I want to be an angel investor. At least I want to know how an angel investor thinks, given that I'll be pitching to a group of angel investors at the VT KnowledgeWorks Entrepreneurship Summit on April 7, 2010, and given the culture of entrepreneurship and angel investor funding developing in our region.
Many angel investment groups require their members to be accredited investors.
I started my research on accredited investors with the U.S. Securities and Exchange Commission:
An "accredited investor" is:
- a bank, insurance company, registered investment company, business development company, or small business investment company;
- an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or 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;
- a business in which all the equity owners are accredited investors;
- a natural person with a net worth of at least $1 million;
- a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
- a trust with assets of at least $5 million, not formed to acquire the securities offered, and whose purchases are directed by a sophisticated person.
Expecting an online application similar to that for an Employer Identification Number (EIN), I looked for the button to click to view the online application. No button.
Sometimes Google won't do, but one still needs a Google-like source. When searching for answers about all things legal, I ask Ken Maready of Hutchison Law Group.
I asked, "How does one become an accredited investor? How does a company founder know he/she is talking with one?"
Because he is, as I term him, an entrepreneur's entrepreneur, Ken replied right away:
Although the term "accredited investor" makes it sound like there's some kind of registration process or certification with some third party, it's really much more simple than that – they just have to meet one of the tests below, and there's no filing or other process for them to become "accredited."
The most common accredited investors you'd be speaking with (outside of venture funds) would be individuals who meet either the net worth test ($1,000,000) or the annual income test ($200,000 per year – or $300,00 per year combined with spouse – for the last 2 years with an expectation of earning that again this year).
Net worth of a $1 million or $200K per year, eh? Not for this start-up's founder. Not yet.
Especially given this caution from Tracy Wilkins, quoted in the Blue Ridge Business Journal:
"A lot of us are entrepreneurs who have made it ourselves and love the game, like to help and we love building companies," said Tracy Wilkins, an angel investor and president of TechLab, a medical diagnostics firm in Blacksburg. "Angel investing is very hard to make money out of, to be honest with you. Unless you can afford to lose it, you shouldn't do it. It's gambling."
Good to know a little more about with whom I may be dealing, though. Thanks, Ken.
A post of possible interest:
Advice to Start-ups Seeking Outside Investment