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How to Find & Verify Accredited Investors

Mihir Gandhi

Do you need investment capital to fund your startup or small business? Since Title II of the Jumpstart Our Business Startups (JOBS) Act was passed into law and subsequently implemented by the Securities and Exchange Commission (SEC), business owners have been free to solicit the funds they need from accredited investors in an effort to get their companies off of the ground. Because the general solicitation ban has been removed, companies looking to issue securities can broadcast their need for funding to accredited purchasers. However, before you can acquire capital, you need to locate and verify prospective investors first.  

Why Does Accreditation Matter?

When it comes to following through with the sale and purchase of private securities, investor accreditation is vital. Investors are considered accredited when they meet Rule 501 requirements and undergo proper verification using “reasonable steps.” Under Title II of the JOBS Act and Rule 506(c) of Regulation D, only accredited investors are permitted to purchase the securities offered in private offerings involving general solicitation. If you're a small business owner looking to raise investment capital through generally solicited Rule 506(c) private offerings, the only way to do it is with accredited investors that have been verified as accredited.

Finding Potential Investors

Finding accredited investors can be difficult if you've never advertised for funding publicly. The first step is to locate the investors.  Focus on investment clubs, crowdfunding sites, and/or peer referrals. Once you have a list of potential contacts, you can start developing your company's name and brand.  Paint a truthful and fair picture of your company and your offering so that investors can identify with your vision, goal, and business.  If a seller is able to provide an organized, sensible business pitch, then good deals will usually sell themselves.  With Rule 506(c) offerings, you can also advertise with audiences that are likely to invest in your offering.  For example, you could solicit investors by targeting advertisements in publications with demographics that match the profile of the investors you believe are most likely to appreciate your business.

About the Validation Process

While private offerings through general solicitation must involve accredited investors, issuers can choose how they verify purchasers. If you're looking for a quick, cost-efficient method, choosing third-party review services will save you time and money.  It’s important to have a reasonable basis to rely on the third-party review service.  Using an improper third-party review service will not be legally compliant, so do your diligence carefully.  To be safe, the reviews of a third-party review service should be conducted by licensed attorneys.