Rule 506(b) under Regulation of the Jumpstart Our Business Startups Act prohibits the use of advertising and general solicitation by companies raising private capital. This made it more difficult to raise capital, leading to market demand for easier access to capital. In response, a new Rule 506(c) was implemented that does allow issuers of securities to advertise and make a general solicitation.
Rule 506(b) allows investors to certify themselves as accredited, issuers raising capital in compliance with Rule 506(c) must verify that participating investors are accredited investors. There are four paths for accredited investor verification.
1. The Insider – An investor can prove accredited investor status if the person is an executive officer, director, or general partner of the securities issuer, or an executive director, director, or general partner of a general partner of the issuer. Various documents qualify as evidence, including incorporation documents, incumbency, resolution, securities filings, research reports, and other third party sources.
2. Professional Letter – This verification path requires submitting a written confirmation letter certifying an investor was an accredited investor during the prior three months and confirming the investor’s status was verified. A registered broker-dealer, an SEC registered investment advisor, a licensed attorney in good standing, or a CPA in good standing and properly registered can write the letter.
3. Income – An investor shows accreditation by proving annual income exceeds $200,000 in each of the last two years and reasonable expectationof earning at least that much in the current year. If married, an investor can qualify using the individual income threshold of $200,000, or a joint income threshold of $300,000 for the same period. Government reports, like IRS tax statements, are ideal. A letter written by an accountant or employer that verifies income is also acceptable if tax documentation is not available.
4. Net Worth – Accredited investor verification is possible by proving individual or joint net worth exceeds $1 million. Investors must generally provide a consumer credit report if one is available, disclose liabilities, and prove assets.
For verification of accreditation, in general, evidence should be no older than three months.
