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Targeting Accredited Investors

JL Law

If you own or manage a new and growing business, sometimes crowdfunding can be the way to take your enterprise to the next level.  Crowdfunding taps into private investors who are willing to take a financial risk on your business idea.  It is a remarkably savvy way to jumpstart the business itself or the next stage of your growth cycle.

But you probably do not want to take money from just anyone.  Accredited investors are the way to go.  Under Title II of the JOBS Act issued by the Securities Exchange Commission (SEC), only accredited investors are allowed to participate in generally solicited and advertised capital raises of non-registered securities (think – broadly broadcasted private raises).  The main reason for this restriction is that it’s believed that accredited investors are more sophisticated so that they can make better investment decisions or more affluent so they can absorb a 'hit' if the investment doesn’t perform after they invest. 

An accredited investor is defined under Rule 501 of Regulation D.  For individual investors, they either must have a minimum net worth of $1 million in assets not including their primary residence or they must have income of at least $200,000 (or $300,000 with a spouse) for a minimum of two years and a reasonable expectation of achieving the same income level in the current year.  There are further nuances in the definitions but these are the basic qualifications for most individual investors.  Corporations, financial institutions, banks, and insurance companies, and a variety of other entities can also be accredited investors.

While businesses taking advantage of Title II of the JOBS Act can generally solicit anybody, accredited or not, they are required to take “reasonable steps” to verify that all of the people that end up actually investing qualify as accredited investors.  Some of the items a business might be required to review in order to conduct a legally compliant verification that fulfills the reasonable steps requirement include:

•            Review of IRS tax forms (e.g. W2, K1, 2099, 1040) to verify income;

•            Review consumer credit report for purposes of discovering liabilities; and

•            Review of bank account statements, certificates of deposit, brokerage statements, annuity statements, tax assessments, or appraisal reports to verify assets.

The laws and regulations governing proper verifications are rather complicated.  In general, it’s much safer to work with an outside party that conducts this service.  These outside parties can include registered investment advisor or broker-dealers or licensed attorneys and accountants.  Properly trained lawyers, in particular, are adept at interpreting and navigating the laws and regulations; as a result, they may be the best suited to provide this service. 

Accredited investors fund over a trillion dollars each year.  The best way to access them is through a Title II, JOBS Act capital raise.