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When determining whether someone is an accredited investor, the responsibility falls on the issuer raising capital.
The process of qualifying investors varies depending on how capital is being raised, and in some cases, there may not even be a requirement to target accredited investors.
However, if you need to qualify investors as accredited, the necessary verification level may differ.
Let's look at the two common capital-raising scenarios and how the verification process works in each case.
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1. Reg D, Rule 506(b) Offering
In a Reg D, Rule 506(b) offering, the issuer can rely on the investor's self-certification.
Essentially, investors make a representation that they are accredited, and the issuer relies on this representation as long as there is no reason to believe it is false.
This method allows for a more straightforward and less burdensome process, where the issuer does not need to perform extensive verification checks.
However, it's important to note that solely relying on self-certification is insufficient for Reg D, Rule 506(c) offerings.
2. Reg D, Rule 506(c) Offering
In contrast to the 506(b) offering, a Reg D, Rule 506(c) offering requires the issuer to verify that investors are indeed accredited.
In addition, the Securities and Exchange Commission (SEC) mandates that issuers take “reasonable steps” to ensure the accredited status of their investors. Simply put, the issuer must go beyond accepting self-certification and conduct additional checks to validate the investors' accreditation.
These “reasonable steps” can involve various verification methods, such as reviewing tax returns, bank statements, and financial statements or obtaining confirmation from a qualified third party.
Consequences of Failing to Verify Accredited Investor Status
If an issuer fails to verify that every investor in Rule 506(c) offering is accredited, the offering may not qualify for the exemption.
This means that the entire offering could be deemed illegal under securities laws.
Therefore, it is crucial for issuers to understand the potential repercussions of non-compliance and the importance of adhering to the verification process.
Seeking Assistance for Verification
Given the complexities of verifying accredited investor status, many issuers turn to specialized services for assistance.
One such service is VerifyInvestor.com, which offers comprehensive support in conducting the necessary verification checks. By partnering with experts in the field, issuers can ensure compliance with the SEC's requirements and minimize the risk of inadvertently engaging in unlawful practices.
In conclusion, checking if an investor is an accredited investor rests with the issuer raising capital.
While self-certification may suffice for specific offerings, a Rule 506(c) offering demands a more rigorous verification process.
Failure to properly verify investors' accreditation status can have severe consequences, including rendering the entire offering illegal. Therefore, it is crucial for issuers to familiarize themselves with the applicable regulations and seek appropriate assistance when necessary.