. Today we’ll define what an accredited investor is and explain why you might want to use accredited investors to grow your out of home company.
What’s an accredited investor?
An accredited investor is a person who meets certain financial or professional criteria set by the Securities and Exchange Commission that qualify them to invest in private securities offerings not registered with the SEC (such as hedge funds, private equity, venture capital, or startup investments). The standards are set to insure that an accredited investor either has the means to make risky investments or the expertise to evaluate risky investments and that includes your startup out of home company.
What makes someone an accredited investor?
- A person who earned more than $200,000 per year ($300,000 jointly with a partner)in each of the past two years and expects the same this year. In 2022 approximately 19% of US households met this test according the the FCC. That’s 24.3 million potential accredited investors!
- A person who has a net worth over $1 million, excluding the value of their primary home.
- A person holding certain financial licenses, such as a Series 7, 65 or 82 financial license.
- A bank, trust or investment company
- A business with more than $5 million in assets
- A business owned by accredited investors
- Executives in the business that is raising the money are considered accredited investors.
How do you verify that someone is an accredited investor?
You can usually rely on self-certification, however you will need to have the investor sign a form to confirm that they are an accredited investor. Your attorney can help you with the form.
Why use accredited investors to fund your out of home company?
Access to capital – You may not have $1 million to invest in your out of home company but it’s pretty easy to assemble a group of accredited investors who will invest $100,000-$200,000 each. This allows you to grow faster.
Lower costs and less disclosure – You can avoid the extensive disclosure requirements of making a public offering. The fees are much less. The cost to take a company public (investment banking fees, accounting fees and legal fees) can easily reach 7% of the proceeds raised. Annual compliance costs can be more than $1 million. On the other hand, the legal fees for reviewing and registering an accredited investor prospectus typically range between approximately $30,000-$45,000. Also keep in mind you will have to pay filing or registration fees to the state authorities in every state in which you decide to raise money.
Hands off money – An accredited investor group typically will be less involved in running your day to day business than a family fund or equity fund. These are investors who like to invest in startups but don’t have the time or desire to participate in the daily business activities. Many accredited investors have great business experience and can add significantly to the “brain trust” needed to operate a company in today’s competitive and complicated environment.
A network for growth – If an accredited investor is happy with your returns they will introduce you to the other accredited investors they know. This makes it easier to raise equity to grow.
There are drawbacks…
The documentation of the offering – You need to prepare a private placement memorandum (the private offering equivalent of the prospectus used in public offerings) with your business plan, financials, projections, a disclosure of investing risks and a description of your legal structure. That takes time and you’ll need the help of a lawyer.
More shareholders mean more work – Accredited investors typically invest $100,000-200,000 each. If you are raising more than $1 million that means lots of shareholders. One of us once ran a company with 110 accredited investors. We wouldn’t do it again due to the heavy administrative burden. If you are going to use accredited investors keep your investor group to 10 or less. Accredited investors will want to stay notified of your company’s progress and financials. They may also want to be able to approve important business decisions. The more outside investors that you admit to your company, the higher the chance that one of them will object to what you want to do.
Need equity or a loan to grow your out of home company? Contact Ken Altena, Partner, Billboard Loans. kenaltena@billboardloans.com, 206-636-8478.
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