Introduction

Investing in private companies can offer significant opportunities that public markets do not provide, especially for non-accredited investors. However, the legal landscape around purchasing shares in these companies can be complex. This article explores whether non-accredited investors are legally permitted to buy shares in private companies before they go public, backed by the provisions of the Securities Act of 1933 ('33 Act') and other relevant legal frameworks.

The Role of the 1933 Act in Investing in Private Companies

The Securities Act of 1933 is one of the key pieces of federal legislation affecting investment in securities in the United States. One of its primary purposes is to ensure that investors receive substantial and accurate information before investing, particularly when selling securities to non-accredited investors. The act requires companies to provide detailed disclosures and maintain fair and transparent practices to prevent potential fraud. However, these disclosure requirements do not limit the activities of non-accredited investors themselves.

The '1933' in the title is a reminder that the act sought to protect investors from fraud by ensuring they have access to comprehensive information. Nevertheless, it does not dictate what non-accredited investors can or cannot do. These investors are legally entitled to engage in investment activities, provided they follow the prevailing legal and regulatory framework.

Access to Private Shares for Non-Accredited Investors

While the legal framework offers some room for non-accredited investors to purchase shares in private companies, the process is often complex and limited. Venture capitalists and insiders, including employees, frequently hold shares or options even before a company's Initial Public Offering (IPO). Private shares, however, lack liquidity until the IPO. Consequently, access to these shares is limited.

Individuals who are friends or family of the CEO may have unique opportunities to buy shares early. But in general, non-accredited investors are not always part of the early investment rounds. Companies often seek to sell shares one-on-one or through crowd-funding campaigns. Although these platforms can be an accessible route for non-accredited investors, they are not always available, and the investment amounts can be substantial.

Secondary Markets and Investment Opportunities

For non-accredited investors, a practical and legal solution may lie in secondary markets. Secondary markets allow investors to buy and sell shares issued by private companies after they have already been sold by initial investors. This can happen through direct one-to-one transactions, through brokers, or on secondary marketplaces such as Forge, a platform that facilitates these transactions for a broader range of investors.

While secondary markets can provide an avenue for non-accredited investors, they typically cater to ultra-high-net-worth individuals and private equity funds due to the high dollar transactions involved. Platforms like Forge are working to democratize this process, lowering the entry point from millions of dollars to tens of thousands.

Despite these advancements, investing tens of thousands in a single non-public company may not be a sound financial decision for non-accredited investors. Instead, it might be more prudent to gradually invest in mutual funds or bespoke private funds managed by fund managers who actively buy and sell shares in private companies. Alternatively, non-accredited investors can gain exposure to private sectors by investing in public companies that serve the same industry.

Conclusion

Non-accredited investors can indeed purchase shares in private companies, but the process is complex and fraught with regulations. The key is to understand the legal framework, the role of the Securities Act of 1933, and the potential opportunities available through secondary markets and investment funds. Navigating these opportunities requires careful consideration and research to ensure compliance and maximize potential returns.