When Selling Private Securities — No Limit on Number of Accredited Investors

Steve Kesten

October 27, 2009

A client recently called concerned that, in connection with his efforts to raise money for working capital through the sale of units of membership interest in a Texas limited liability company, his company could only sell to 35 investors.  To make matters worse, there were already 10 owners of the company holding membership units, so he could only sell to 25 more investors.  I quickly dispelled him of his concerns.

There is a common misunderstanding that when selling private securities, an issuer is limited to selling to 35 investors.  It is true that in order to maintain certain exemptions from having to register the sale of securities with the Securities and Exchange Commission, there is a limit in the number of investors to whom an issuer can sell, but such limitations only relate to unaccredited investors.  Alternatively, there is no limit on the number of accredited investors to whom an issuer can sell securities provided the other applicable requirements are met relative to the exemption from registration that an issuer is pursuing.

So what is an accredited investor?  Generally speaking, an accredited investor is a natural person, entity or institution that has a level of sophistication, net worth and experience in financial matters that the SEC believes does not require the same level of protection relative to the sale of securities than does someone without such traits.  The list of qualifications of accredited investors can be found in Rule 501 of Regulation D, which is a regulation that was promulgated under the Securities Act of 1933.