The Title II JOBS Act fundamentally changed private securities offerings by allowing general solicitation and advertising, provided that all investors are verified as accredited. This shift enhanced capital-raising flexibility but placed a heavier compliance burden on issuers. To meet verification requirements efficiently, many issuers rely on third-party verification services. While this approach offers several benefits, it also introduces compliance and operational considerations that issuers must understand before delegating investor verification.
Benefits of Third-Party Verification
1. Compliance Confidence
Under the Title II JOBS Act, issuers must take “reasonable steps” to verify accredited investor status. Third-party verification services specialize in interpreting regulatory expectations, ensuring compliance through standardized and well-documented verification processes. This helps issuers demonstrate regulatory diligence in the event of an audit or enforcement review.
2. Efficiency and Scalability
Manually verifying investor credentials, such as tax returns, W-2s, or brokerage statements, can be time-consuming and prone to errors. Professional verification firms streamline these processes using secure, automated systems, enabling issuers to scale their offerings without overwhelming internal teams.
3. Investor Privacy and Data Security
Delegating verification to an independent provider allows sensitive financial documents to be handled by entities equipped with secure data infrastructure and privacy protocols. This reduces the issuer’s exposure to data protection risks while maintaining investor confidence in how their information is managed.
4. Independent Validation and Credibility
Using a recognized third-party verifier adds a layer of impartiality to the process. Investors often perceive external verification as more objective, and regulators may view it as evidence of a good-faith effort to comply with the Title II JOBS Act’s verification standard.
Key Considerations and Risks
1. Responsibility Remains with the Issuer
Even when outsourcing, issuers remain ultimately responsible for ensuring compliance. Engaging a third-party provider does not absolve them from liability if verification standards are found insufficient. Clear contractual terms and audit rights are essential to mitigate this risk.
2. Varying Standards Among Providers
Not all verification services apply identical methods. Some may rely on self-certification combined with document review, while others perform deeper checks. Issuers should evaluate whether the provider’s methodology meets the “reasonable steps” test defined under Rule 506(c).
3. Data Retention and Privacy Obligations
Issuers must confirm how long verification data is stored and whether it complies with privacy laws such as the Gramm-Leach-Bliley Act or state-level data protection regulations. Transparency in data handling policies is critical.
4. Cost and Accessibility
Third-party verification adds an expense, especially for offerings involving numerous investors. However, this cost often offsets potential penalties or delays caused by noncompliance or incomplete verification.
Selecting a Reliable Verification Partner
When choosing a third-party verifier, issuers should:
- Assess the provider’s compliance history and familiarity with Title II JOBS Act requirements.
- Review the verification criteria and documentation retention policies.
- Ensure data encryption, privacy safeguards, and secure transmission protocols are in place.
- Seek clear service-level agreements (SLAs) defining turnaround time, verification methods, and record-keeping practices.
Conclusion
The Title II JOBS Act opened new avenues for capital formation while increasing the need for rigorous investor verification. Third-party verification services can greatly simplify compliance, enhance investor trust, and reduce operational strain. However, issuers must exercise due diligence in provider selection and remain accountable for the verification outcome. When properly managed, third-party verification is not just a compliance mechanism; it’s a strategic tool that reinforces transparency and integrity in modern securities offerings.
