Generally speaking, businesses that raise capital by issuing securities are required to register their securities with the Securities and Exchange Commission (SEC), as well as with states as required. Many people attempt to find an exemption due to the length of the process involved. A number of exemptions exist – they generally concern the fact that certain types of offerings are a limited dollar amount and don’t require the same level of protection, only target certain types of investors who can protect themselves, and are not generally solicited.
The accredited investor concept refers to an investor who has sufficient wealth and/or sophistication to handle a certain level of investment in the financial sense. Particular securities exemptions apply to certain types of offerings made by accredited investors.
ICOs and Accredited Investor Verification
Concerning ICOs and accredited investor verification, the question may be asked as to whether ICO’s are regulated by the government. The answer would be that yes, they are. There has been a debate about whether an ICO consisting of tokens with utility versus tokens that are actually securities. Some have thought that ICOs that have tokens of utilities are not securities and therefore do not require an exemption from registering as a security. If the ICO, however, consists of security tokens, then accredited investor verification may apply. The SEC now suggests that virtually all ICOs are categorized as securities offerings.
If ICOs qualify as securities offerings, the standard exemptions from registration also apply. The exemptions most commonly applicable for ICOs include Rule 506 (c), Reg S, and Reg A+. Reg CF would be less commonly used due to difficult compliance requirements and a $1 million maximum limit capital allowed to be raised. For Rule 506 (c) offerings you must be an accredited investor – not so for the other offerings mentioned above. Due to the fact that it is the easiest exemption, the Rule 506 (c) exemption is most often seen in the marketplace. Under this rule you have to also prove that you are an accredited investor to the issuer – the issuer must verify that you are accredited.
ICO Pre-sale
Some private pre-sales of an ICO will often be done through the Rule 506(b) exemption. This exemption allows a maximum of 35 non-accredited investors. However, commonly only accredited investors will be admitted by the issuer. Under this Rule, investors are not required to prove they are accredited – they may just claim the status. However, general solicitation is not permitted under Rule 506(b) – this is the reason why it is not used for ICOs since those offerings are most often generally solicited.
