Private equity funding is a method individual investors use to buy an interest in a company or venture they think will be financially successful in the future. Start-up companies to established non-publically traded companies (meaning the companies stocks aren't listed on a stock exchange like the New York Stock Exchange) that need an injection of funds will often look to private equity investors to find private placement investors when traditional sources of funding, like banks and credit unions, decline to provide financing to them. If you recently came into money and you're looking to invest in the marketplace, here is a quick guide on how private equity investing works.
You are either an accredited or an non-accredited private equity investor.
Accredited Investor: You need to meet the federal qualifications to be an accredited investor. The minimum qualifications are that you make at $200,000 per year (or $300,000 if you are married) and have a net worth of $1 million dollars. This qualifies you to buy private placement investments through private equity firms that are registered with the U.S. Securities and Exchange Commission (SEC). Private placement means the company or venture you are investing in is not registered with the SEC, and you don't have the same level of protection against loss and fraud that you do with registered investments.
These minimum qualification rules for accredited investors were put in place because investing in individual companies is always riskier than investing in mutual funds and registered investments vehicles. The SEC feels that people who have the stated minimum level of financial net worth are considered "sophisticated" investors who are better able to make informed choices, and are also better able to recover financially from any losses that might occur if those investment decisions are wrong.
Private equity firms need to make sure you have the wherewithal to invest in private equities before they can allow you to buy an ownership stake in a private business or venture. If a private equity firm cannot verify your financial status, they will not allow you to participate in their investment offerings.
If your friend or brother asks you to invest in their business idea, you are free to do so without worrying about breaking any rules with the SEC. Investing in this way means you are accepting all the risks associated with the investments you are making to support your friend's business, and if something goes wrong, you will be limited to the protection of the civil courts to help you settle any financial or legal disputes arising out of the arrangements you made your friend.