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Regulation D of the Securities and Exchange Act of 1933 makes it possible to raise capital through the sale of shares, units etc. while verifying accredited investors without officially registering the offering with the SEC.  Limited disclosure requirements make it easier to raise money in a private offering, and the private placement industry raises more capital on an annual basis than the stock market.

Recently, the SEC lifted the ban on general solicitation and made it possible for companies to advertise their private offering using Rule 506(c).  Simultaneously they also changed the requirements for verifying investors.  Rule 506(c) says that you can advertise your offering as long as you only accept money from accredited investors.

In the past, the SEC allowed investors to “self-certify”.  They could check a box and sign a form saying that they were accredited investors.  Per the changes to Rule 506, this is no longer an option.  Now, the company receiving the funds must take “reasonable steps” with verifying accredited investors.

These reasonable steps may include:

  • Reviewing IRS forms.  This may include tax returns, W-2’s, Ki-1’s, 1099’s etc for the past three years.  An investor needs to have made $200,000 on their own or $300,000 as a couple in order to qualify.
  • Reviewing bank statements.  Bank statements can be examined to determine income over the past several years.
  • Brokerage statements.  This can be used to prove assets along with statements for CDs.
  • Credit report proving liabilities.   In order to determine net worth, you have to verify not only assets but also liabilities.  An independent credit report is sufficient as long as it is a recent report.
  • Written confirmation from a registered broker dealer, CPA, or attorney.  One of these professionals would need to certify that they verified the net worth and past income of the investor within the past three months and confirm that they are an accredited investor.
  • Previous purchaser. If they investor participated in your 506 (b) offering, in the past, they can now participate in your 506 (c) offering, confirming their accreditation.

Understandably, these new guidelines are raising alarm bells for investors concerned about their privacy.  Most investors do not relish the thought of exposing their entire financial picture to an unknown company in order to give them money.  Fortunately, there are options you can offer investors that will guarantee their privacy.  Third party verification sites are now available where you can verifying accredited investors can become certified and provide that certification document to any company they wish to invest in.  You can also tie up with an attorney or CPA and refer your investors to them for the certification process.  Give your investor’s peace of mind so that you can continue to cultivate the relationship and have a successful capital raise.

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This entry was posted in Accredited Investors, Reg D, SEC and tagged , , , by John Fischer. Bookmark the permalink.

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