Accredited Investors Compliance Rules for 506c of Reg D

Regulation D of the Securities and Exchange Act of 1933 has been used as a safe harbor for raising capital apart from officially registering the offering with the SEC.  By reducing disclosure requirements, paperwork, and time, Reg D has been a popular solution for businesses and entrepreneurs looking to raise investment capital.  It has been so popular that over four times the amount of money has been raised in recent years through private placement offerings as compared to the stock market. The Reg D exemption was always designed for Accredited Investors that presumably have more disposable income than the average citizen.

The rules regulating Reg D have stayed consistent until the JOBS Act was passed and the SEC voted to remove the ban on general solicitation in 2013.  While many thought that this would help to free up capital, time will tell if it actually helps small businesses.  One thing that is sure is that the SEC has used the JOBS Act to further regulate the private offering industry and to gain additional, private information on investors.  In typical government fashion what appeared to be a law to help people actually lets them implement additional controls.

There are specific changes to compliance requirements surrounding the verification of Accredited Investors.

Up until now investors could self certify, meaning they could state their personal net worth and sign a statement to that effect.  With Rule 506c this is no longer satisfactory.  Now Accredited Investors need to provide verification documents from a third party.  This is a drastic shift that removes privacy barriers between investors, companies, and the government.  Now every time an investors puts money into a company through accredited investor compliance Rules for 506c of Reg D, everyone in the transaction will have access to their personal financial information.  This could pose more challenges than not for companies looking to raise funds.  Investors with privacy concerns may only choose to invest in deals that come from their personal network.

Companies, and their representatives, that are raising capital need to be aware of compliance rules for 506c and these new certification requirements so as not to violate the rule.  Investor verification’s can come from their CPA, lawyer or a registered broker dealer.  Otherwise the company needs to review tax records, bank statements, and investment accounts in order to verify the net worth of each investor.  Many investors will run from these deals as who wants to expose their tax returns to a complete stranger?  Just because a company has a good product or opportunity does not mean people want all of their personal information exposed.  As a company raising funds it would be wise to identify an attorney to work with that can provide these verification’s in a confidential fashion for interested investors.  Stay tuned for the final changes to ensure that you are in compliance going forward.  They should be complete by the end of September 2013.

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