The passage of the JOBS Act (Jumpstart Our Business Startups Act) marked a pivotal shift in how private securities offerings can be marketed and conducted in the United States. Specifically, Title II of the JOBS Act lifted the long-standing ban on general solicitation for certain offerings, provided issuers take additional steps to verify the accredited status of their investors. This stands in contrast to traditional private placements, which maintain a more limited scope and less stringent verification standards.
For issuers, understanding the key differences in investor verification requirements between these two frameworks is essential for regulatory compliance and operational efficiency.
Verification Under Traditional Private Placements (Rule 506(b))
Under Rule 506(b) of Regulation D, issuers may raise an unlimited amount of capital from accredited investors and up to 35 non-accredited but sophisticated investors. However, they cannot engage in general solicitation or advertising.
Verification Characteristics:
- Self-Certification Permitted: Investors can complete a questionnaire or sign a representation letter declaring accredited status.
- Limited Documentation: Issuers are not required to independently verify income, net worth, or professional qualifications.
- Reasonable Belief Standard: Issuers must have a reasonable belief, based on facts and circumstances, that an investor meets the accredited criteria.
- Lower Compliance Burden: No specific verification method is mandated, allowing more flexibility during onboarding.
This approach relies heavily on investor representations and trust, but carries potential risks if investors misstate their status and the issuer does not perform due diligence.
Verification Under Title II of the JOBS Act Rule 506(c)
Title II of the JOBS Act introduced Rule 506(c), which permits general solicitation and advertising in private offerings,but only if all purchasers are verified accredited investors. This fundamentally changes the nature of investor onboarding and compliance.
Verification Characteristics:
- Mandatory Verification: Issuers must take “reasonable steps” to verify that each investor is accredited prior to accepting funds.
- Objective Documentation Required: Acceptable methods include reviewing IRS tax documents, bank and brokerage statements, or obtaining written confirmation from qualified third parties (e.g., attorneys, CPAs, registered investment advisers).
- Documentation Retention: Issuers should maintain records that prove compliance in the event of an audit or regulatory inquiry.
- No Non-Accredited Investors: Unlike Rule 506(b), no portion of the offering can be sold to non-accredited participants.
This approach offers broader reach via public marketing but demands stricter verification and greater documentation oversight.
| Feature | Rule 506(b) (Traditional) | Rule 506(c) (Title II JOBS Act) |
| General Solicitation | Not Allowed | Allowed |
| Investor Verification | Self-certification allowed | Objective verification required |
| Non-Accredited Investors | Up to 35 permitted | Not allowed |
| Documentation Requirements | Minimal | Extensive |
| Compliance Risk | Moderate | Higher if verification is weak |
For issuers, the choice between traditional private placements and a JOBS Act-compliant Rule 506(c) offering depends on several factors:
- Target Audience: If reaching a broader, less-known investor base is critical, 506(c) may be preferable.
- Operational Capacity: Consider whether internal teams or third-party support can handle the increased verification and documentation requirements.
- Regulatory Tolerance: Risk-averse issuers may favor 506(b) for its simplicity and reduced oversight.
The JOBS Act has introduced new opportunities—and new responsibilities—for capital raising. While traditional private placements still play a vital role, Title II offerings under Rule 506(c) demand a more rigorous and transparent verification process. Issuers who understand these differences can better align their compliance strategies with their fundraising goals, ensuring both regulatory adherence and investor trust.
