Why do you have to be an accredited investor?
grellas: When a startup issues stock to investors, it is critical to keep the offering within the limits of recognized securities law exemptions. Otherwise, it is an illegal offering and any investor who purchased stock can rescind and demand his money back from the issuer or its promoters. Thus, securities laws are not to be taken lightly.That said, it is an extremely simple proposition to structure early-stage offerings in a way that meets exemption requirements and this can and does very often involve stock sold to relatives and friends. In California, for example, there is something known as the "limited offering exemption" (Cal. Corp. Code section 25102(f)) that permits issuances of stock to up to 35 non-accredited investors who have a pre-existing relationship with the company or its founders and who represent that they are purchasing for bona-fide investment purposes and not for immediate resale. The disclosure requirements for this, and the accompanying paperwork, are very easy to comply with.Most states have something comparable, as do the federal rules as interpreted under Section 4(2) of the 1933 securities act and under Regulation D (which sets out "safe harbor" provisions for private placements).The main advantage of using accredited investors lies in the tremendous reduction in compliance risk when issuers are doing more complex offerings. In the early-stage context, I recommend to my startups that they attempt if possible to limit their offerings to accredited investors simply because this keeps things things safest for compliance purposes but I also tell them that limited sales to non-accredited investors are usually fine. I have done a brief write-up on this at http://grellas.com/faq_business_startup_012.html.