Being able to raise capital as a business can be a very complicated process that is governed by specific securities laws. These regulations or laws have been limiting on companies, prohibiting the company from advertising or soliciting to be able to raise the capital the company required.
The JOBS Act, the Jumpstart Our Business Startups Act, was designed to create a set of new regulations that provided the opportunity for businesses to be able to publicly advertise and solicit to raise capital under specific conditions. The most powerful regulation set forth by the JOBS Act was Title II, Rule 506(c) crowdfunding. This type of crowdfunding allowed general solicitation through any means, including through social media such as Facebook or LinkedIn, through traditional types of media such as print or radio, or through a company or other website.
Although this may seem like a lot freedom, and it does provide the opportunities required by many small or large businesses, there is a catch – all investors must be reasonably verified as accredited investors. Businesses can attempt to handle the verification internally, or use a qualified third party to hand the accredited investor certification.
What the Accredited Investor Certification Entails
There is a significant amount of misunderstanding and even confusion about the definition of an accredited investor. There are some slight variations, but for most people wanting to obtain an accredited investor certification they will need to:
* Have an earned income of $200,000 or more or $30,000 if being considered with a spouse in at least the last two years with the same income expected in this year
* Or, have a net worth of one million dollars excluding the value of the primary residence
The actual verification can occur with the investor proving income or demonstrating net worth or obtaining a professional letter from their accountant, lawyer, broker-dealer, or investment adviser. For entities seeking verification, verification is straightforward, but can be tedious depending on the type of accredited investor they are.Properly taking the steps to verify accredited investors is extremely important. The failure to reasonably verify even a single investor could make a company’s entire capital raise illegal.
