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Regulation D of the Securities and Exchange Act of 1933 allows for companies to raise capital through private offerings without registering with the SEC.  They are still required to file a Form D but can avoid more of the tedious document requirements.  Funds must be raised primarily through Accredited Investors.

The SEC defines Accredited Investor certifications as follows:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan (within the meaning of the Employee Retirement Income Security Act) if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a tax exempt charitable organization, corporation or partnership with assets in excess of $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • an enterprise in which all the equity owners are accredited investors;
  • an individual with a net worth of at least $1 million, not including the value of his or her primary residence;
  • an individual with income exceeding $200,000 in each of the two most recent calendar years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets of at least $5 million, not formed only to acquire the securities offered, and whose purchases are directed by a person who meets the legal standard of having sufficient knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of the prospective investment.

Traditionally Accredited Investor certifications can be done by the investor.  They can state that they are accredited by declaring their net worth and signing a simple form that includes their contact information.  When the SEC passed Rule 506c they made the requirement different to where investors need to be certified by a third party.  This can include a CPA, lawyer, or broker dealer.  There are companies such as Accredited Investor Solutions that now offer third party verification for investors as well.  If you are issuing a private offering you may want to establish a relationship with an attorney, CPA, or third party provider that can quickly and easily certify your investors.  Companies, and their agents, that have successfully raised capital through a private offering know that time is of the essence.  Delaying the process for a third party verification is unwise.

Prior to issuing your private offering identify which rule under Regulation D you want to use.  This will give clarity to whether or not your investors can self certify along with whether or not you can accept investment from a non-accredited investor.  Keep in mind that if you sell units or shares to a non-accredited investor you may be required to provide them with the same type of disclosures as if you went public.  This can increase your financial disclosure requirements to include audited financial statements and create additional challenges with compliance.

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