Navigating the Legal Requirements for Raising a Fund from Non-Accredited Investors

The topic of raising a fund from non-accredited investors to invest in ventures typically restricted to accredited investors is complex and involves intricate regulations under securities law. It is critical to understand the legal and regulatory framework before attempting to structure and raise such a fund.

Structure Your Fund as a Debt Securities Offering

Based on the details provided, it seems that the proposal to offer a fixed return to investors more closely aligns with debt financing. Instead of attempting to sell equity to non-accredited investors, creating a company and issuing notes or bonds could present a more feasible option. By structuring your offering as a debt securities offering, you avoid the complex and costly process of raising funds via equity.

Steps to Create a Debt Securities Offering

Step 1: Create a Company

The first step is to create a company that will issue the debt instruments. This company will act as your vehicle for raising funds.

Step 2: Issue Notes or Bonds

Once the company is in place, the next step is to issue notes or bonds to investors. These instruments will offer a fixed return to the investors who purchase them.

Step 3: Own 100% Equity in the Company

As the owner of the company, you will retain all equity. Investors will be stakeholders in the debt instruments but not in the equity of the company.

Legal Considerations

While you do not legally need any specific credentials to issue debt instruments, it is essential to comply with state securities laws. Each state may have its own requirements for registering debt offerings. This process can be complex and costly, requiring the company to file and disclose detailed information about the offering.

Challenges of Raising Debt Capital

One of the main challenges in raising debt capital is the fixed return you are offering. A modest 2.5% return is unlikely to attract significant interest from investors, especially when compared to the current yields on AAA corporate bonds and high-yield CDs. Other factors to consider include:

Investors' preference for liquid and known assets over illiquid and potentially riskier debt issued by a startup company. Insurance and risk: FDIC insurance provides a safety net that is hard to replicate with private debt. Rating and capital contribution: You may need to consider paying a ratings agency to rate your debt, and contributing a significant amount of equity to ensure the company's financial stability.

Even if you manage to raise 10 million, the actual return on investment may be lower than expected due to the high costs of compliance, generating annual reports, and audits.

Regulatory Barriers for Equity Private Placement

Another option is to raise capital through equity private placement. However, this is also fraught with legal and regulatory challenges.

Accredited Investors and Private Companies

Private companies are not allowed to sell equity to non-accredited investors directly. The U.S. Securities and Exchange Commission (SEC) strictly enforces this requirement. To raise capital from non-accredited investors, a company must go through a costly and lengthy process of registering its offering, which is known as going public, and obtaining a capital raise through a public offering.

The JOBS Act of 2012

While the JOBS Act of 2012 introduced some exemptions and allowed non-accredited investors to directly invest in startups under certain conditions (Title III), these changes are still in their early stages and do not fully address the issue. The complications and restrictions remain.

In summary, raising a fund from non-accredited investors and using it to invest in ventures restricted to accredited investors is challenging. It is recommended to carefully consider the legal and financial implications and seek professional advice to navigate the regulatory landscape successfully.