The Title II JOBS Act revolutionized private securities offerings by allowing general solicitation under Rule 506(c), provided all investors are accredited. This flexibility, however, requires issuers to take “reasonable steps” to verify accredited investor status—a critical compliance obligation for private equity firms and other issuers.
The Verification Mandate
Rule 506(c) permits broad marketing of offerings, but unlike Rule 506(b), simple self-certification isn’t enough. Issuers must confirm that investors meet accredited criteria, typically based on income or net worth. The SEC notes that “reasonable steps” vary by circumstance, demanding a proactive and tailored approach.
Verification Methods
Several methods help issuers meet this requirement:
- Financial Document Review: Examining tax returns, W-2s, or account statements or other asset and liability evidence, offers direct proof of an investor’s financial standing. While reliable, this can feel intrusive, potentially discouraging participation.
- License or Employment Status Verification: Confirming an investor’s accreditation status or employment position status. This can be time-consuming or tedious depending on the information supplied.
- Third-Party Certifications: Written confirmations from broker-dealers, advisers, attorneys, or CPAs provide a credible alternative.
Best Practices for Private Equity Firms
A robust verification process is key to compliance and trust:
- Combine Approaches: Using multiple methods—like financial reviews and third-party certifications—enhances accuracy while respecting investor preferences.
- Adapt to Context: Known investors with a track record may need less scrutiny than newcomers or those with red flags, allowing firms to calibrate efforts efficiently.
- Document Thoroughly: Detailed records of verification steps protect firms during regulatory reviews, proving diligence.
Timing and Risks
Verification must occur before investors join the offering. Failure to verify properly risks penalties, loss of the Rule 506(c) exemption, and even investor rescission rights—threats to both compliance and reputation.
Navigating Rule 506(c) under the Title II JOBS Act requires issuers to balance diligence with practicality. By blending verification methods, tailoring processes, and maintaining records, private equity firms can ensure compliance, safeguard offerings, and build investor confidence in an ever-evolving regulatory landscape.
