Regulation D issued by the Securities and Exchange Commission (SEC) includes multiple exemptions to the Securities Act registration requirements that many businesses rely on when issuing securities offerings. Rule 506(b) and 506(c) are two prominent examples. If issuers comply with these Rules, they may legally raise funds without registering the offering with the SEC. Below we look at how Rule 506(b) verifications work.
Rule 506(b) Verification
When startups operate under requirements and provisions of Rule 506(b), they are permitted to have an unlimited number of accredited investors and a maximum of 35 non-accredited investors participate in one of their securities offerings. Under this Rule, companies may also raise unlimited funds. The process for verifying the accredited status of an investor under Rule 506(b) is very brief – the issuer accepts the investor’s word.
However, when operating under Rule 506(b), every issuer should utilize a questionnaire in the investor screening process. The investor is to fill out and submit the questionnaire which provides information that may be used to help verify the investor’s accredited status. This screening process is important, because if one investor is found out later to be non-accredited, the entire securities offering may be deemed illegal by the SEC.
Using a law firm to perform this screening process can be too expensive for some companies. Attempting to use untrained in-house staff to screen potential investors can be risky. There is a better option.
Outsourcing 506(b) Verifications
The most efficient option is to outsource this verification process to a third-party investor verification service. Such a third-party provider performs the process in a streamlined fashion, helping ensure you remain in compliance with requirements of Rule 506(b) with respect to the use of accredited and non-accredited investors.
You can simply upload the Accredited Investor Questionnaire to the system for review. Issuers may either upload on behalf of their investors or have their investors provide the completed questionnaire to the 3rd party service directly. The option also exists to convert the questionnaire into an editable online form.
It is strongly recommended that issuers do not verify investors themselves, but instead rely on a third-party investor verification service to save time and prevent unnecessary errors.
You can rely on the knowledge and expertise of the third-party verification service or establish your own reviewing standards and create your own reviewer pool. You can also set your own deliverables, whether a detailed verification letter from a licensed attorney or just a simple affirmation.
Rule 506(b) verifications are truly a breeze when relying on a qualified third-party investor verification service.
