Biz Features

4 Things Every Company Seeking Investors Should Do – To Protect Themselves!

by . July 10th, 2014

How every venture courting investors can play it safe

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.

Outside investment represents one of the most effective ways for companies to seek opportunities for growth. It used to be a bit difficult to raise capital, as most private companies were restricted to raising capital in private offerings.

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.


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:

1. Understand recent SEC regulations:

As part of the Jumpstart Our Business Startups (JOBS) Act, the SEC adopted amendments to Rule 506 of Regulation D under the Securities Act of 1933. Among other things, this lifted the ban on general solicitation (e.g. such as advertising and presentations) for companies seeking investments, provided that the companies follow specific steps. The steps include limiting actual investment to accredited investors and requires that companies make reasonable efforts to verify the status of investors.

2. Know the definition of an accredited investor:

It’s important that companies understand the definition of an accredited investor. Essentially, it means that the organization or individual in question meets minimum income thresholds, net worth, or assets requirements, although some investors are accredited just by the nature of their entity or relationship with the issuer. Accredited investors include (but are not limited to) the following:

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

3. Follow the nonmandatory protocols laid out by the SEC:

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…

4. Consider a third-party service:

Firms concerned about expenses may initially be contemplating conducting an internal assessment. However, there are a number of advantages to utilizing a third-party service. The first is that an internal audit of prospective investor paperwork takes a significant amount of time. If you’re hiring your CPA or lawyer by the hour, the cost may be exorbitant.

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, 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

About the author:

Liz Alton
Liz Alton is a writer for 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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