For companies that want to raise funds for growth, accredited investors are a great source of capital. Rule 506(c) of Regulation D created by the Securities and Exchange Commission allows private companies to advertise and solicit potential investors. Traditionally, raising money for startups through “accredited investors” has been the way to go – and the process of accepting money from those investors is not as difficult as you would think. There is no official license or piece of paper that accredited investors give to confirm their financial eligibility.
However, there is a catch in some situations (and this does not apply to Regulation A+ offerings). Issuers who plan to tap a Rule 506(c) (as in the case of Title II equity crowdfunding) offering need to be sure that reasonable steps are taken to confirm the investor is actually accredited. An “accredited” investor meets certain income or wealth requirements as defined by the SEC. Read our post about the requirements for accredited investors by clicking here.
An issuer can verify an accredited investor’s status by:
Non-Exclusive Safe Harbor Verification:
Investment experts, and attorneys too, recommend verifying a potential investor through this more formal method – which falls under the SEC “safe harbor” rule. Some of the more formal verification methods include:
· Reviewing a person’s IRS forms (e.g., Form W-2, Form 1099, Schedule K-1, and Form 1040) from the previous two years to verify income. It is also important to receive written documentation from the investor with an expectation for their income in the year that is current.
· Examining the investor’s credit report, bank statements, and appraisals via real estate professionals to determine net worth.
· Hiring a third party, licensed professional, as well as an attorney, to provide written confirmation that the investor is accredited.
When examining a purchaser’s income, not reported in U.S. dollars, issuers may use either (1) the exchange rate in effect on the last day of the year for which income is being determined or (2) the average exchange rate for that year.
As mentioned in previous posts, accredited investors must have an earned income of at least $200,000, or $300,000 combined with a spouse, in the previous two years. Or the person must provide evidence of a net worth of $1M, which cannot include the primary residence.
Rod Turner
Rod Turner is the founder and CEO of Manhattan Street Capital, the #1 Growth Capital service for mature startups and mid-sized companies to raise capital using Regulation A+. Turner has played a key role in building successful companies, including Symantec/Norton (SYMC), Ashton Tate, MicroPort, Knowledge Adventure, and more. He is an experienced investor who has built a Venture Capital business (Irvine Ventures) and has made angel and mezzanine investments in companies such as Bloom, Amyris (AMRS), Ask Jeeves, and eASIC.
www.ManhattanStreetCapital.com
Manhattan Street Capital, 5694 Mission Center Rd, Suite 602-468, San Diego, CA 92108.