The Role & Benefits of General Solicitation
Mihir Gandhi
The lifting of the ban on general advertising and solicitation on capital raises by private companies has provided small and private companies in the U.S. with a number of new opportunities. Accredited investors are now able to purchase securities from startups and small businesses, giving these companies the financial resources they need to succeed in their industry. If you're looking to obtain funding and wish to verify the status of an investor, or are interested in accrediting yourself, consulting a qualified third-party reviewer will provide the validation you need quickly, affordably, and safely.
FREEDOM TO ADVERTISE PUBLICLY
On September 23, 2013, Title II of the Jumpstart Our Business Startups Act (JOBS Act) became effective and removed the decades old ban on general solicitation for private capital raises. Before the JOBS Act was signed into law by President Obama, private companies were prohibited from advertising their need for investment capital publicly. The enactment of this law has given startups and small businesses the capability to openly advertise to investors, allowing them to garner the investment capital they require to advance the growth of their companies. Under these regulations, small companies are able to market securities to accredited investors while still qualifying their capital raises as private offerings which would not need to be registered with the Securities and Exchange Commission (SEC).
ADVANTAGES FOR ISSUERS & PURCHASERS
Prior to the passing of these new laws, it was essential for small companies to have close, personal ties with investors in order to obtain funding. Title II of the JOBS Act gives private, growing organizations with the opportunity to utilize public avenues of marketing for fundraising purposes, such as online equity crowdfunding sites, print media, social media, and more. On the flip side, accredited investors also benefit from the implementation of Title II of the JOBS Act. Because startups and small businesses are no longer restricted from advertising publicly, plenty of new investment opportunities are continuously emerging. With this freedom of information, an industry that was previously controlled by gatekeepers is now open as fair game for everyone.
IMPORTANCE OF VALIDATION
Obtaining funding through general solicitation requires that an issuer acquire certain information regarding a potential investor's status. Before securities are sold, issuers must first take "reasonable steps" to verify that their investors are “accredited investors”. Relying on an investor questionnaire or subscription agreement whereby the investor essentially self-certifies was how companies used to confirm that their investors were qualified, but that method is no longer legally compliant for generally solicited capital raises. The SEC requires that an issuer take “reasonable steps” and has given some guidance on what would constituted approved methods of verification by companies of investors. Failing to obtain valid verification can result in disastrous penalties that could financially destroy companies and cause the investors that invested in that company to lose their investment.
To verify the accredited investor status of yourself or a potential investor, rely on the legally compliant verifications that VerifyInvestor.com provides.
Updated on 12/14/2021
The act of general solicitation seems innocent enough, however, as we can see its use in private equity is heavily regulated to ensure the safety of investors and issuers alike. The investor criteria involved in the accredited investor verification is aimed to ensure only those who are financially able to take on the risk of private investments should invest.
Knowing the ins and outs of the Jumpstart Our Business Act and Rule 506(c) of Regulation D can be a cumbersome task, so it is important to have a general counsel to guide your potential fund. To ease the stress of staging compliance it is also recommended that the review of accredited investor status be done by a third party which ensures non-bias. If it is possible to use this type of exemption through the JOBS Act, there is room for a large amount of opportunity to raise funds. Just look at the SEC public filings for Rule 506(c). On a daily basis, dozens of companies are filing to raise millions of dollars.
We continue to recommend our services for accredited investor verifications. Not because VerifyInvestor.com is the only company that provides these reviews, but because we feel our dedicated team and support staff are essential to a successful Rule 506(c) raise.