I received a message the other day from a high school classmate about what opportunities exist to invest in small businesses and startups when you’re not accredited. There’s no simple and easy way to do this, but I highlight some opportunities in this video.

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Hi, Matt. Our financial situation has shifted slightly and we’re looking to start investing, in small ways (a few thousand each) into interesting local ventures that align with our interests. I have two questions: First, are you personally involved with an investment group that is currently accepting low-dollar participants? And second, more important, have you written/ can you recommend an article about the best way to “set up” our investments to maximize financial gains/minimize taxes? I appreciate your guidance. Sorry for the clumsy question – new to this.

This is a great question and it’s one I’ve gotten several times. So, you have a bit of money and you want to invest it into local businessses, but aren’t quite at the level where you would be considered an accredited investor by SEC guidelines. Typically if you want to join an angel investment fund or invest in a private equity fund, you have to be able to prove that you make $200,000 per year as an individual, $300,000 as a married couple or have $1 million in assets outside your home. If you meet one of those qualifications, you are considered to be an accredited investor in the United States. The thought that the SEC has is that if you meet those guidelines, you can afford to make some mistakes with your investments. If you lose all of the money you put into a single investment, it probably won’t ruin you financially. If you haven’t reached accredited investor money yet, the government just doesn’t want you taking risks on very high-risk and high-reward investments. Because if you put all of your money into someone else’s business and it doesn’t work out, you’re probably bankrupt and will have to rely on the social safety net to get by.

Generally speaking, I think this is a good rule. You should probably only mess with “more interesting” investments than stocks, bonds and real-estate once you’re already doing a lot of those things. If you have a good amount of savings, have maxed out your IRAs, have maxed out your 401K plan and have a healthy income, at that point you’re probably okay to make some higher-risk, higher-reward investments. But you want to make sure you have the basics covered first. Get your debt paid off. Start saving for retirement. Have some cash in the bank. If you’re there, you can start to think about investing in local businesses.

Let’s say you’re doing well, but not quite accredited yet. There just aren’t a lot of good ways to invest in local businesses or startups a few thousand dollars at a time at this stage. You can’t and probably shouldn’t invest in an angel investment fund or private equity fund until your accredited. And generally, a few thousand dollars is also not enough money for most business owners to get excited about when you want to make an investment.

One thing you could do is setup an investment club with a few friends that are at a similar income level as you and make stock investments and real estate investments as a group. I did this with a few friends back in 2012. We first bought some stocks together then we bought a rental house. It was fun for quite a while, then we all got busy and it kind of runs on auto-pilot now.

The other thing you could do is find an existing local business that you are excited about and see if there’s an opportunity to become a partner in the business. Perhaps you could put $10,000 into a local business, become an employee of that business and get a piece of ownership in the business as well. That happens all the time. I did that with my friends Jason and Stevie shea. They were starting a fundraising software business that they had expertise in that I thought I could help with. I put in a little bit of money. I think it was around $15,000, and I got a third of the business and helped out with marketing. Seven years later, we continue to operate that business and it throws off a few hundred thosand dollars per year in profit.

Regarding the second part of your question, where you ask about setting up these investments in a tax-advantaged way, there’s really not much you can do with private equity investments. You can do things like a self-directed IRA and put money into investments in private equity, but that’s usually not a good idea, because you should probably only be investing in local businesses after you have maxed out an IRA and your 401K plan if you have one.

Hopefully this answers your question. Sorry I don’t have a quick an easy answer for you. Unfortunately, investing in small businesses is just a complicated endeavor. They have a high risk of failing and it’s not for the faint of heart. There are a couple of options such as starting an investment club or finding a local business to become a minority owner in that you could pursue though. Thanks for watching.