To become an investor in a company, you either buy shares of a public company through a brokerage account or you invest directly in a private company through an exempt offering that requires you to qualify financially, submit identity and tax documentation, sign a subscription agreement, and wire your funds. The public route is open to almost anyone. The private route is governed by the Securities Act of 1933 and SEC rules under Regulation D, and it comes with investor qualification tests, mandatory paperwork, and restrictions on when you can resell. What follows walks through both, with most of the attention on the private side, where the requirements are real and the mistakes are expensive.
Buying Shares in a Public Company
If the company trades on an exchange like the NYSE or Nasdaq, becoming an investor takes an afternoon. Open an account with a brokerage, provide a government-issued ID and your Social Security Number, fund the account, and place a buy order. There is no income test, no net worth test, and no minimum beyond the share price. This is how most people first become shareholders, and the regulatory burden sits on the company and the broker, not on you.
Who Can Invest in a Private Company
Private companies raise capital through offerings that bypass full SEC registration, and in exchange the SEC limits who can participate. The main gate is the accredited investor definition in Rule 501 of Regulation D.
Accredited Investor Thresholds
You qualify as accredited if you meet any one of these financial tests:
- Individual or joint net worth with a spouse or spousal equivalent exceeding $1 million, excluding the value of your primary residence.
- Individual income over $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 over $300,000 under the same two-year rule and current-year expectation.
That “reasonable expectation” piece matters. Two strong years followed by a drop in income you can’t credibly project back up to the threshold doesn’t get you in.
Entities can also qualify. A corporation, LLC, partnership, or trust with total assets over $5 million is generally accredited, as long as it wasn’t formed specifically to invest in the offering. An LLC or similar entity whose equity owners are each individually accredited qualifies regardless of its 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 without hitting any of the dollar thresholds. The SEC recognizes holders of a Series 7, Series 65, or Series 82 license in good standing as accredited investors based on the license alone.2U.S. Securities and Exchange Commission. Accredited Investors
If You Aren’t Accredited
Not meeting the thresholds doesn’t shut you out of private investing. Three pathways are available:
Regulation Crowdfunding lets companies raise up to $5 million in a 12-month period from both accredited and non-accredited investors through SEC-registered online platforms. If you aren’t accredited, your personal investment is capped based on your income and net worth, with the limits applying across all crowdfunding offerings combined, not per company.3eCFR. 17 CFR Part 227 – Regulation Crowdfunding, General
Regulation A+ offerings let companies raise up to $20 million (Tier 1) or $75 million (Tier 2) in a 12-month period. Non-accredited investors in Tier 2 are capped at 10% of the greater of their annual income or net worth. Tier 1 has no per-investor cap but requires state-by-state registration.4U.S. Securities and Exchange Commission. Regulation A
Rule 506(b) private placements can include up to 35 non-accredited investors, but each one must be “sophisticated” (meaning they have the financial knowledge to evaluate the risks), the company can’t use general advertising to find them, and it must provide them with substantially more disclosure than it gives accredited investors.5U.S. Securities and Exchange Commission. Private Placements – Rule 506(b)
Documents You’ll Need to Provide
Every private investment starts with identity verification. Federal anti-money laundering rules require the company or its intermediaries to confirm who you are before accepting your money. A valid, unexpired government-issued photo ID (passport or driver’s license) is the baseline.6Federal Register. Customer Identification Programs for Registered Investment Advisers and Exempt Reporting Advisers
You’ll also need a tax identification number: a Social Security Number if you’re investing as an individual, or an Employer Identification Number if you’re investing through a business entity.7Internal Revenue Service. U.S. Taxpayer Identification Number Requirement
If the offering is limited to accredited investors, expect to prove it. Common forms of verification include bank or brokerage statements from the past three months, tax returns from the previous two years, or a signed letter from a CPA, attorney, or registered investment adviser confirming they’ve reviewed your finances and certify your accredited status.1eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D If you’re qualifying through a FINRA license, a copy of the license in good standing takes the place of financial documentation.
Investors in community property states should expect one more item. Some companies require a spousal consent form, because community property laws give both spouses an interest in assets acquired during the marriage and the company wants the transfer restrictions in your agreements to be enforceable against both of you.
Pull these materials together digitally before you start. Private offerings close on short windows, and hunting for a two-year-old tax return mid-process is how deals get missed.
What You’ll Sign
The subscription agreement is the core document. It states how much capital you’re committing in dollars, how many shares or units you’re buying, and the terms of your ownership. The company uses your dollar figure to calculate 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, giving the company your name, address, and taxpayer identification number so it can report dividends, distributions, and capital gains to the IRS. Skipping the W-9 or filling it out 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
Alongside the subscription agreement comes an investor questionnaire. This is where you formally declare whether you’re accredited or non-accredited, describe your familiarity with private investments, and acknowledge the risks. Your answers have to match the supporting documentation you submitted. Discrepancies between the questionnaire and your bank statements will get your application rejected.11U.S. Securities and Exchange Commission. Accredited Investor Questionnaire
Rule 506 offerings add questions about your regulatory and criminal history. Rule 506(d) disqualifies certain “covered persons” with specific securities-related criminal convictions, SEC disciplinary orders, or court injunctions from participating.12U.S. Securities and Exchange Commission. Disqualification of Felons and Other Bad Actors from Rule 506 Offerings and Related Disclosure Requirements Answer these honestly; a disqualifying event concealed on the questionnaire is grounds to unwind the investment.
Funding the Investment
Once your paperwork is signed, the company sends wiring instructions or ACH details for an escrow or operating account. Factor in your bank’s wire fee. Closing doesn’t happen until the company confirms your funds have arrived.
After the money lands and the company’s legal team reviews your documents, you’ll receive a countersigned copy of the subscription agreement. That’s your binding proof the deal closed. The company or its transfer agent then records your ownership, either by issuing a stock certificate or entering your name in a book-entry system.13U.S. Securities and Exchange Commission. Transfer Agents
Investing Through a Self-Directed IRA
You can also fund a private investment through a self-directed IRA, with your IRA custodian holding legal title and income flowing to the account rather than to you personally. The constraint is the prohibited transaction rules under 26 U.S.C. ยง 4975, which bar transactions between your IRA and “disqualified persons,” including you, your spouse, your lineal descendants, and entities you control. Invest IRA funds in a company you manage or that employs your family and you can disqualify the entire IRA, which triggers immediate taxation on the full account balance.14Office of the Law Revision Counsel. 26 U.S. Code 4975 – Tax on Prohibited Transactions
How You’ll Be Taxed on the Ownership
How you’re taxed depends on the entity you invested in. In a partnership or LLC taxed as a partnership, you’ll receive a Schedule K-1 each year reporting your share of income, losses, deductions, and credits, and those figures flow onto your personal return whether or not you received cash. For calendar-year entities, companies must furnish K-1s by March 16, and late K-1s on complex deals routinely force investors to extend their returns.15Internal Revenue Service. First Quarter – Tax Calendar
In a C corporation, there’s no K-1. You’re taxed on dividends when paid and on gains when you sell. Shares held more than a year get long-term capital gains rates; shares held a year or less are taxed as ordinary income.
Qualified Small Business Stock
Section 1202 offers one of the strongest tax breaks in the private-company world. If you buy originally issued stock in a domestic C corporation with aggregate gross assets of $50 million or less at issuance, and you hold it for at least five years, you can exclude up to 100% of the gain from federal income tax. The per-issuer exclusion is capped at the greater of $10 million or ten times your adjusted basis.16Office 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 finance, hospitality, and professional service industries are excluded.
Getting Your Money Back Out
Private company shares are illiquid. You generally can’t sell them when you want to, and this gap between private and public investing catches new investors off guard.
SEC Rule 144 imposes mandatory holding periods on restricted securities before you can resell. For companies that file reports with the SEC, the minimum is six months. For non-reporting companies, which covers most private startups and small businesses, the minimum is a full year. The clock doesn’t start until you’ve paid the full purchase price.17eCFR. 17 CFR 230.144 – Persons Deemed Not to Be Engaged in a Distribution and Therefore Not Underwriters
Your investment agreement will add its own transfer restrictions on top of the federal rules. The most common is a right of first refusal: before you can sell to an outside buyer, you have to offer your shares back to the company or existing investors at the same price and terms, typically giving the company 15 days to decide. If the company passes, other investors often get a secondary right to buy. Any transfer that skips these procedures can be voided and won’t be recorded on the company’s books.
In practice, many private investors hold for years, often until the company is acquired or goes public. If you need access to the money within a few years, private investing is the wrong vehicle.
Understanding the Risk Before You Commit
Losing the entire investment is a real outcome in private company investing, not a disclaimer. The private placement memorandum you’ll review before investing contains pages of risk factors, and they’re worth reading rather than skimming. Common risks include the company running out of cash before reaching profitability, dilution from future fundraising rounds, dependence on a small number of key employees, and competitive pressure on the company’s market position. Private companies have no obligation to send you regular financial updates unless your investment agreement requires it.
Your personal liability is generally capped at what you invested. Shareholders in a corporation and members of an LLC aren’t automatically on the hook for the company’s debts. Two limits on that protection: a personal guarantee on a company loan bypasses the shield for that debt, and if you actively manage the company and personally commit a tort or regulatory violation, your own conduct can still produce personal liability independent of your investor status.
Before you wire funds, read every document the company provides, verify the business plan’s claims against independent sources where you can, and don’t invest money you can’t afford to lose. The regulatory framework guarantees disclosure. It doesn’t guarantee the business will work.