There are multiple exemptions contained in Regulation D of the Securities and Exchange Commission (SEC) to the Securities Act registration requirements. These exemptions provide various benefits to issuers when issuing securities offerings. The two most notable exemption examples are Rule 506(b) and 506(c). When issuers adhere to the requirements of these Rules, they are permitted to legally solicit and raise funds without the need to register the offerings with the SEC. In this article, we review how Rule 506(b) verifications work.
Rule 506(b) Verification
When startups function under the provisions and requirements of Rule 506(b), they may receive investments from an unlimited number of accredited investors and a maximum of 35 non-accredited investors. In addition, under Rule 506(b) issuers may raise an unlimited amount of money. There is a very short process for verifying investors as accredited under Rule 506(b). The issuer only needs to accept the word of the investor.
However, when functioning according to Rule 506(b), the issuer should utilize a questionnaire during the screening process. The investor is to fill out the questionnaire which will help the issuer verify the accredited status of the investor. The screening process of investors is important because if even one investor is later found to lack accredited status, the SEC may deem the securities offering illegal.
Rather than hiring a law firm to conduct the verification/screening process, there is a better, less expensive option – outsourcing the verification.
Outsourcing 506(b) Verifications
By outsourcing the verification process to a third-party investor, you can achieve the necessary verification. The third party will carry out the verification process in a streamlined manner, helping to ensure you are in compliance with Rule 506(b) with respect to verifying the accredited status of investors.
Preferably, investors should not attempt to verify themselves but rather rely on a third-party investor verification service to prevent unnecessary errors and save time.
A third-party investor verification service will have the know-how to perform the necessary verifications in a smooth and efficient manner.
When utilizing a third-party verification service, Rule 506(b) verifications are quick and easy.
