Reasonable Steps Verification – A Small Price to Pay to Reach a Wider Investment Base

by | Oct 2, 2017 | Money And Finance

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It has only been in the last several years that the investment world in the realm of privately held companies has changed to a significant degree. Prior to this time, the SEC had provisions in place that forbade an issuer of securities from engaging in general solicitation of possible investors. These restrictions prevented issuers from legally engaging in marketing and advertising as well as sales of private offerings in industry publications, magazines, newspapers, and online.

Relaxed Provisions

Starting in 2013, the SEC relaxed these prohibitions by implementing something referred to as Rule 506(c). This Rule, as it exists under Title II of the JOBS Act, allows issuers to raise unlimited funds in a private offering without the requirement for SEC registration, which also includes the ability to conduct general solicitation and advertising to an investor pool. The requirement, however, is that investors are accredited investors.

An accredited investor is defined as a person who qualifies as having one of the following:

 * A yearly income exceeding $200,000 in both of the two most recent tax years, and also reasonably expect to earn the same amount in the current year. The requirement can also be achieved through joint income of $300,000 with spouse.
 * An individual net worth of over $1 million (either single or jointly with the spouse and not including the primary residence)
 * Executive officers, directors, and general partners of the issuer
 * Entities may also count as an accredited investor. These may include: Insurance companies, banks, tax-exempt charitable organizations, employee benefit plans as permitted by ERISA, and other entities having assets greater than $5 million

Reasonable Steps Verification

Under 506(c), the burden to conduct reasonable steps verification of potential investors is on the issuer. The issuer must inquire regarding the necessary determining factors that confirm accreditation.

In the recent years in which Rule 506(c) has been in force, issuers have been able to canvas wider pool of investors in securities marketplace because issues are able to generally solicit and advertise their offerings.

In particular, the rule is helpful to private companies and real estate developers who require capital from the outside which costs much less than what is traditionally available from institutional sources of funding, such as those from institutional investors and traditional lenders.

The relaxation of the rules regarding general solicitation, which include the need for reasonable steps verification, has opened up the door for the development of Internet-based platforms enabling issuers to directly reach a larger investment audience than was possible through traditional private offerings in the past.

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