Some securities exemptions, such as the Regulation D, Rule 506(b) exemption (and some state securities exemptions), allow investments by a limited number of non-accredited but financially sophisticated investors with whom the syndicator has a pre-existing, substantive relationship. Although the exemption allows this, some syndicators may still restrict their offerings to accredited investors only in order to reduce their liability.

The financial qualifications for investors will be spelled out in the “suitability” section of the Private Placement Memorandum (which is required if non-accredited investors are allowed), so prospective investors should always read this section of the offering documents carefully to make sure they are qualified before investing.

In a Rule 506(b) offering, investors can “self-certify”, so this is where the opportunity for an investor to falsify their qualifications comes in. In a Rule 506(c) offering, investors must provide “reasonable assurance” to the Syndicator that they are accredited, which must be dated within 90 days of the investment. This “verification” should come in the form of a letter from a CPA, registered investment adviser, or an attorney (someone with a license) signed by the professional, certifying that they have reviewed the investor’s financial information within the past 90 days and found them to be accredited. There are services that provide this; in fact we offer Accredited Investor Verification through an affiliate (click on the “Get Verified” tab in the website navigation bar).

Accredited Investors should beware of “fudging” their qualifications. It’s surprising how many people say they’re accredited to get into a deal (when they are not) and then complain later that they weren’t qualified and shouldn’t have been allowed to invest when the deal fails. Syndication offering documents may require the investor to indemnify the Syndicator if they lie about their qualifications and it causes liability for the Syndicator later (ours do), so there could be repercussions against investors in those cases. I know of a regulatory action involving a Syndicator where this very issue was raised. In that case, the Syndicator was absolved because they were able to show that the investor was sophisticated as they had attended numerous training programs on the subject of Syndication prior to investing.

The flip side of this is that a Syndicator may think it’s OK to allow someone to say they’re accredited, even though the Syndicator has knowledge they are not. In this case, the liability lies with both parties. I know this happens, as I have seen it. In that case, we were able to get the investor’s money back as they never should have been allowed in the deal in the first place and the Syndicator was in clear violation of securities laws for letting them in their deal. FYI — there is no indemnification and no limited liability for violations of securities laws — so if you do something like this as a Syndicator, you could become personally liable for that investor’s losses if your deal fails, as well as regulatory penalties or prosecution. It’s simply not worth the risk.

Bottom line, investors need to be as truthful about their qualifications as they expect the Syndicator to be about the deal, and don’t invest if you can’t afford to lose the money. And Syndicators should carefully review the Subscription Agreements of their investors and deny admission to any whom they have reason to believe don’t meet the qualifications required by the securities exemption the Syndicator has selected for a deal.

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