When and How a Sponsor Can Reject an Investor's Subscription
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Not every person who wants to invest should be allowed to. A sponsor sometimes has to decline a subscription: the investor cannot show they are accredited, a screening comes back with a problem, their state is not covered or the raise is full. Saying no feels awkward, but done well it protects the deal and the other investors. This post covers common reasons, the process and what to avoid.
What are valid reasons to decline?
| Reason | Why |
|---|---|
| Not accredited, and the raise is 506(c) | All purchasers must be accredited and verified (17 CFR 230.506) |
| Cannot verify accreditation | In 506(c), you must take reasonable steps. See accredited investor verification |
| Failed identity or sanctions screening | Legal and risk obligations. See KYC and AML and OFAC |
| Bad actor issue | A covered person's disqualifying event can affect the exemption. See bad actor rule |
| State not covered | Blue sky filings may not be made there. See blue sky notice filings |
| Incomplete documents | Missing signatures, entity papers or tax forms |
| Allocation | The raise is full or an investor's cap is reached. See oversubscribed raises |
| Ownership limits | A single investor's share may trigger lender or other limits. See lender beneficial ownership disclosure |
| Plan-asset concerns | Benefit-plan investors near the 25 percent test. See ERISA 25 percent test |
How should you decline?
- Decide using a written checklist that you apply to everyone.
- Hold the funds until you decide. Do not mix them with operating money. See escrow.
- Send a short, neutral letter or email: thank them, state that the company is not accepting the subscription, give a general reason, say when funds will be returned and offer a contact.
- Return the money the way it came, and confirm in writing when it is done.
- Record it in your investor log.
What should you avoid?
- Telling the person you "can't say why" when there is a simple factual reason you can share.
- Revealing screening details that could tip off a sanctions match. Ask counsel what you may say.
- Keeping the money "in case" they fix something. Return it or ask for the fix within a stated time.
- Accepting an investor who does not pass a check because they are a friend.
Can you give them another chance?
If the issue is fixable, such as a missing document, set a clear deadline. If the issue is eligibility, you can note they may be a fit for a future deal that uses a different exemption, without promising.
Our take
A clear, kind decline is better than a vague delay. The friends and followers you turn down today may invest in the next deal if you handled it well.
Trade-offs and who this is not for
- Not a way to cherry-pick. Use criteria you can explain.
- Common mistake: keeping funds while you "think about it."
- Not a substitute for counsel. A screening hit needs legal advice.
How DoorRaise fits in
DoorRaise helps sponsors raise equity for apartment buildings with 5+ units from friends and followers who already trust them, under Rule 506(b) or 506(c). We are software, legal document preparation, escrow coordination and verification services. We are not a law firm, broker-dealer, investment adviser, funding portal, bank or escrow agent, and we do not hold investor money: investors wire their money to escrow at Enterprise Bank & Trust, in the deal's name.
DoorRaise keeps the deal in its own company with its own documents and a deal page, and runs an accreditation check on every investor, in 506(b) and 506(c) raises. Flat fees, never a percentage of the raise (see pricing). Create your free sponsor page.
FAQ
Can a sponsor refuse an investor in a syndication?
Usually yes, if the subscription agreement gives the company the right to accept or reject. Check yours.
Do I have to explain why?
Give a general reason you can support. Do not reveal screening details that could create legal problems.
How fast must I return the money?
As fast as your documents and the escrow terms allow. State a date in the notice.
Can a friend who fails verification still invest?
Not in a 506(c) raise. Everyone must pass.
Sources
This article is general information, not legal, tax or investment advice. Talk to a securities attorney before you decline an investor over screening results. DoorRaise is not a law firm, broker-dealer, investment adviser or funding portal.