Last year, provisions put in motion by the Jumpstart Our Business Startups Act (JOBS Act) were finally adopted by the Securities and Exchange Commission (SEC) which made it easier for entrepreneurs to fund their businesses through general solicitation of accredited investors. Startups and expanding companies are now legally able to fundraise without running into harsh restrictions on public advertising. However, issuers are still expected to abide by certain terms, which are laid out in Rule 506(c) of Reg D.
Easy & Affordable
Per the JOBS Act, investors purchasing securities in private offerings with startups and small businesses that have generally solicited for the capital raise must all be accredited investors. The burden is on the issuer to take "reasonable steps" to verify that their investors are all accredited investors. The SEC does not set forth any specific requirement that an issuer must take to validate an investor, but does provide a list of non-exhaustive steps issuers can take to meet the "reasonable steps" requirement that they impose. The SEC stipulates that verification by licensed professionals and third-party verifiers may be legally-compliant certification methods. While this may seem expensive, there are affordable options available in the marketplace as well.
Significance of Accreditation
Obtaining proof of accreditation is important because it helps to protect both issuers and investors. General solicitation was originally banned to prevent instances of fraud; however, as times have changed, not publicly advertising for investment capital was no longer practical for US companies. After Title II of the Jumpstart Our Business Startups Acts was signed into law by President Obama, new regulations were added to the securities laws, particularly to Rule 506. Rule 506(c) was added to lift the general solicitation ban, which had previously prohibited businesses from using public fundraising tactics.
Obligations of Issuers
The need for issuers to take "reasonable steps" is outlined in the amendment of Rule 506. In essence, to ensure investors are certified, business owners offering private securities should proactively seek verification before proceeding with a sale of their securities. As stated above, there is no single "safe harbor" that is required to be used to obtain proof, but the SEC mandates that issuers or third-party reviewers evaluate investors to make sure they meet the standards for accreditation. Typically, income, taxes, assets, net worth, and existing investor accreditation are reviewed to determine investors' statuses.