by Guest Poster . July 10th, 2014
By Liz Alton
Liz writes on issues relating to social media and entrepreneurship for Huffington Post, USA Today, PolicyMic, Social Media, The Daily Muse, Technorati, and others.
However, recent SEC regulations make it possible for companies to generally solicit investors while still qualifying their offerings as private offerings which enjoy more lenient treatment under the laws.
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By taking advantage of the new SEC regulations permitting general solicitation, however, companies must only accept investments from a limited pool of verified accredited investors, who generally need to meet minimum income, net worth, or minimum asset standards. The tradeoff proposition is simple:
You can freely advertise your capital raise to anyone and still qualify as a private offering in exchange for your agreement to follow strict investor verification protocols and to only accept accredited investors as the final purchasers.
Here are four steps companies can take to protect yourself:
a.) A charitable trust, corporation, partnership, or charity with assets over $5 million
b.) A bank or insurance company
c.) A business in which all the owners are accredited investors
d.) A natural person (individually, or together with a spouse) having more than $1 million in assets, excluding the primary residence, or a natural person having income above $200,000 ($300,00 for couples) for the last two years and a reasonable expectation of achieving the same income in the current year
e.) A director, executive officer, or partner at the company issuing securities
It’s the responsibility of the company offering the securities to verify that investors meet the minimum criteria discussed above. The SEC has provided recommendations on what constitutes an acceptable level of effort to verify this. These include:
a.) For income verification: Reviewing two years of IRS filings and obtaining written representation for an ongoing level of compensation for the year ahead.
b.) For net worth verification: Review credit reports, tax documents, bank and investment brokerage statements, and appraisal reports – all less than three months old where feasible.
c.) Written verification from a qualified third party: Obtain written confirmation by a qualified third party such as a CPA, attorney, registered investment advisor, or…
If your staff isn’t qualified to make the determination, you could be opening yourself up to significant future financial and legal risks. A reliable third-party service can expedite the process, mitigate your risks, and help control costs. At VerifyInvestor.com, for example, the cost to verify a single investor is $69 and is completed by a licensed attorney.
The cost decreases quickly with bulk discounts for purchasing multiple verifications. The process of seeking investments is an exciting time for companies, but it’s important that companies take steps to ensure that they’re protected.
The potential exposure from failing to comply with SEC regulations includes fines, returning invested funds, and future fundraising restrictions.With such high stakes, businesses are wise to take the simple steps necessary to ensure that their prospective investors meet the guidelines for accredited status.
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Image credits: Suit of armor cover photo via Imgur; turtle Sea Frost via photopin cc; Dogbetta design via photopin cc;HandsJasonparreira via photopin ccDefinitionsDave Edens via photopin cc
Liz Alton is a writer for VerifyInvestor.com. VerifyInvestor.com offers an efficient and easy method of compliance for companies looking to verify the accreditation of investors in a safe and confidential method.
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