Corporate Finance & Securities

Investor Verification Services Offer Simple Affordable Solution for Companies Using Advertising to Raise Funds

iVLG CheckmarkA recent Wall Street Journal article discussed the “murky” waters that have become the regulations surrounding the JOBS Act and the lifting of the ban on general solicitation for raising funds in a private placement. The article highlights some of the issues with the new regulations and points out that many small, privately-held companies are not taking advantage of the opportunity to raise capital using general solicitation because of the uncertainties associated with the new rules. One “hurdle” that the article points to is the requirement for companies to take “reasonable steps to verify” that investors are accredited investors—individuals with annual income of at least $200,000 (or $300,000 joint income with his or her spouse), or at least $1M in assets (excluding a primary residence).

Safe harbors ease burden on companies
Asking a potential investor to disclose confidential financial records is an issue. And even more of an issue is investors having to disclose the personal bank account records, tax information, and a credit report in order to invest in companies that are raising funds under the new Rule 506(c); however, this isn’t the only way to satisfy the SEC’s investor verification requirements. Instead, companies can rely on SEC safe harbors to these requirements. One of these safe harbors is obtaining a third party opinion from an attorney who has taken reasonable steps to verify that the investor is in fact accredited.

The benefits of relying on an attorney verification letter
Not only can companies sleep well at night knowing that each investor has been verified under one of the SEC’s safe harbors, but there are additional benefits to both the company and its investors.

By obtaining an attorney verification letter, companies do not have to request confidential information from investors and investors don’t have to disclose personal information to companies. This information remains strictly confidential as it is protected by the attorney-client privilege.

Further, companies do not have to implement new administrative procedures for verifying investors, and companies can reduce their liability by relying on a safe harbor as opposed to verifying each investor and risking that their steps were not “reasonable.”

Last, this process does not have to be time consuming or expensive. Investors can be verified in a matter of hours for less money than a premium oil change at your local mechanic’s shop.

A significant burden? We don’t think so
We don’t agree that the heightened investor verification requirements are a “significant burden,” nor do we believe that this requirement should keep companies from utilizing 506(c) to raise funds. While we are not trying to downplay the significance of complying with securities regulations, we want to point out that compliance isn’t always as burdensome as it’s made out to be.

If you want to learn more about our investor verification services or you have questions about the requirements of Rule 506(c), please don’t hesitate to contact us today.



Gavin Johnson

Gavin enjoys craft beer and is learning the art of brewing.

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