Verification by tax returnBy http://profile.typepad.com/1237764140s22740 // November 16, 2012 in Accredited Investor Definition, General Solicitation, JOBS Act
After live blogging the public, webcast portion of the 2012 SEC Government-Business Forum on Small Business Capital Formation yesterday morning, I participated, by phone, in an afternoon breakout session on exempt offerings, and I brought up and idea that fell flat.
At that point in the breakout session, we were talking about the problem of "verification," means by which an "issuer" (startup company or other company raising equity financing in reliance on Rule 506, or the new version of Rule 506 under which general solicitation is to be permitted) vouchsafes that its investors are accredited.
There seemed to me to be a strong preference among the group to get professionals (lawyers, accountants) and service providers (broker-dealers, other firms) involved in verification. That is to say, folks were advocating for a verification safe harbor to the effect of: get a letter from the investor's lawyer, accountant or broker-dealer, and you've satisfied the verification requirement as to that investor.
A safe harbour like this might spawn a cottage industry around third party verification.
I still think we ought to be pulling to include a tougher variation of investor self-verification. (Some people did advocate for some kind of penalty for investors who make false representations about their status, such as, misrepresent yourself, and the issuer has an affirmative defense against any claim you might bring later; we talked about such a concept here on this blog, in connection with advocating for self-certification under an equity crowdfunding exemption.)
Here, again, is that self-certification idea that EVERYONE hates, except for me: permit an individual to check a box on her 1040 return that says “I opt in to the IRS database verifying my accredited status.” After doing so for three consecutive years, presto, the person presumptively meets the income test of the accredited investor definition.
Merits to the self-certify-by-tax-return idea:
- Investors who so self-certify, on the penalty of perjury under tax laws, are totally fair targets for any issuer generally soliciting under 506(c), and no middlemen need be paid for the verification.
- Investors are certifying completely separate from any pressure or hype over any given deal (heat of the moment is what Congress was worried about, after all, in calling for heightened verification when general solicitation occurs).
- The IRS is already set up to handle individual and joint (marital) returns, so, folks could certify as to the individual or joint income standards.
Folks hate this idea but it may have less hair on it than any other.
Photo: 401(K) 2012 / Flickr.