Reverse Merger Tip of the Week: Accredited Investors

In completing a financing contemporaneous with a PIPE, a challenge with investment banks can be making sure they know their investors.  Most financings into reverse mergers require the company to have a reasonable belief that the investors are accredited, meaning essentially that they meet a certain income or net worth test under SEC Regulation D. In addition, the shell is offering its shares to the owners of the private company merging in, so it must ensure the accredited status of each current shareholder of the private company in order to determine if a Regulation D exemption from SEC registration is available.

How does one build this reasonable belief of accredited status? The SEC would probably say that nothing short of an investor’s certified personal financial statement is enough to demonstrate accredited status.  Most practitioners, however, will accept other proof.  First, the investor may sign a statement indicating he is accredited and check off or initial the criteria that legally qualify him for accreditated status (in other words, not just signing whatever is put in front of him).  Second, the company or the investment bank may reasonably believe that an investor is accredited if this information has come from a preexisting business or personal relationship between the investor and either the company or the investment bank raising the money.

Unfortunately, while virtually all the bankers I have worked with complete this research diligently, there are a few unscrupulous investment bankers anxious to complete a deal who will accept anyone willing to write a check, and the bnaker ”helps” them fill out the accredited investor statement, even if they do not know the person, or worse, they know the person is probably not accredited.

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