The accredited investor exemption provides a way for businesses and investment funds to raise capital without having to file a registration statement in accordance with U.S. securities laws. To be considered accredited, a potential investor must meet certain criteria for income amount or net worth.
Prior to September 2013, an issuer could rely on a warranty or representation from an investor regarding the latter’s certification, but the Jumpstart Our Business Startups (JOBS) Act implemented new Rule 506(c) into Regulation D that requires issuers to now make ‘reasonable efforts’ to confirm that their investors are indeed accredited.
The definition of ‘reasonable’ when it comes to effort depends on the following factors:
- The amount and type of information available about the investor. If, for example, the person’s salary was publicly disclosed, fewer verification steps would be necessary.
- The type of offering, as well as its terms and the manner of the solicitation. For example, mass solicitations sent out via social media would require more in-depth verification than an approach that only targets pre-screened accredited investors.
If you are seeking to raise money for your business, there are four easy ways to identify a person’s accredited investor status. The method you select will ideally depend on your preferred identification method.
- For decisions based on net income, you may review the person’s tax returns for the past two years and obtain written confirmation that he or she reasonably expects to earn enough income in the present year to qualify as an accredited investor.
- For decisions based on net worth, you may review tax assessments, bank records, brokerage statements, and a credit report, provided they have been dated within the past three months, and obtain written confirmation that the person has disclosed all the liabilities required to determine their net worth.
- You may obtain written confirmation from certain third parties such as registered broker-dealers, investment advisors, licensed attorneys, and certified public accountants. These individuals must state that they have taken reasonable steps to verify the person’s accredited investor status within the past three months and have determined that the person qualifies.
- Securityholders who had qualified as accredited investors for a Rule 506 offering before 506(c) took effect may qualify for a Rule 506(c) offering as long as each participating securityholder certifies his or her accredited investor status at the time of the sale.
Each of these four non-exclusive verification strategies constitutes a ‘reasonable effort’ provided that you take care to follow the specific requirements of the method you choose. Keep in mind that there are other ways to make reasonable efforts to confirm the accreditation of a potential investor.
If you want to use accredited investors to raise capital for your business, contact Doida Law Group today. We will help you comply with federal and state securities laws as you work toward your goal of creating a successful business.