General solicitation has become a widely utilized method for raising capital in the private securities market. However, with the increased reach of public offerings comes the responsibility for issuers to verify that their investors meet the criteria of being accredited, as outlined by the Securities and Exchange Commission (SEC). Adhering to these verification requirements is essential to ensure compliance with SEC regulations, avoid costly fines, and maintain trust with investors. Here, we explore best practices that issuers should follow to efficiently verify accredited investor status during general solicitation.
1. Understand the SEC’s Accredited Investor Definition
Before initiating any verification process, issuers must thoroughly understand the SEC’s definition of an accredited investor. The SEC outlines specific criteria based on income, net worth, or professional credentials that an investor must meet to be classified as accredited. This understanding is crucial as it serves as the foundation for the verification process during general solicitation.
2. Implement a Rigorous Verification Process
Under SEC Rule 506(c) of Regulation D, issuers conducting general solicitation must take reasonable steps to verify that investors are accredited. These steps include gathering and reviewing financial documents, such as tax returns, W-2s, and bank statements, to substantiate an investor’s income or net worth. Issuers can also rely on third-party services or accredited professionals, such as CPAsor licensed attorneys, to confirm the investor’s eligibility. The key is ensuring that the verification process is thorough, transparent, and repeatable, providing documentation that can be referenced if needed.
3. Use a Third-Party Verification Service
To streamline the verification process and ensure impartiality, many issuers turn to third-party verification services. These services specialize in performing accreditation checks based on SEC guidelines, saving time and reducing the risk of human error. Using a third-party provider can help issuers mitigate compliance risks by relying on an expert who is well-versed in the intricacies of SEC requirements. However, issuers need to choose a reputable provider with a proven track record of compliance.
4. Document and Retain Records of Verification
For each accredited investor, issuers must keep detailed records of the verification process. These records should include copies of the documents reviewed, the methodology used to verify accreditation, and any correspondence with third-party professionals or services. This documentation serves as proof of compliance and will be invaluable in the event of an SEC audit or inquiry. Retaining these records for a reasonable period is a critical aspect of maintaining a defensible position during a compliance check.
5. Periodically Review and Update Verification Procedures
The SEC’s rules and market conditions can evolve, making it necessary for issuers to periodically review their verification procedures. Investors’ financial situations may change over time, requiring re-verification before additional investments or subsequent rounds of funding. Regularly updating internal processes and staying current on SEC guidance helps issuers avoid outdated practices and ensures ongoing compliance.
6. Train Your Team and Stay Informed
Ensuring that all relevant team members are well-trained on the SEC’s accreditation verification process is essential. Investors may approach various departments with questions or requests, and it’s important that employees can confidently and accurately respond. Staying informed on any changes to SEC regulations is equally important to ensure that your process remains compliant and up to date.
Conclusion
Investor verification during general solicitation is a complex process that requires careful attention to SEC guidelines. Issuers who follow best practices such as understanding accreditation definitions, implementing rigorous verification procedures, using third-party verification services, and maintaining proper documentation, can ensure they remain compliant and mitigate potential risks. By staying informed and proactive, issuers can successfully navigate the regulatory landscape and maintain a reputation of trustworthiness in the investment community.
