In the few years following the Great Recession of 2008–2009, the market was in demand of easier access to capital. In response, a new type of Regulation D offering was added to the Jumpstart Our Business Startups Act. In September 2013, Rule 506 (c) was placed into Regulation D which permitted general solicitation and advertising activities. With new sails under their wings, companies are now permitted to advertise their offerings through various mediums of communication including traditional forms, such as newspapers and magazines, as well as over the radio, online, and via social media platforms. The stipulation to this new-found marketing freedom is that investors must obtain verification of accredited investor status.
With Rule 506(c), issuers of securities are not permitted to rely on a warranty or representation provided by the investor concerning their own certification. Issuers are instead required to take reasonable steps to acquire verification of accredited investor status.
There are four primary methods of verifying this status for individuals, as described below:
Income
An investor can prove accredited investor status with an income greater than $200,000 in the last two previous years, or with a joint income with a spouse greater than $300,000 for the same period of time, with a reasonable expectation of retaining that income level in the current year. In general, providing tax documents is required under the safe harbor guidelines.
Net Worth
An investor can bring about verification of accredited investor status if their net worth individually or with a spouse is greater than $1 million. The value of an investor’s primary residence may not contribute toward the net worth calculation for this purpose. As well the value of the net worth must be reduced by debt greater than the value of the primary residence as well as debt accumulated in the previous 60 days against the primary residence. In general, a consumer credit report and written statement as to liabilities and evidence of assets (statements, appraisals, etc.) is required under the safe harbor guidelines.
Professional Letter
An investor can achieve accredited investor status through the process of obtaining written confirmation from one of several possible sources, including:
* Licensed attorney in good standing
* Investment advisor registered with the SEC
* Registered broker-dealer
* CPA in good standing
The written confirmation must confirm that reasonable steps have been taken to verify the accredited status of the investor than the previous three months and that actual determination has been made that the investor is accredited.
Insider
An investor may demonstrate verification of accredited investor status through their position as general partner, executive officer, or director of the issuer of the securities offered for sale, or general partner, executive officer, or director of the general partner of the issuer. Although this may be the simplest way to verify, only a small percentage of investors qualify by this method. Verification through this method may be achieved from one or more possible sources of information, including documents, certificates, resolutions, research reports, securities filings, or other possible information provided by one or more trusted third parties.
These four methods of obtaining verification of accredited investor status provide significant opportunities for numerous individuals to participate in the startup efforts and continued growth of companies in various industries.
