The Sky is the Limit

Back in late April, once we had the business plan done; we started sending out emails to people we knew, who might know people with money, who might be interested in investing in Why Go Solo. We basically began soliciting for investors.

Shortly after the email blast, our lawyer sent us an email to inform us of the blue sky law. I have a saying: “The sky is not the limit…there are no limits.” Well, turns out, when it comes to soliciting unaccredited investors there are some limits, 35 to be more exact, in the state on Virginia. We can legally solicit 35 unaccredited investors without first seeking the approval of our state or federal officials. Our lawyer recommended we start keeping track…

A blue sky law is a state law in the United States that regulates the offering and sale of securities to protect the public from fraud. Though the specific provisions of these laws vary between states, they all require the registration of all securities offerings and sales, as well as of stock brokers and brokerage firms. Each state's blue sky law is administered by its appropriate regulatory agency, and most also provide private causes of action for private investors who have been injured by securities fraud.

Great, I thought. There’s always a catch and there’s always something. When our lawyer sent out the email he did not mention that there is a difference between an unaccredited investor and an accredited investor.

Accredited investor is a term defined by U.S. securities laws that delineates investors permitted to invest in certain types of higher risk investments, limited partnerships, and angel investor networks. The term generally includes wealthy individuals and organizations such as a corporation, endowment or retirement plans.

For an individual to be considered an accredited investor, he must have a net worth of at least one million US dollars or have made at least $200,000 each year for the last two years ($300,000 with his or her spouse if married) and have the expectation to make the same amount this year. This rule came into effect in 1933 by way of the Securities Act of 1933.

Once I knew the difference between the type of investors, I realized that the law made sense. We also rapidly realized that an email blast isn’t going to result in finding investors. Also, accredited investors are obviously more knowledgeable, better equipped to invest, provide help and increase your chances of success. Plus, accredited investors are in the business of making investments—so it’s typically less of a hassle and risk for the entrepreneurs.

Update: Check out Ask the VC, turns out they posted on the same topic.