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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