Here are a list of the common questions we get around the investor accreditation process.
- What are securities? What is the SEC?
- What are the differences between public and private securities?
- How does the SEC achieve its stated objective?
- What is the JOBS Act?
- What is an accredited investor?
- What documentation is required to assert my accredited investor status?
- Can entities be accredited investors?
- What if I cannot assert my accredited investor status?
- How do you secure my data?
- Who has access to your servers?
- Is my personal data safely transferred?
- What does your verification letter look like?
- How is my information shared with third parties?
The term “securities” is broadly defined under United States federal law. It includes things like promissory notes, stocks, bonds, membership interests, options and other investment contracts. A workable, short-form test would be: if you are investing your money in equity of a company or in order to make a debt claim on its cash flows, you are likely investing in a security.
The United States Securities and Exchange Commission (the “SEC”) is the primary federal agency responsible for regulating securities markets. The SEC’s stated goals are to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. All securities sold in the United States must either be registered with the SEC or otherwise exempt from registration. The registration process can be difficult, expensive and time consuming, so issuers will often look for exemptions from registration. The most common exemption from registration is for sales of securities to what are known as “accredited investors.”
Public securities are typically traded on one of the national exchanges (for example, the NYSE or Nasdaq). Issuers of public securities must go through a registration process with the SEC prior to listing stock on a national exchange, and they maintain a standardized set of ongoing reporting obligations.
Private securities, on the other hand, do not trade on any of the national exchanges and have no federally mandated reporting requirements. Due to the lack of exchanges and ongoing information updates, privately held securities have traditionally been significantly less liquid than their publicly traded counterparts. The JOBS Act broadened the manner in which issuers could raise capital and provided for additional paths to liquidity for private securities.
The two key components of securities regulation in the United States are anti-fraud liability and disclosure requirements.
Anti-fraud. Regardless of whether a security is public or private, investors and regulators have the ability to bring suit in the event an issuer or its representatives (1) employ any device, scheme or artifice to defraud, (2) make any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstance under which the statements were made, not misleading or (3) engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person.
Disclosure. The other tool the SEC uses to achieve its state objectives is a broad spectrum of disclosure depending on the sorts of investors an issuer or its representatives wishes to market to. As a general rule, the more broadly targeted the investor group is and the less capable the investors sought are to fend for themselves, the more disclosure the issuer is required to provide (often by registering the securities to be offered). Ultimately, if an issuer sells to enough unaccredited investors or becomes large enough with over 2,000 total investors, it will be forced to report as a public company does.
The Jumpstart Our Business Startups Act (the “JOBS Act”) was an overhaul to the securities regulatory regime enacted in 2012. As it relates to private securities offering, the most important developments that came from the JOBS Act include: (1) the ability for an issuer and its representatives to engage in general solicitation (think banner ads on Facebook) of accredited investors for a private offering and (2) the imposition on the issuers and its representatives of responsibility for verifying each investor’s status as an “accredited investor.” Issuers must take “reasonable steps” to verify each investor’s status, and failure to do so can have disastrous consequences for the company.
An “accredited investor” is a category of person permitted to participate in certain unregistered securities offerings. A simple way to think of the line-drawing exercise the SEC is engaged in here is that the more capable an investor is of fending for him/herself in an offering, and the more able an investor of withstanding a complete loss on the investment, the less the SEC is concerned about mandating the obligations of a public reporting company on an issuer.
For natural persons, an “accredited investor” is anyone who has either: (1) earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or (2) a net worth of over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence). There are other exemptions based on financial sophistication, but these thresholds are the most generic in terms of determining accreditation status.
For entities, there are a number of tests to determine whether the entity in question is accredited. For the most part, if the entity has over $5 million in total assets or all of the owners of the entity are accredited, then the entity will be deemed to be accredited.
For determinations of net income, you can use any official tax records (tax returns, W-2s, K-1s, 1099s or any other governmental document that states your net income for tax purposes).
For determinations of net worth, the investor must show evidence of assets held less liabilities. Assets can be proven via bank statements, appraisal of real estate (so long as not the investor’s primary residence), brokerage statements and the like. Liabilities are usually determined using a consumer credit report. All documentation must be valid and true within the preceding 90 days.
Yes! The typical requirement for an LLC, corporation, trust or GP-LP to be accredited is to have over $5 million in assets. This can be verified via brokerage statements, real estate appraisals, bank accounts and the like. Additionally, entities that are owned by solely accredited investors are also deemed to be accredited.
If you cannot assert your accredited investor status, then you will be ineligible for certain securities offerings. Unaccredited investors do not have as many broad-based exemptions from registration as accredited investors do, so typically they are more constrained in their investing opportunities.
We store sensitive data in a three-tier system depending on the level of confidentiality and types of access needed. All storage is on servers maintained by Amazon Web Services (“AWS”), which are protected by state of the art, best-in-industry physical and digital access controls. AWS has certification for compliance with the ISO/IEC 27001:2013, 27017:2015, and 27018:2014 internationally-recognized standards. These certifications are performed by independent third-party auditors to guarantee compliance with industry leading best practices. Our infrastructure runs in an environment that benefits from the same physical and electronic protections that currently ensure financial services like Nasdaq, Dow Jones, and Capital One remain secure.
All data is transmitted to our servers via secure HTTP (HTTPS) with 2,048 bit public-key encryption. It is then encrypted with a 256 bit key using a AES GCM cipher before being stored to disk (this is the same cipher approved by the NSA for storing Top Secret information). The key used to encrypt each document is protected by a FIPS 140-2 validated cryptographic hardware security module (HSM). These documents are protected by time and role-based access control and require decryption on the server before they can be accessed.
No employee has physical access to our servers. All electronic access to our server infrastructure by engineering employees is role-based, IP restricted, and requires strong passwords and multi-factor authentication. All server upgrades, security updates, and software patching is performed on a routine basis by Amazon directly. All data (including all form inputs and file uploads) is transmitted to our servers via HTTPS with 2,048 bit Transport Layer Security (TLS) encryption.
Yes. Personal data includes copies of identification documents, tax returns, and other highly sensitive user information.
We have an example that you can look at here.
Personal data includes copies of identification documents, tax returns, and other highly sensitive user information. Your personal data will only be shared with third parties if you specifically give your permission. If you use your Parallel Markets identity to sign in to another website, you will go through a flow that:
- Asks what, if any, information we may share with the third party
- Includes a section that allows you to revoke that permission at any time