The enactment of the Jumpstart Our Business Startups (JOBS) Act in 2012 marked a significant shift in how private companies raise capital. Among its various provisions, Title II of the JOBS Act introduced substantial changes to the way accredited investor verification is conducted in securities offerings. Title II specifically amended Regulation D, particularly Rule 506(c), allowing issuers to engage in general solicitation and advertising when raising capital, but it also imposed more stringent requirements on verifying accredited investor status. This article explores how Title II transformed accredited investor verification standards and offers insights for issuers navigating this new landscape.
1. Title II JOBS Act Overview
Title II of the JOBS Act lifted the ban on general solicitation and advertising for certain private offerings, particularly those conducted under Rule 506(c) of Regulation D. Before this, private companies were prohibited from publicly promoting their offerings and had to rely on pre-existing relationships with investors. With the new rule, issuers could publicly advertise to a broader audience, including via social media, websites, and other public channels. However, with this newfound ability to broadly solicit investors came an important requirement: issuers must take “reasonable steps” to verify that all investors are accredited.
2. Increased Scrutiny of Investor Accreditation
Prior to the JOBS Act, under Rule 506(b) of Regulation D, issuers could rely on self-certification to verify whether investors were accredited. Issuers typically collected written representations from investors stating they met the SEC’s accredited investor criteria. However, this approach lacked stringent oversight and posed risks for non-compliance, especially if an investor later proved not to be accredited.
Title II, through Rule 506(c), imposed new guidelines to eliminate this risk. Issuers are no longer allowed to rely solely on self-certification. Instead, they must undertake a robust verification process to confirm that investors meet the accredited investor definition. This can involve reviewing documents such as income tax returns, W-2 forms, bank statements, or obtaining a third-party verification from professionals like accountants or attorneys. These steps ensure that the issuer has “reasonable grounds” to believe that investors are accredited.
3. SEC’s Verification Requirements
The SEC’s 2013 amendments to Regulation D provided further clarification on the verification process. The SEC outlined several methods that issuers can use to verify accredited investor status. These include:
- Reviewing documentation: Issuers can ask investors to provide financial statements, tax returns, or bank statements to prove their income or net worth.
- Third-party verification: Issuers can engage a third-party to verify an investor’s accredited status. This can include services from professionals or third-party firms that specialize in investor accreditation.
- Other methods: Issuers can rely on a combination of different methods, such as reviewing an investor’s professional certifications or relying on a registered broker-dealer’s verification of the investor’s status.
Issuers must maintain documentation of the steps taken to verify each investor’s accredited status. This documentation must be kept for a reasonable period, typically five years, in case of an SEC audit.
4. Benefits and Challenges for Issuers
Benefits:
- Increased capital-raising opportunities: The ability to publicly advertise offerings opens up new avenues for attracting accredited investors.
- Reduced risk of non-compliance: The more rigorous verification process reduces the risk of inadvertently violating securities laws and facing penalties.
Challenges:
- Additional administrative burden: The verification process can be time-consuming and resource-intensive. Issuers must ensure they implement procedures that meet SEC standards.
- Reliance on third-party services: For many issuers, navigating the verification process requires assistance from external professionals or third-party verification services, adding costs.
Title II of the JOBS Act significantly changed the landscape of accredited investor verification. By allowing general solicitation while simultaneously imposing stricter verification requirements, the SEC has created a more regulated environment for private capital raising. Issuers must now implement robust, documented verification procedures to ensure compliance and mitigate the risk of penalties. Navigating this new verification landscape requires understanding the SEC’s guidelines and, in many cases, leveraging third-party services to streamline the process. By doing so, issuers can not only expand their fundraising potential but also ensure they meet the regulatory requirements of Title II JOBS Act.
