Becoming an investor in a company means one of two very different processes. If the company is publicly traded, you open a brokerage account and buy shares on an exchange. If the company is private, you have to qualify under federal securities rules, submit identity and financial documentation, sign a subscription agreement, wire funds, and accept that your shares will be illiquid for years and can lose all their value. The Securities Act of 1933 and SEC Regulation D set the framework for private deals, and most of the real requirements sit on that side.
Buying Shares in a Public Company
Public market investing has the lowest barrier of any path to company ownership. You open an account with a brokerage, fund it, and place a buy order for shares listed on the NYSE, Nasdaq, or another exchange. The brokerage will ask for a government-issued ID, your Social Security Number, and basic personal information to satisfy customer identification rules. There’s no income test, no net worth test, and no minimum investment beyond the price of a single share. Most people who invest in companies do it this way.
The rest of what follows is about private companies, because that’s where qualification, paperwork, and restrictions actually shape whether you can invest at all.
Do You Qualify as an Accredited Investor?
Most private placements are limited to accredited investors. The category is defined in SEC Rule 501 of Regulation D, and the financial tests are specific:
- Individual or joint net worth (with a spouse or spousal equivalent) above $1 million, excluding the value of your primary residence.
- Individual income above $200,000 in each of the two most recent years, with a reasonable expectation of the same in the current year.
- Joint income with a spouse or spousal equivalent above $300,000 on the same two-year-plus-expectation basis.
The “reasonable expectation” language matters. Two strong years alone won’t do it if your income has since dropped and you can’t credibly project reaching the threshold again.
Entities can qualify too. A corporation, LLC, partnership, or trust with more than $5 million in assets is generally accredited, so long as it wasn’t formed specifically for the offering. An entity whose equity owners are all individually accredited also qualifies, regardless of asset level.1eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
Qualifying Through a Professional License
You can also qualify as accredited by holding a Series 7, Series 65, or Series 82 license in good standing, regardless of your personal income or net worth.2U.S. Securities and Exchange Commission. Accredited Investors The SEC treats professional investment knowledge as an acceptable substitute for wealth-based tests of sophistication.
If You’re Not Accredited
Failing the accredited tests doesn’t close off private investing. Three main pathways exist for non-accredited investors, each with its own caps.
Regulation Crowdfunding. Companies can raise up to $5 million over 12 months through SEC-registered crowdfunding platforms. If either your annual income or net worth is below $124,000, you can invest the greater of $2,500 or 5% of the larger of the two figures across all crowdfunding offerings in a 12-month period. If both your income and net worth are at least $124,000, the limit rises to 10% of the greater figure, capped at $124,000 total. These are aggregate limits across every crowdfunding issuer, not per company.3eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General
Regulation A+. Tier 1 offerings raise up to $20 million and Tier 2 up to $75 million in a 12-month period. Non-accredited investors in Tier 2 deals are capped at 10% of the greater of their annual income or net worth. Tier 1 has no per-investor cap but requires state-level registration wherever shares are sold.4U.S. Securities and Exchange Commission. Regulation A
Rule 506(b) placements. Traditional 506(b) offerings can include up to 35 non-accredited investors alongside unlimited accredited ones, but the non-accredited investors must be “sophisticated” enough to evaluate the risks. The company can’t advertise the offering publicly and must give non-accredited investors substantially more disclosure than accredited ones receive.5U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
Documents You’ll Need to Provide
Every private deal, accredited or not, requires identity documentation under federal anti-money laundering rules. Expect to hand over a valid, unexpired government-issued photo ID such as a passport or driver’s license.6Federal Register. Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers
You’ll also provide a tax identification number: a Social Security Number for individuals, or an Employer Identification Number for business entities, obtained through the IRS or by filing Form SS-4.7Internal Revenue Service. U.S. Taxpayer Identification Number Requirement
For accredited-only offerings, the company must verify your financial qualification. Common documentation includes bank or brokerage statements from the past three months, tax returns from the previous two years, or a verification letter from a CPA, attorney, or registered investment adviser certifying that they’ve reviewed your finances.1eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D If you’re using the license pathway, a copy of your FINRA license in good standing takes the place of financial documentation.
If you live in a community property state, some issuers will ask for a spousal consent form. Because both spouses have an interest in assets acquired during the marriage, the company may need your spouse’s signature for the transfer restrictions in your investment agreement to be enforceable.
Have all of this organized digitally before you commit. Private offerings often have short closing windows, and hunting for an old tax return while the deal is closing is a fast way to miss it.
The Paperwork You’ll Sign
The subscription agreement is the main legal document. It states how much you’re committing, the number of shares or units you’re buying, and the terms governing your ownership. The dollar figure you enter drives the calculation of your ownership percentage.8U.S. Securities and Exchange Commission. EXHIBIT 4.1 Form of Subscription Documents for RUNWAY GROWTH CREDIT FUND INC.
You’ll also complete IRS Form W-9 so the company can report dividends, distributions, and capital gains to the IRS. Skipping the W-9 or filling it in incorrectly triggers backup withholding of 24% on any payments owed to you until the issue is resolved.9Internal Revenue Service. About Form W-9, Request for Taxpayer Identification Number and Certification10Internal Revenue Service. Publication 15 (2025), (Circular E), Employer’s Tax Guide
The investor questionnaire is where you formally declare your accredited or non-accredited status, describe your investment experience, and acknowledge the risks. Your answers must line up with the documentation you provided. Mismatches between what you claim and what your statements show will get the application rejected.11U.S. Securities and Exchange Commission. Accredited Investor Questionnaire
Rule 506 offerings add bad-actor questions to the questionnaire. Rule 506(d) bars certain “covered persons” from participating in these offerings if they have specific disqualifying events, including securities-related criminal convictions within the past ten years, SEC disciplinary orders, or court injunctions related to securities fraud.12U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements
Funding the Deal
Once your documents are signed, the company sends wiring instructions or ACH payment details for its escrow or operating account. Wire transfers usually carry a bank fee, so factor that in. Closing doesn’t happen until the company confirms your funds have arrived.
After the money lands and the company’s legal team reviews your paperwork, you’ll receive a countersigned subscription agreement. That’s your binding proof the deal closed. The company or its transfer agent then records your ownership by issuing a stock certificate or by entering your name in a book-entry system.13U.S. Securities and Exchange Commission. Transfer Agents8U.S. Securities and Exchange Commission. EXHIBIT 4.1 Form of Subscription Documents for RUNWAY GROWTH CREDIT FUND INC.
How You’ll Be Taxed
Owning equity in a private company creates tax reporting that doesn’t happen with public shares in a normal brokerage account, and the entity structure decides how.
Invest in a partnership or an LLC taxed as a partnership and you’ll receive a Schedule K-1 each year reporting your share of income, losses, deductions, and credits. Those figures flow onto your personal return whether or not you received any cash. Calendar-year entities must furnish K-1s by March 16.14Internal Revenue Service. First Quarter – Tax Calendar Complex partnerships often deliver K-1s late, which can force you to file an extension.
Invest in a C corporation and there’s no K-1. You’re taxed when you receive dividends or when you sell at a gain. Long-term capital gains on shares held more than a year are taxed federally at 0%, 15%, or 20% depending on your income. Short-term gains are taxed as ordinary income.
The Qualified Small Business Stock Break
Section 1202 offers one of the largest tax advantages available to private investors. Buy originally issued stock in a domestic C corporation with $50 million or less in aggregate gross assets at issuance, hold it for at least five years, and you can exclude up to 100% of the gain from federal income tax on sale. The per-issuer exclusion is capped at the greater of $10 million or ten times your adjusted basis.15Office of the Law Revision Counsel. 26 USC 1202 – Partial Exclusion for Gain from Certain Small Business Stock
The 100% exclusion applies to stock acquired after September 27, 2010. The corporation must use at least 80% of its assets in an active trade or business, and certain industries such as finance, hospitality, and professional services are excluded.
You Can’t Sell When You Want
Private shares are not liquid. This is the difference new investors most consistently underestimate.
Under SEC Rule 144, restricted securities carry mandatory holding periods before resale. For SEC-reporting companies the minimum is six months; for non-reporting companies, which includes most private startups, it’s one year. The clock starts once you’ve paid the full purchase price.16eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
On top of federal holding periods, most private investment agreements add contractual transfer restrictions. The most common is a right of first refusal, which forces you to offer your shares to the company or existing investors before selling to an outside buyer. In practice, private investors often hold shares for years, sometimes until acquisition or an IPO. If you might need the money within a few years, private company investing is the wrong place for it.
What You Stand to Lose
Private company investments can lose their entire value, and for early-stage companies that’s a common outcome rather than an edge case. The private placement memorandum will lay out pages of risk factors. Read them. Common risks include the company running out of cash before it turns profitable, dilution from later fundraising rounds, dependence on a few key employees, and competitive pressure. Private companies also have no obligation to send you regular financial updates unless your agreement specifically requires them.
Your personal liability is generally capped at the amount you invested. Corporate shareholders and LLC members aren’t automatically on the hook for company debts. That protection has limits: personally guaranteeing a company loan puts you on the hook for that guarantee, and if you actively manage the company and commit a tort or a regulatory violation in that role, your own conduct can still create personal liability separate from your investor status.
The most useful risk step happens before you fund the deal: read every document the company gives you, verify what’s in the business plan against outside sources where you can, and don’t invest money you can’t afford to lose entirely. The regulatory framework is built to make sure you get disclosure. It cannot make the business succeed.