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Regulation D and the JOBS Act | Accreditedinvestorleads.com

Regulation D and the Myth of Startups

There are many myths that swirl around investments, especially in light of some of the new regulations or changes to regulations that have come about after Congress passed the Jumpstart Our Business Startups (JOBS) ACT. With the Securities and Exchange Commission (SEC) having to change its rules with regard to general solicitation, advertising for those of us getting used to the jargon, and especially with the new phenomena of crowdfunding the myth factory has been in overdrive. Perhaps the most common idea swirling around is that most offerings made under Regulation D are made by start-up companies or are entrepreneurial ventures. Naturally this increases risk factors significantly and so a long look at the facts are warranted.

According to the SEC, most Reg D offerings in the past four years have been from established companies who, traditionally, have a top line revenue of around $1 million. In 2012 the average offering for a Reg D offering was $1.5 million. The report, which was released by the SEC on July 10th 2013 continued saying “Offerings conducted in reliance on Rule 506 account for 99% of the capital reported as being raised under Regulation D from 2009 to 2012, and represent approximately 94% of the number of Regulation D offerings. The significance of Rule 506 offerings is underscored by the comparison to registered offerings. In 2012, the estimated amount of capital reported as being raised in Rule 506 offerings (including both equity and debt) was $898 billion, compared to $1.2 trillion raised in registered offerings. Of this $898 billion, operating companies (issuers that are not pooled investment funds) reported raising $173 billion, while pooled investment funds reported raising $725 billion.”

Not allowing this myth to stand is important because it will allow economic developer to shift their focus from the university tech transfer model, and allow them to target investments in other populations which could include established, operational, small manufacturing or information technology (IT) firms. Additionally by using crowdfunding under Reg D Rul 506c and self-underwriting these small companies could save up to $250,000 in commissions.

As the SEC report covering the last four years, interestingly, noted that only eleven percent of the Reg D offerings involved the payment of commissions. It is an important fact to note, since it is this 11% of the market that is acting as a red herring for the politically motivated agenda which is slowing down the issuing of SEC regulations on crowdfunding. The reported stated –

“An analysis of all Form D filings submitted between 2009 to 2012 shows that approximately 11% of all new Regulation D offerings reported sales commissions of greater than zero because the issuers used a broker intermediary. The average commission paid to these intermediaries was 5.9% of the offering size, with the median commission being approximately 5%. Accordingly, for a $5 million offering, which was the median size of a Regulation D offering with a commission during this period, an issuer could potentially save up to $250,000 if it solicits investors directly rather than through an intermediary…”

regulation d

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Calculating the Net Worth of Accredited Investors

The SEC has strict rules for who can be considered an Accredited Investor.  Issuers of private offerings are typically required to only accept investment dollars from an accredited investor which makes understanding the rules extremely important.  The SEC recently lifted the ban on general solicitation, allowing companies to advertise but only if the company does not accept any capital from a non accredited investor.

Accredited Investor Definition

On the SEC website they detail who is an Accredited Investor, stating the following:

    1. “a bank, insurance company, registered investment company, business development company, or small business investment company;
    2. 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 millionn
    3. a charitable organization, corporation, or partnership with assets exceeding $5 million;
    4. a director, executive officer, or general partner of the company selling the securities;
    5. a business in which all the equity owners are accredited investors;
    6. a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
    7. a natural person with income exceeding $200,000 in each of the two most recent 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
    8. a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.”

Households That Qualify For Accredited Investor Status

Calculating Net Worth

Issuers need to understand how the SEC calculates the net worth portion of the requirements.  There are some lesser known rules that make the process more complicated than it initially appears to be.

For example, their primary residence cannot be included in the net worth calculation.  The liability (mortgage) associated with the property is also not included.  There is, however, a rule that if the debt on that property increased within the past sixty days the additional debt must be deducted from their net worth.  Also if the debt on the property is greater than its value, that amount must also be deducted from their net worth.

To calculate their net worth have an investor list out all of their assets (bank balances, portfolio, other property etc) in one column and list out their debts in another column.  Ask them to include their primary residence and mortgage so you can determine if the home is underwater. Ask the investor if they have increased their mortgage debt in the past sixty days.

If the investor’s home has positive equity, and they have not recently increased their mortgage debt, the calculation is fairly simple.  Add the total of their other assets and the total of their non mortgage debt.  Deduct the debt from the assets to get their total net worth.  Remember, that if they owe more than there home is worth the amount above the fair market value must be added to the debt column.

If you are relying on investors to fill out their own net worth documents include a question asking about their home’s value and mortgage.  For example, you could ask “Do you owe more on your home than the current market value?” and “Have you increased your mortgage liability in the past 60 days”.  If the answer is yes, direct them to speak with you so you can assist in the final net worth calculations.

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Online Verification for Accredited Investors

The JOBS Act contained provisions that would allow companies issuing a private placement to advertise their offering to Accredited Investors.  After much deliberation, the SEC created Rule 506(c) to lift the ban on general solicitation.  This creates an excellent opportunity for business owners, entrepreneurs, and real estate developers to market their PPM.  Their is, however, a caveat.  Companies can no longer use the “check a box if accredited” method.  They actually have to get an online verification for accredited investors.

The SEC determined that verification can include:

  • Review IRS Forms for Income and Net Worth.  This can include W-2s and 1099s.
  • Asset Statements.  You can verify net worth using bank or brokerage statements, certificates of deposit, or statements of other securities holdings.
  • Third Party Verification.  A registered broker-dealer, licensed attorney, SEC registered investment advisor, or CPA can certify an investors status.
  • Prior Relationship.  If an investor has invested with the company before, and remains an investor, this can serve as verification that they are accredited

This change may seem small but it is significant because it exposes investors by making private data public.  Many investors will not want to go through this process with multiple companies on multiple deals.  Recognizing this, Crowdentials is working on a solution.  They have raised $300,000 to complete an online verification process so when Accredited Investors want to invest in a deal the process goes smoothly with limited paperwork.

In the Crowdentials platform a start-up uploads their list of investors and pays a $20 -$40 fee for each one to become verified.  Crowdentials completes the initial verification and keeps it up to date over time, without charging an additional fee.  Lead investor Charles Stack said, “This kind of vetting used to cost start-ups and venture firms hundreds to thousands of dollars per deal or fund.”

Crowdentials is working with institutional investors, banks, businesses, and crowdfunding sites to provide ongoing online verification for Accredited Investors.  They aren’t the online only verification option.  Other companies include CrowdCheck and CrowdBouncer LLC.  Additionally several of the investment crowdfunding sites are offering this service, including SeedInvest and CircleUp Network Inc.

Working with a third party eliminates some of the ongoing compliance headaches of issuing a private placement offering. Those companies that want to verify investors themselves should do the following:

  • Create a checklist.  Make sure staff members understand the documents that can be used as part of the verification process.
  • Get signatures.  Investors need to sign a disclosure form that states they are an Accredited Investor.  Use that same form to write down which documents were used during the verification process.  Have the representative doing the verification sign the form as well.
  • Make copies.  It isn’t enough to say you saw their W-2.  Make a copy and protect yourself in the event of an audit.
  • Keep a file.  You should have a file on every investor that includes their certification documents, financial transaction history (for their investments), contact information, and investment certificates.
  • Annual Review.  Remember to conduct an annual review and get updated information that includes W-2s and asset statements.

If you are too busy to certify investors, or they are concerned about releasing information, use a third party company to help the online verification for accredited investors to complete the process.  This can save you time while giving your investors confidence.  Remember, this is specific to Rule 506(c) of Reg D.  If you are using a different rule, Rule 504 for example, you can continue to verify investors like normal.

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Investors Outside of the US Do Not Need to be Accredited

EB5Private offerings are a fantastic way to raise capital without having to officially register with the SEC.  The Regulation D exemption under the Securities and Exchange Act of 1933 makes private placement offerings possible.  According to the rules companies should raise money from accredited investors. These investors are thought to b e more savvy and financially able to withstand a loss if the investment doesn’t work out.

The SEC defines an Accredited Investor as someone who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of their primary residence and makes over $200,000 for the two most recent years, or $300,000 with a spouse.

The rules change when taking investment from overseas.  A U.S. based company may accept investment from non accredited investors that live outside of the United States.  This can be done through the EB-5 program.  This program allows investors outside of the United States to invest in local companies and use that investment to qualify for a visa to come to the U.S.  Some programs require a minimum investment of $500,000 while others require a minimum investment of $1 million.  The EB-5 program creates an opportunity for investors outside of the U.S. to connect with businesses that need capital.

This program has been frequently used for real estate projects but is specifically tied to direct and indirect job creation.  The investment needs to make or retain jobs in an effort to improve the local economy.  The United States Citizenship and Immigration administers the program and investment opportunities need to be approved for the investment to count toward the visa approval guidelines.

Why is the SEC more lax on foreign investors?

One has to ask why the SEC has more relaxed rules for investors that live outside of the United States.  Within the U.S. non accredited investors have been blocked from participating in investment opportunities due to their lack of income or net worth.  If those same people lived overseas they could invest in a non public offering through the EB-5 program without income or asset requirements.

When the JOBS Act passed it was supposed to open up investment opportunities to non accredited investors through crowdfunding platforms.  The SEC has released their proposed guidelines but, when passed, they will still greatly limit the amount of money a non accredited investor may invest on an annual basis.  Investors may only invest $2,000 or 5% of their income on an annual basis, unless they are accredited. Compare that with investors outside of the U.S. being able to invest $500,000 to $1 million.

Many foreign investors have lost their money in these EB-5 projects as they are loosely regulated and some projects never even get off the ground. Investors, locally and internationally, should always do their due diligence prior to investing.  Accredited Investors are perceived to have more knowledge an experience but much of this knowledge comes through making mistakes.  You can always check with the SEC to see if a company has registered their private offering using the Edgar system or if their are any complaints file against them.  That is a good, and easy way, to start the due diligence process.

This next year will be very interesting as the SEC finalizes their crowdfunding rules and non accredited investors are able to participate in a wide variety of offerings.  Even after this takes place it is beneficial to be an Accredited Investor, as you can invest without a cap in your favorite deals.

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About Regulation Exceptions?

Much ado has been made about the exemptions to various regulations, including and definitely not limited to the crowdfunding rules which are still pending in the Securities and Exchange Commission (SEC)’s queue. The SEC itself has followed closely legislation that was put in place after the stock market crash of 1933 which brought about the great depression. After the fall of the stock market in 1933 the US Congress adopted the Securities Act of 1933, which has become the cornerstone for all legislation relating to stocks and shares ever since. It is important to understand the implications of the 1933 Act, in order to understand the essential nature of the exemptions offered to it.

The primary purpose of the ’33 Act is to ensure that securities markets receive accurate and timely disclosure, in order to protect investors and ensure fair dealings.[1] Accurate and timely disclosure of material information goes to the heart of federal securities regulation. The legislature intended to augment the existing State laws, which were commonly known as “Blue Sky Laws”. The philosophy behind the Securities Act was one of accurate disclosure, meaning that the law did not make it illegal to sell a bad stock, it made it illegal to not provide the proper documentation and information about the stock. The liability for companies to reveal, accidentally or intentionally, false information was extremely high and so teams of experts are now required to ensure that every i is dotted and every t is crossed, Hence the term “due diligence” took on its current and very broad appeal. The registration process with the SEC is not only long and tedious, but also extremely expensive creating a natural barrier to the market for companies with less time, money, and expertise at their disposal. It is important to note that unless they qualify for an exemption, securities offered or sold to the public in the U.S. must be registered by filing a registration statement with the SEC.

A company that is required to register under the ’33 act must create a registration statement, which includes a prospectus, with copious information about the security, the company, the business, including audited financial statements. The prospectus alone has a registration component which requires –

  • A description of the securities to be offered for sale;
  • Information about the management of the issuer;
  • Information about the securities (if other than common stock); and
  • Financial statements certified by independent accountants.

These requirements place a significant challenges on the company seeking investment and essentially have turned small businesses away from seeking money on the stock market or through a public offering. The various exemptions were put into place to limit this heavy burden for companies who could meet certain criteria. The rules and the exceptions have been like a brick wall which has both protected consumers and restricted business growth from 1933 on. Now with the advents of the JOBS Act and Crowdfunding, the legislature and people in general, have changed the very nature of the process and have left the SEC scrambling to formulate a new regulation for  the old philosophies.

We hope this article has been informative regarding regulation exceptions.SEC logo

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Small Corporate Offering Registration (“SCOR”)

Many states are now accepting the Small Corporate Offering Registration (“SCOR”), in conjunction with Rule 504 of Reg D, which will make it easier for small businesses to use the Reg D exemption.  By using Form U-7 the disclosure process is streamlined so you can present information in an easy format instead of worrying about a variety of different disclosure documents. It reduces the overall cost to the company or entrepreneur in putting the private placement memorandum together.   You may need help from an attorney on some of the more technical legal questions but more experienced entrepreneurs may be able to answer this on their own.

Another benefit to SCOR is that Accredited Investors are able to have all of the information they need in order to make an informed decision on whether or not to invest.  This is good for the company as well, since investors cannot claim they had a lack of information prior to investing.

In order to use SCOR a company must meet these qualifications:

  • be a corporation or centrally managed limited liability company organized under the laws of the United States or Canada
  • not be an investment company under the Investment Company Act of 1940;
  • not be subject to the reporting requirements of the Securities Exchange Act of 1934;
  • not be engaged in petroleum exploration and production, mining, or other extractive industries; and
  • not be a development stage company with no specific business plan or purpose other than merger.

If any Officer or Director has a previous securities violation the company cannot use SCOR.

The offering itself must also meet this criteria:

  • Each unit or share must be sold for a minimum of $1 each (common stock)
  • The Company cannot split the common stock for at least 2 years if doing so would cause the value of each share or unit to drop below $1.
  • Financial statements need to be prepared using standard accounting principals.
  • Un-audited financial statements are okay if they are for interim (mid year) statements.

You should complete and submit the SCOR form with the state where you plan on selling your private securities before you start selling them.  You may be able to arrange a pre-filing meeting to go over your forms to ensure compliance.  If you are selling in multiple states you may be able to get a regional review which will save time.  Having your documents reviewed and approved for compliance is a safe guard for your company from future violations and complaints.

Complete your SCOR at the same time you are filing out Form D for the SEC.  Your Form D will become part of the offering package you submit to the review board. You can read more information about SCOR HERE.

You can raise capital without registering with the SEC by using the Regulation D exemption found in the Securities and Exchange Act of 1933.  There are basic disclosure requirements under Reg D but they are minimal in comparison with issuing a public offering. The major difference is that you need to raise funds from Accredited Investors instead of on the open market.

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Accredited Investor Guidelines

The SEC released an Investor Bulletin on Accredited Investors describing what it means to be one and the risk involved.  For companies raising money through private offerings accredited investors are extremely important.  They are the investor data base from which you can raise capital.  Reg D does allow for some non-accredited investors to participate in a private offering but a company then has to give additional disclosures.  When the disclosure requirements go up the process becomes more expensive for the company raising money.  With this in mind it is easier and recommended to only work with accredited investors.

What are the the accredited investor guidelines?

The SEC considers an individual or couple to be an Accredited Investor if they meet the following:

  • The investor needs to earn $200,000 a year or $300,000 a year for a couple OR
  • Has a net worth of over $1 million alone or with their spouse.  The net worth threshold can not include a primary residence.

Can someone be accredited if they just started earning $200,000 a year?

No, the SEC requires the investor to have earned that much money for the previous two years and to expect to make that much in the current year.  In other words someone that has gotten a new raise or just graduated from medical school would not be considered accredited until they had a consistent pattern of earning that much money.

WARNING – SEC HIDDEN REQUIREMENT

What most people don’t realize is that the SEC has an unknown requirement on the income calculation.  In this scenario an investor would not qualify:

Year One: An investor made $125,000 and his spouse made $175,000 to equal the $300,000 threshold.

Year Two: The investor made $200,000 and his wife made nothing.

Year Three: The investor made $150,000 and his wife made $150,000.

Even though the couple met the income requirements for all three years the SEC would not consider them to be accredited because they used joint income for years one and three and individual income for year two.  It needs to be one or the other consistently in order to be an Accredited Investor.

Who else can be an Accredited Investor?

Banks, partnerships, corporations, nonprofits and trusts can be accredited investors under SEC guidelines.  Their guidelines state the following:

  • any trust, with total assets in excess of $5 million, not formed to specifically purchase the subject securities, whose purchase is directed by a sophisticated person, or
  • any entity in which all of the equity owners are accredited investors.

How do I calculate net worth?

Your net worth is your assets minus liabilities.  On a peace of paper or spreadsheet list the following:

  • Cash in bank accounts
  • CD’s
  • Stocks and bonds
  • Retirement accounts
  • Car
  • Any additional property or accounts

Add all of these items together than list…

  • Car loan
  • Credit card debt
  • Student loans
  • Any other misc. debt other than your primary residence

Your total assets minus your total liabilities is your net worth.  Your primary residence can no longer be calculated into your net worth so the only reason it would be listed is if you owe more on your home than it is worth.  In that case it would go on the debt column.

Can I take money from investors that were accredited and now aren’t because of the mortgage rule?

People that were accredited prior to removing the value of their primary residence can invest in things that they are already invested in prior to the rule changing on July 20, 2010.  These investments are grandfathered in. Otherwise non-accredited investors can participate in crowdfunding.

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Presenting Your Private Placement to Angel Investors

Private offerings raise more money on an annual basis than public offerings.  There is a common misconception that public companies raise more money.  The reality is they do not, in part because of active angel investors.  Angel investment groups meet throughout the company in order to review business proposals, private placement offerings, and speak with entrepreneurs.  If you are looking to raise capital through a private placement, attending these meetings can help to get the ball rolling.

Here is the process for presenting to an Angel Investment Group or angel investors.

Submit an Application to Present

Most Angel Investment Groups or angel investors require you to complete a formal application.  This application contains information on your company, your financials, officers, and what you are trying to accomplish.  This is typically a paper application that reads like a mini offering statement.  They can be up to ten pages long and enable you to summarize your investment opportunity.  A committee will review your application and, if approved, invite you to present.  This process can take around 60 days so if you apply in November don’t expect to present until January.

Prepare Your Presentation

Each group sets a timeline for presentations.  They are typically under ten minutes long with a follow up Q&A.  You need to convey information in a clear and concise fashion. Many companies make the mistake of being too boring.  A room full of investors, listening to pitch after pitch, may find it difficult to get excited about your product or technology when you give them a million financial slides.  Break up your presentation with graphic images, video clips, customer testimonials, and product demonstrations.  If investors can hold something or interact in some way it will be easier for them to understand what your company does.

Prior to presenting evaluation the strengths and weaknesses of each member of the team.  Select individuals that can discuss your ideas with authority.  Don’t have the product engineer talk about finances or the CFO talk about design.  Select the right people to cover the areas they are experts in.

Financial Documentation

Investors want to know what is in it for them. Make sure that you have solid financial data to back up where your company is today, where you are going, and what it will take to get you there.  If you are trying to raise $1 million demonstrate how that money will impact the company and the profits that will be generated as a result. Graphs demonstrating growth and ROI can be helpful.

Company Valuation

Don’t overvalue your company.  This one mistake can scare off investors and prevent them from participating in your private offering. Remember that your company needs to be valued based on its performance today – not its performance after the investment.  Investors should get the benefit of the lift that is created by implementing their capital.

Private Placement Memorandum

Prepare your PPM and bring it with you.  Make sure that each one is marked and you have a register to document who they are given to.  If an investor wants more information you can give them a copy.  While each angel investor is supposed to be accredited in order to participate in the meetings, sometimes non-investors attend meetings.  Protect yourself by having each person sign a simple disclosure statement.

Follow Up

Get business cards and follow up with investors.  It takes diligent pursuit to secure investment so stay in constant communication as you take it over the finish line.

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Private and Crowdfunding Campaign Together

According to the SEC’s proposed crowdfunding legislation a company will be able to simultaneously issue a private offering and a crowdfunding campaign.  This will increase a companies opportunities for raising capital, and provide qualify investment vehicles for non-accredited investors.  In other words accredited investors can participate in your private offering, at higher investment amounts, and non-accredited investors can participate through a crowdfunding portal that limits their overall investment. The goal of the ruling is to ensure that everyone has access, while limiting the investment risk for non-accredited investors that may not be able to sustain the loss.

The SEC analyzed the current market and determined that crowdfunding portals and broker dealers would benefit the most by working together.  This increases access to investors for both parties and benefits the company overall. Interestingly enough only 13% of all new Reg D offerings from 2009 to 2012 used a broker dealer.  Apparently many companies prefer to go it on their own or with local counsel.

If you are a company that needs to raise money consider the following:

Create One Set of Disclosurs

You will save time, and be in compliance, by creating one comprehensive set of disclosures that can be used in your private offering and crowdfunding campaign.  While there may be some changes, creating a core set of documents that is reviewed by a Securities Attorney is smart.  We recommend that you create disclosures as if you are offering the investment opportunity to a non-accredited investor.  While this is additional paperwork it will protect you down the road in the event that a non-accredited investor is accidentally allowed into your private offering.  While we can all say that this never happens – it does.

Audited Financial Statements

The SEC does not require audited financial statements for Reg D offerings.  However, it is important to note that the SEC will fine companies and issuers that make what they feel are misleading statements or representations.  Hiring a CPA to audit your financial statements removes some of the risk from the issuer.  If you provide accurate information to the auditor it is their responsibility to certify them which can protect the issuer in the event that the opportunity does not produce the level of return that was anticipated.

Advertising

If you are going to run a crowdfunding campaign and issue a private offering simultaneously it is recommended that you use Rule 506c.  This lifts the ban on general solicitation.  One of the requirements is that the SEC has to review your advertising and marketing material prior to it being issued.  Since crowdfunding campaigns rely on marketing efforts submit those materials to the SEC for review as well and ensure that you are in overall compliance.  It is better to have the SEC comment and make changes, than to be fined after the fact.  It will also prevent some confusion.  For example if you are using Rule 504, which bans advertisement, while running a crowdfunding campaign, you would technically not be allowed to discuss your private offering in public forums.  It would be extremely confusing to separate the two so make it easier by using Rule 506c.

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Accredited Investor Certifications

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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