Typically, when a company raises capital, it has to register its securities (basically the shares/interests that they are offering for sale). Registration is expensive and takes a long time. Most companies look for an exemption from registration. The most common exemption used by companies for this purpose is the private placement exemption, which basically meant the companies couldn’t publicly solicit or advertise.
The “Jumpstart Our Business Startups Act”, or the “JOBS Act” changed that. The JOBS Act allows companies to publicly solicit for funds and advertise while still conducting a private offering. However, it comes with a major catch. The only investors allowed to invest must be “accredited investors”, and the company raising money has to verify that their investors are truly accredited investors.
A simple questionnaire is no longer sufficient – instead, companies must take further “reasonable steps” to prove their investors are accredited investors. Failure to comply is a violation of federal laws and may subject the company to enforcement action and the obligation to return money raised. That’s obviously bad for companies, but it’s also bad for investors who don’t know if the companies they invested in will suddenly have to return a portion of its capital to other disgruntled investors.
What is an “Accredited Investor”?
An “accredited investor” is a type of investor. Generally, sales of securities must be registered with the SEC unless an exemption is found. Some of the exemptions require sales to be made to accredited investors. Our application lists out the various categories of accredited investor.
The Securities and Exchange Commission also has a helpful page on accredited investors here: https://www.investor.gov/additional-resources/news-alerts/alerts-bulletins/investor-bulletin-accredited-investors
For more information, please contact Paul McIntyre at firstname.lastname@example.org