Investor Accreditation & Private Offerings Under Rule 506

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.

Accredited Investor Status: Vital in Private Offerings that Generally Solicit

Do you need to verify a prospective investor, or wish to self-verify to prove your accredited status? While being certified as an accredited investor isn't mandatory for all capital raises, it's necessary for those wishing to participate in private offerings that have engaged in general solicitation. For those startups and businesses that have publicly solicited while fundraising, they are required to take reasonable steps to ensure their securities transactions are concluded with accredited investors only. This is the only way to ensure that such small businesses and entrepreneurs raise the investment capital they need in a legal manner.

Determining Accreditation

Purchasers who are interested in obtaining an accredited investor status must first meet the requirements held by the U.S. Securities and Exchange Commission (SEC). An investor's income, net worth, and assets are assessed to determine whether or not they qualify as a validated accredited investor. Typically, the minimum-asset requirements vary for different types of investors. For instance, an individual investor's net worth must add up to $1 million or more, while corporations, charitable organizations, and institutions are generally required to have more than $5 million in assets to qualify for accreditation.

Reliable, Licensed Reviewers

Title II provisions of the Jumpstart Our Business Startups Act (JOBS Act) and Rule 506(c) of Regulation D charges issuers with the responsibility of taking reasonable steps to verify that their investors are accredited investors. While the SEC allows an issuer to take any steps that the SEC might later deem reasonable, the only safe method of compliance is to employ one or more of the SEC's pre-approved methods of investor verification. If you're an issuer, one of the methods you can use to determine the status of a potential investor is third-party verification services. Trustworthy third-party platforms will typically use SEC-registered investment advisors or broker dealers, licensed accountants, or attorneys to evaluate investors.

Necessity of Reasonable Steps

Proving accredited investor status is important for both issuers and purchasers. If an issuer doesn't take reasonable steps to ensure an investor is verified, they may be required to return the money to the investors and may be prohibited from raising investment capital through Reg D exemptions. This can be disastrous for a company that needs to raise capital in the future because Reg D is the most commonly used exemption in the US. Purchasers who feel they meet the accredited investor requirements should consider requesting a self-verification from a reliable third-party reviewer, as having that pre-certification will make you a more attractive investor to companies.

The Role of Investor Accreditation in the Jumpstart Our Business Startups Act

The Jumpstart Our Business Startups Act, or JOBS Act, is a law that makes it easier for startups and small businesses to obtain capital by lessening the restrictions on investment funding and securities. If you're an issuer or purchaser who's interested in participating in private offerings that have generally solicited for investors, the JOBS Act requires that investors must be accredited investors. Relying on the services of a reliable third-party reviewer can help you obtain investor verification whether you're a business owner or an investor.

Before the JOBS Act

The Securities Act of 1933 was signed into law in the U.S. with a ban on general solicitation, which prevented small businesses from publically advertising their need for investment capital. In many ways, these laws protected investors and issuers alike from fraud. However, the ban on general solicitation made it extremely difficult for small startups and business owners to obtain the funds they needed to expand their companies. Recognizing that information is easier to obtain in today's modern world, the ban against general solicitation was lifted under Title II of the JOBS Act, allowing organizations to use public advertisement as a means to fundraise. Final rules formally enacting the general solicitation provisions of the JOBS Act went into effect on September 23, 2013.

Public Advertising

Before the implementation of Title II of the JOBS Act, companies had to rely on close, personal connections with investors as they couldn't advertise their capital raise. Now, under the JOBS Act, small businesses have the right to utilize a variety of public advertising methods to obtain investment capital. Business owners can advertise through social media sites, crowdfunding sites, printed publications, etc., while still considered by the SEC as conducting "private" offerings. Through the provisions outlined in Title II of the JOBS Act and Rule 506(c), business entrepreneurs are given the freedom to raise the capital they require, improving their companies' chances of succeeding.

Mandated Purchaser Certification

The primary requirement for these new capital raises that may be generally solicited is that all eventual purchasers of the securities must be "accredited investors." The stakes are high. If an entrepreneur or business takes even one non-accredited investor, the entire offering can be illegal. Before an issuer offers securities, they should first obtain proof that an investor meets the SEC's definition of accredited. Whether or not an investor is accredited is largely based on their income and net worth. The type of investor they are also determines the minimum-asset requirement they must meet to be considered accredited.

Do You Meet the SEC's Accredited Investor Requirements?

Whether you're a purchaser or issuer looking to participate in private placement, it's important to make sure either you or a potential investor is accredited. Since Title II provisions of the JOBS Act went into effect in 2013, small businesses have been given the opportunity to publicly raise capital without having to register securities. The key requirement is that reasonable steps must be taken to prove that all investors in such a "private" offering are actually accredited investors prior to completing the sale.

Accreditation Under Rule 506

Under Rule 506(c) of Regulation D, startups and businesses can publicly solicit and advertise their private offerings only if they take reasonable steps to verify that their investors are all accredited investors. For this reason, it's important for issuers to abide by securities laws and take reasonable steps to collect information on potential investors' statuses before selling securities. The U.S. Securities and Exchange Commission (SEC) maintains a list of guidelines issuers can refer to for more information on how they can validate an investor. For instance, both issuers and purchasers can use reasonably reliable third-party reviewers to verify investors or themselves.

Who Can Qualify?

The term "accredited investor" isn't applicable to individual investors exclusively. Foundations, charitable organizations, pension funds, and companies are among the other types of investors out there. Investors can become accredited due to high income, high net worth, high asset levels, or even relationship to the issuer. Rule 501 of Regulation D provides the legal definition of "accredited investor." To be considered accredited, investors need to fall within one of the outlined categories set forth in the definitions.

How much is enough?

Generally, corporations, partnerships, and charities must have assets worth over $5 million, while individual/ joint investors must have a net worth of $1 million or more. Additionally, individuals or joint couples who earned incomes over $200,000 and $300,000, respectively, for the last two years and who have a reasonable expectation of achieving the same income in the current year, may also meet accredited investor requirements.

To request validation for an investor, or to learn more about how to obtain verification for yourself, visit https://www.VerifyInvestor.com.

Securities Offerings & Sales Under Regulation D

Are you part of a private startup and looking to raise investment capital? Or, are you an investor interested in verifying your accredited status? Rule 506(c) was added to Regulation D per the Jumpstart Our Business Startups Act, giving companies the freedom to participate in general solicitation, their capital raises while still qualifying them as private offerings that don't need to be registered with Securities and Exchange Commission (SEC). The sale of private securities through general solicitation requires accreditation of the investors as "accredited investors," a definition found in the securities laws. Choosing to obtain a third-party review from a licensed professional is one of the safe harbor methods approved by the SEC to validate oneself, or the status of a purchaser, as an accredited investor. In fact, a third-party verification from a licensed attorney has emerged to be the go-to standard in the capital raising industry.

About Regulation D

Under the Securities Act of 1933, offerings involving the sale of securities are required to be registered with the SEC. However, exemptions from having to register securities exist under Regulation D. The purpose of a Reg D offering is to provide small startups and businesses with the opportunity to acquire capital, without having to shoulder the steep costs of registration with the SEC. On September 23, 2013, certain provisions of Title II of the JOBS Act were finally implemented by the SEC which changed the policies surrounding public advertising and general solicitation for certain Reg D offerings.

General Solicitation

Reg D contains several rules but the three primary ones that provide exemptions from SEC securities registration are Rule 504, Rule 505, and Rule 506. Rule 506 is the most widely used exemption because there is no limit on how much money can be raised (there are limits with Rule 504 and Rule 505) and because a qualifying offering under Rule 506 is exempt from state registration (which is not the case with Rule 504 and Rule 505). Before the implementation of the JOBS Act, general solicitation of purchasers was prohibited in Rule 506 securities offerings and most other Reg D offerings. As directed by the JOBS Act, the SEC added a new Rule 506(c) in Reg D, which grants issuers the right to generally solicit and openly advertise securities without having to register said securities. Companies can now take advantage of Rule 506(c) as long as they meet certain heightened requirements for verifying that the eventual purchasers of their securities are accredited investors. Specifically, they need to take "reasonable steps" to verify their purchases as accredited investors.

Role of Accredited Investors

Since generally solicited offerings under Rule 506(c) require that the eventual investments be made by accredited investors only, it's important to understand who qualifies. The term, "accredited investor," is defined in Rule 501 of Regulation D and includes qualifying high income or high net worth individuals and married couples, as well as certain entities and institutions. Investors who meet one or more of the definitions of accredited investors promulgated under Rule 501 of Regulation D are qualified investors for Rule 506(c) offerings. Issuers should validate the status of potential investors using the safe harbor methods outlined by the SEC. Not taking reasonable steps to ensure that an investor is accredited can lead to serious ramifications which may harm the company and its investor as well as possibly disallow an issuer's ability to rely on Regulation D to raise capital in the future.

VerifyInvestor.com provides legally-compliant third-party reviews by licensed attorneys which allow issuers and purchasers to obtain accredited investor verifications quickly and securely.

Requirements of Private Offerings Under Rule 506(c)

The Jumpstart Our Business Startups Act (JOBS Act) was signed into law in 2012.  Section 201(a) of the JOBS Act required the Securities and Exchange Commission (SEC) to remove the ban on the use of general solicitation by companies seeking to conduct a private placement so long as certain requirements are observed.  In September 2013, the ban on general solicitation in private placements was finally lifted and formally memorialized as Rule 506(c) of Regulation D.  Rule 506(c) plays a critical role in private startups and companies' ability to conduct a private placement of their securities while still being able to generally solicit and publicly advertise.  However, there are certain requirements that must be met for a securities offering and purchase to be properly carried out under Rule 506(c).

ACCREDITED INVESTORS
Under the terms of Rule 506(c) of Regulation D, companies are permitted to utilize general solicitation to obtain funding. Private startups and business can publicly advertise for investment capital via a number of methods and still be considered as conducting private offerings which do not require registration with the SEC. The main requirement for companies taking advantage of Rule 506(c) is that they must take “reasonable steps” to verify that their investors are actually accredited investors.  They can no longer rely on investors’ self-verifications through investor questionnaires and subscription agreements which the industry had regularly utilized in the past.

VERIFICATION & REASONABLE STEPS
What constitutes a valid verification?  The fact that a company takes “reasonable steps.”  The SEC provided some guidance as to what methods they would consider as sufficient reasonable steps.  These methods include reviewing certain defined documentation to ensure that an investor meets income or net worth requirements or seeking third-party confirmation from a certified attorney or accountant. In the event that an investor is found to be unaccredited after purchasing securities, an issuer that took reasonable steps to confirm the purchaser's status will not lose their exemption from SEC registration.  The gold standard for compliance in the industry is to obtain third party verification from a licensed attorney.

ADDITIONAL REGULATIONS
As well as meeting the requirements involving investor accreditation and accredited status verification, it's important that other rules and regulations under Regulation D are adhered to.  Consulting with your attorney on how to properly abide by all the requirements of Regulation D and the securities law is strongly recommended.  As Rule 506(c) is relatively new, the SEC has proposed additional regulations that might take effect in the future.  We’ll update you with the latest developments.

VerifyInvestor.com provides legally compliant third-party verifications of purchasers as accredited investors from licensed attorneys. To verify your accredited investor status or the status of another investor, visit https://www.VerifyInvestor.com. 

VerifyInvestor.com - Heartbleed Bug Squashed

Some of you may have heard of the Heartbleed bug.  Experts say that it affects most of the internet.  Chances are that it directly or indirectly impacts you because millions of websites, many of which you may use  (for example, USPS, Instagram, ESPN, Yahoo, Facebook, Yelp, Gmail, Dropbox, Flickr, Intuit Turbo Tax, YouTube, Go Daddy, Pinterest, etc.) were susceptible.  Even networking devices such as mobile smartphones, network routers, and internet-capable blue-ray players are susceptible as well. 

Heartbleed is NOT a virus.  It is a vulnerability in OpenSSL, an open source service that runs commonly on Linux servers responsible for SSL authentication. SSL is the process of encrypting sensitive information transferred between a website and your computer, and is generally validated through a 3rd party certificate authority such as VeriSign, GeoTrust or Comodo.  Basically, it is a bug that affects the internet and not your computer so your desktop anti-virus software and malware scanners won't fix the bug.  To learn more about Heartbleed, visit: http://heartbleed.com/ or just type “Heartbleed” into an internet search.

VerifyInvestor.com is committed to security and the protection of our users’ information.  When we first learned about the Heartbleed bug, we waited to receive confirmation from our technology partners that they were either not affected by the bug or that they had already patched their systems.  We then immediately patched our systems.  We patched our systems before most other sites had provided fixes or even finished internal reviews of their site vulnerability.  To our knowledge, none of the information belonging to our users was compromised as a result of the Heartbleed bug. 

Nevertheless, we do recommend that all users on our system change their passwords, especially if those passwords were used on other websites.  To change your password, simply log into your account, click on your name and select the “Settings” from the drop down menu.  When selecting a new password, please refrain from using a password that you used or plan to use on another site, especially if that site is susceptible to the Heartbleed bug.

To learn more about how VerifyInvestor.com protects user information, visit our Support/FAQ page located at: http://www.verifyinvestor.com.  If you have any further questions about VerifyInvestor.com's security, please do not hesitate to contact us.