How to Invest in Private Companies

Individual investors can invest directly in some private companies, although many private offerings are limited to accredited investors. Federal securities rules also permit non-accredited investors to participate in certain offerings, including Regulation Crowdfunding. You can also gain exposure to private companies indirectly via ETFs and mutual funds.

Do you have questions about managing your investment portfolio? Speak with a financial advisor today.

Rules and Regulations for Investing in Private Companies

Private companies don’t offer their stock to the public at large. They also don’t adhere to all of the SEC reporting and oversight regulations that apply to publicly traded companies.

Private companies are usually owned by a small number of founders and initial investors. Private companies are not listed on public stock exchanges. However, they can raise money by selling shares to investors through private offerings without completing an IPO.¹

Instead, private companies can sell shares of stock to accredited investors, as well as certain non-accredited investors under applicable securities exemptions. While the SEC publishes further details on its website, an accredited investor is either an institutional or sophisticated investor that meets specific regulatory criteria.

Institutional investors: Institutional investors, such as a bank or a university, can buy assets restricted to accredited investors if they meet the applicable qualification requirements.
Individual investors: Sophisticated or wealthy investors must meet a minimum level of wealth or experience to become accredited investors. To qualify, you must meet one of the following requirements.
- You earned more than $200,000 per year individually in each of the previous two years and reasonably expect to maintain that income in the current year.
- You earned more than $300,000 per year jointly with a spouse or spousal equivalent in each of the previous two years and reasonably expect to maintain that income in the current year.
- You have a net worth exceeding $1 million individually or jointly with a spouse or spousal equivalent, excluding your primary residence.
- You hold a qualifying financial license, such as a Series 7, 65 or 82 license in good standing.

Accredited investors can invest in private companies and other assets restricted to the public at large. This is generally because the government considers something like a private company to be a higher portfolio risk.

Private firms don’t need to disclose the same level of financial information and business operations as publicly traded companies, making it easier to mislead investors. Accredited investors are more likely to have the knowledge to properly vet these businesses. Therefore, it’s more likely that they can handle the losses of a higher-risk asset.

However, accredited status is not required for every private investment. Regulation Crowdfunding, for instance, permits non-accredited individuals to invest through registered intermediaries, subject to investment limits based on income and net worth. Certain Regulation A offerings and private placements also permit non-accredited participation under specific conditions.

Ways for Retail Investors to Invest in Private Companies

The rules around private investing are determined by the type of securities offering. If a private company issues shares of stock, individuals may be able to buy those shares, depending on the exemption used. Some offerings are for accredited investors only.

However, there are a few ways that you can still participate in this market.

Early Investment

Ordinary investors may be able to buy shares in a private company through qualifying offerings. However, that doesn’t mean you can’t give someone startup capital. If you find a private company that hasn’t yet issued shares of stock, you may be able to invest directly with its founders. This is the difference between buying shares of restricted stock and giving someone seed capital to kickstart their company.

On a very small scale, it’s not uncommon for people to pursue this option through local organizations. Many communities will have angel investor clubs that give startup capital to local entrepreneurs. This can be a fun way to join the startup scene. However, you’re very unlikely to make any significant money from a club or a local business.

Instead, it is often best to connect with someone with a very strong business idea who is looking to get started. Just be careful, as providing capital to a startup may involve securities laws even when the investment is described as a loan. The terms of the arrangement and the applicable registration exemption determine which requirements apply.

Therefore, we cannot recommend this route unless you have a pre-existing relationship with the company’s founder and a solid understanding of the company’s potential.

Equity Crowdfunding

Equity crowdfunding gives individual investors another way to buy an ownership stake in a private business. Under Regulation Crowdfunding, eligible companies can raise capital from accredited and non-accredited investors through online platforms operated by SEC-registered broker-dealers or funding portals.

Investors can review available offerings, including the company’s business description, financial information and proposed use of the money raised. The securities offered may include shares, debt instruments or other investment contracts, so it’s important to understand what you’re purchasing.

Non-accredited investors face limits on how much they can invest across Regulation Crowdfunding offerings during a 12-month period. Those limits depend on annual income and net worth. Investors should also understand that crowdfunding securities generally cannot be resold during the first year, except under certain permitted circumstances, and finding a buyer afterward may still be difficult.

Funds

The better way to invest in private companies for investors who prefer not to purchase individual private securities is to invest around them, so to speak. There are several ETFs and mutual funds that give their investors exposure to the private market. They do this in many different ways.

For example, some invest in companies that themselves invest in private companies. Others invest in sectors that tend to track the performance of private companies. This can include investing in companies that private companies rely on or industries with a large number of private firms.

This tends to be one way for individuals to invest around private companies. Funds offer a diverse range of asset types, helping to mitigate some of the risks of this market. At the same time, they have access to information that private companies may not publish to the market. This helps them decide where to invest.

Private Equity Firms

As noted above, many private equity and other investment firms offer shares of their own stock. Some publicly traded investment companies provide exposure to private businesses. For example, Berkshire Hathaway owns numerous privately held businesses, and investors can buy shares of Berkshire Hathaway on the New York Stock Exchange.²

These companies, in turn, invest directly in private companies. As a result, their value will reflect the strength of these investments, along with other business operations and market factors.

Buying shares in a private equity firm can be a strong move. These are almost like buying a fund, because the firm’s profits reflect its portfolio overall.

However, these are still individual equities. That makes them subject to company-specific risk, unlike a diversified ETF or a mutual fund.

Private Companies vs. Public Companies

A retail investor determines how best to invest in private companies.

One notable advantage of private companies is their focus on long-term growth, free from the constant scrutiny of public markets.

Public firms are often criticized for being overly focused on short-term results. This is driven by the need to meet Wall Street’s quarterly expectations. This pressure can lead them to prioritize immediate profits over long-term value creation. This, in turn, could sacrifice opportunities for innovation and sustainable growth. For instance, a public company may hesitate to invest in a new product that could take years to develop and yield returns, fearing the impact on short-term earnings.

Private companies, by contrast, have more flexibility. They can invest in long-term projects that may not pay off immediately but have the potential for significant future gains. Without the constant pressure to meet quarterly expectations, private firms can pursue strategies better aligned with their long-term goals. This enables them to foster innovation and create sustainable value over time.

Direct Participation in Profits

Ownership in a private company also provides the opportunity for more direct participation in the firm’s profits. While public companies may see their earnings grow, these profits are often retained by the company unless distributed as dividends or used for stock buybacks. Private firms may also distribute profits to their owners, although distributions are not guaranteed and depend on the company’s finances and governing agreements.

Additionally, owners of private firms, especially those with significant stakes, often play a more substantial role in decision-making. This level of involvement can lead to more personalized and strategic decision-making. This helps better align the company’s direction with the owners’ values and long-term vision.

Risks and Challenges of Investing in Private Companies

Investing in private companies can be appealing because of the potential for high returns and early access to promising ventures. However, it’s important to understand that these investments come with significant risks and challenges. This is because they are more complex than buying public stocks.

Lack of liquidity: Shares in private companies are not traded on public markets. This means they can be very difficult and sometimes impossible to sell. You may have to wait years for a liquidity event, such as an IPO or acquisition, before cashing out.
Limited or no financial disclosures: Private companies are not required to publicly disclose detailed financial statements, business operations or risks the way public companies are. Disclosure requirements vary by offering type, making it harder to evaluate the company’s true financial health and prospects.
Higher failure rates: Startups and small businesses are inherently riskier than established public firms. Many private companies fail within their first few years. This increases the risk of losing your entire investment.
Regulatory and legal risks: The rules governing private investments are stricter, and failing to comply with SEC regulations can result in penalties. For example, an offering that fails to meet the requirements of its claimed registration exemption may expose investors to additional legal and financial risks.

Being aware of these risks and carefully assessing them before you invest is essential. Working with a financial advisor or attorney experienced in private investments can help you review these considerations before making a commitment.

How a Financial Advisor Can Help You Assess Private Investments

Advice can be useful when investors start exploring private investments. The rules, risks and access limits differ significantly from those of public markets.

Many individuals are unsure whether they qualify as accredited investors. They may also wonder about the available types of private exposure or how private investments fit alongside traditional stocks, bonds and funds.

These decisions often center on access, structure and risk. Investors may decide to pursue indirect exposure through ETFs or mutual funds. They may also evaluate publicly traded firms that invest in private companies or determine whether a potential opportunity crosses regulatory boundaries. These choices can be difficult to evaluate without a clear view of how private investments differ from public ones.

A financial advisor can help clarify these distinctions by reviewing eligibility rules and explaining how different private-market vehicles work. They can also outline the risks related to liquidity, transparency and concentration.

Advisors can also help assess how private investments may affect overall portfolio balance, cash flow needs and long-term goals. This is especially crucial given the higher failure rates and longer holding periods common with private assets.

Those considering private investments may ask whether they meet accredited investor requirements, how to allocate their portfolio to private markets and how to evaluate opportunities with limited public information. They may also want to understand how indirect exposure compares to direct ownership in terms of risk and access.

Because private investments involve regulatory limits, long time horizons and reduced liquidity, timing and structure matter. Professional guidance can help investors weigh these trade-offs before committing capital. This is particularly critical when considering private investments alongside more familiar public-market options.

Bottom Line

Two investors decide how to invest in private companies.

You don’t necessarily need to be an accredited investor to buy shares in a private company. Some offerings, including Regulation Crowdfunding, allow non-accredited investors to participate, although eligibility requirements and investment limits may apply. You can also gain indirect exposure through funds or by buying shares of private equity firms that invest in private companies. This can be a good way to get exposure to private shares without purchasing them directly.

Investment Tips

A financial advisor can help you invest in many different types of companies. Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with financial advisors who serve your area, and you can interview your advisor matches at no cost to decide which one is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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