General solicitation has transformed private securities offerings, allowing issuers to broadly market their investments and expand their reach under Rule 506(c) of Regulation D. This flexibility, however, requires that all purchasers be accredited investors, with issuers obligated to take reasonable steps to verify their status.
Why Verification Matters
Proper verification is critical. If an issuer fails to confirm an investor’s accredited status, they risk losing the registration exemption and potentially face rescission rights, civil liabilities, or regulatory penalties. A diligent verification process is not just a formality—it’s a cornerstone of compliance and risk management.
Best Practices for Verification
Here are key strategies issuers can employ:
- Document Review: Request and examine current financial records—like tax returns, W-2 forms, bank, and other asset-related statements—to confirm an investor meets income or net worth thresholds. Confidentiality and recency of documents are paramount as generally, evidence should be no older than 90 days.
- Third-Party Confirmation: Rely on written verification from a registered broker-dealer, attorney, certified public accountant, or investment advisor familiar with the requirements. This leverages professional expertise to ensure accuracy.
- Verification Services: Third-party providers offer specialized solutions, often delivering certificates or reports issuers can depend on. This approach enhances efficiency and strengthens compliance.
- Tailored Steps: The SEC emphasizes that verification should reflect the offering’s context. For instance, less rigorous checks may suffice for investors known to the issuer or with prior investment history.
- Technology Tools: Emerging platforms and tools can streamline verification, providing issuers with innovative, compliant options to confirm investor status.
The Role of Documentation
Thorough record-keeping is essential. Issuers should retain evidence of their verification efforts—this may include documents that are reviewed, third-party correspondence, or other steps that were taken throughout the investment purchase process—to demonstrate “reasonable steps” compliance if regulators should inquire. Investor accreditation status must be established immediately before any securities sale. General solicitation under Rule 506(c) unlocks significant opportunities for issuers to attract capital, but it demands a disciplined approach to investor verification. Issuers can confidently navigate compliance challenges by adopting these best practices, documenting their process, and exploring specialized services or technology while maximizing the benefits of broader solicitation.
