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When raising capital at what point is it required by United States law that the investor be accredited, and if possible what are the laws stating these guidelines? Also, what due diligence is required to show that the investor claimed to be accredited, and when does the claim expire?

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When you are raising money through a private placement memorandum you need to qualify the investor. This qualification process should be documented in a "Investor Questionnaire". Completion of the Investor Questionnaire comes prior to presenting the PPM. The investor questionnaire includes documentation of their qualification as an accredited investor.

Under your state's Blue Sky laws you may also have an option to have a certain number of unaccredited investors participate in your offering. Check with the state regulations to understand that implication.

Where you work with a lawyer, a licensed broker, an investment adviser or a specialized marketing company to support this effort-- they will have the documents that you need to do this in a way which does not unnecessarily expose you and your company to unneeded risk.

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Thanks, realized after askings the question how complex the answer appears to be. That said, still puzzled by the "friends and family capital" approach. So, does this mean raising ANY funds from anyone that's not accredited is illegal in most cases? Also, it's my understanding that PPM are overkill in most cases, are they now required? – blunders Nov 30 '11 at 2:45
I could be wrong but raising from friends is not illegal, it just means those friends can go after you any time in the future and force you to give them their money back. That's why you want to raise from friends, not from strangers :-) – Alain Raynaud Nov 30 '11 at 3:13
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I will edit my answer to make this clearer (later, not now), that this is when you are raising money through the sale of stock -- a security. You can raise a certain amount of money from a non-accredited investor based on the "Blue Sky Laws" of your state. Friends/Family is no different. You can raise money in ways other than the sale of stock. Convertible notes for example. So for the answer -- at what point? When you exceed the number allowable by your state's BLue Sky Laws. – Joseph Barisonzi Nov 30 '11 at 3:24
+2 and selected as answer... @Joseph Barisonzi: No need to edit the answer, it's fine as is with the comments - thanks! – blunders Nov 30 '11 at 4:15
So note that a PPM is not always needed and is often overkill -- but the issue is that when giving a security-- selling stock -- you have to follow the rrules, it is very regulated. You can only have so many non-accredited -- and the rules for working with them is different that accredited. – Joseph Barisonzi Nov 30 '11 at 4:26

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