By: Jim Verdonik
I'm an attorney with Ward and Smith PA. I also write a column about business and law for American Business Journals, have authored multiple books and teach an eLearning course for entrepreneurs. You can reach me at JFV@WardandSmith.com. Or you can check out my eLearning course http://www.youtube.com/user/eLearnSuccess or you can purchase my books at http://www.amazon.com/Jim-Verdonik/e/B0040GUBRW
Most of the discussion about verification of "Accredited Investor" status in Rule 506 (c) offerings has been about verifying that individual investors are accredited.
But individual investors aren't the only sources of capital. Other investors often include:
- Small investment funds.
- Businesses that want to invest cash to invest to promote a customer or a supplier.
- Vendors who are willing to trade goods or services for stock.
How can issuers satisfy their obligation to take reasonable steps to verify the Accredited Investor status of these types of entities that want to invest in your Rule 506 (c) offering?
Some of these types of investors may contact you because of your general solicitation on a technology platform or through social media.
We think if the platforms that advertise offerings as ways to raise capital. But sales people will be looking at these platforms to find businesses that are growing and who may need the products and services they sell. Some of these sales people will be contacting issuers that make general solicitations and offer to take part of the payment for products and services in stock.
You may meet investment funds, corporate partners and vendors through in-person networking that has nothing to do with your general solicitation. But, because of the SEC's integration rules, it may be difficult to find another exemption from registration, if you are conducting a simultaneous Rule 506 (c) offering. So, you may be forced to take reasonable steps to verify the Accredited Investor status of many types of business entities that you meet in different ways.
As more offerings utilize Rule 506 (c):
- How do small investment funds, trusts and other business entities demonstrate to issuers that they are Accredited Investors?
- How do issuers satisfy the requirement to take "reasonable steps" to verify the Accredited Investor status of small investment funds and other business entities.
Let's start our analysis by looking at the two potential ways small investment funds and other business entities can be an Accredited Investor:
- Rule 501 (a) (3) indicates that any corporation or partnership "not formed for the specific purpose of acquiring the securities being offered or sold" is an Accredited Investor, if the entity has "total assets in excess of $5,000,000."
- Rule 501 (a) (8) indicates that "any entity in which all of the equity owners are accredited investors" is an Accredited Investor.