Rule 506(c) and Elevated Investor Requirements

Rule 506(c) and Elevated Investor Requirements

Don’t let the investor verification requirements under the Security and Exchange Commission’s Rule 506(c) of Regulation D dissuade you from a potentially rewarding search for investors. The new rules for private placement, designed to let the investment industry catch up to the digital age, permit solicitation to the general public in exchange for some back-end due diligence on verification of accredited investor status.

What is an Accredited Investor?
Some knowledge of investors has always been a requirement for those selling securities, as a measure of consumer protection. For the purposes of Regulation D and Rule 506(c), here are the general qualifications of an individual “accredited investor”:

* $200,000 or more in earned income ($300,000 if combined with a spouse) in each of the previous two years and a “reasonable expectation” of the same in the current year, or
* More than $1 million in net worth, either alone or with a spouse. This net worth amount cannot include primary residences.

There are many ways entities can qualify as accredited investors.

Difference between 506(b) and 506(c)
The 506(b) rule is the old standard and stipulates that companies can sell securities to accredited investors without actually verifying that each investor is accredited. The catch with 506(b) is that companies cannot advertise to the public, called general solicitation, in order to attract these investors under Rule 506(b). That generally means they must rely on contacting potential investors whom they already know or have established substantial pre-existing relationships.

Rule 506(c) permits general solicitation, but the difference is that companies must conduct a verification of each investor to ensure they are accredited before they can finalize the transaction.

How Do You Take ‘Reasonable Steps” to Verify?
Raising capital under Rule 506(c) means you need to take reasonable steps to verify your investors are indeed accredited. There are methods suggested by the SEC, such as:

* reviewing tax returns
* review of specific documentation such as credit reports and brokerage or bank statements, or
* secure written confirmation that the investor is accredited from:
* a registered broker or dealer
* an investment advisor who is SEC-registered
* a licensed attorney, or
* a certified public accountant

Taking these steps and conducting private placements under the new SEC Rule 506(c) may be a good alternative to sitting on the sidelines, trying to make a go of raising capital the good old fashioned way, one contact at a time.

There’s no better way to verify your accredited investors than through VerifyInvestor.com. VerifyInvestor.com offers a confidential, fast and secure way to ensure your investors are accredited. Contact us today to learn more.

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