Pouncing on New SEC Rules, Entrepreneurs Develop Tech-Based Solutions for Accrediting Investors
Digital badge company Basno got its start generating badges for athletes who completed the New York City Marathon. Starting today, it's generating badges for accredited investors.
When the Securities and Exchange Commission lifts its 80-year-old ban on general solicitation on Monday, private companies will be allowed to publicly advertise their efforts to raise funds. The historic change brings with it a new rule that requires that any investor wishing to fund a private company be accredited by a reputable third party. Until now, investors had been able to declare that they meet the U.S. requirements for being accredited, but as of Monday, they will need to have a third party, such as an accountant or lawyer, vouch for their accredited status.
The change has caused a bit of uncertainty among entrepreneurs and investors, who now have to deal with an extra step in the fundraising process. But for the founders of Basno, the change represented an opportunity.
"As we read all the news with what the SEC is doing with general solicitation -- and there has obviously been a good bit of debate as to how effective that is going to be, how valuable that is actually going to be for the ecosystem -- what was clear to us was that it is definitely not going to be valuable if verifying the accreditation of investors is not easy and efficient and reliable," says Nicholas Thorne, Basno's CEO and co-founder.
Basno will begin offering accredited investors a digital badge to display on their websites and social-networking accounts. An accredited investor has to have an income of at least $200,000 a year or a minimum of $1 million in assets, not including his or her primary residence, according to U.S. standards. Investors can get a Basno investor accreditation badge once they upload a signed document from a lawyer, financial planner or accountant to the Basno system.
The company sees the badge as a reliable, effective way both for businesses to verify an accredited investor and for investors to prove their status to entrepreneurs. Each digital badge that Basno generates is linked to a single website address, making it unique and less vulnerable to fraud than a purely image-based digital stamp, which could theoretically be screen-grabbed, copied and pasted.
Right now, the company is offering the badge to investors for free. Thorne has not written off the idea of making money off the badges by selling the service to other financial platforms, but for now it is offering the service as a way to raise awareness of its tools.
"What we are kind of obsessed with is how you get people recognition and value for who they are and for their accomplishments or skills or their commitments and we think a badge is a really elegant and effective and kind of 21st century way of doing that," Thorne says.
Basno isn't the only company to see a regulatory problem and seek to solve it.
CrowdBouncer, a Buffalo, N.Y.-based company that launched in October 2012, was started by a lawyer who read the JOBS Act, and preemptively anticipated the regulatory pain points the new legislation would create for both entrepreneurs and investors. The most popular service that CrowdBouncer offers is its investor accreditation verification.
CrowdBouncer, whose clients tend to be fundraising platforms, verifies the accreditation of potential investors by seeking information from the IRS database, bypassing the need for investors to turn over sensitive financial documents. "Rather than have to have investors turn over documentation to our customers, which is intrusive and onerous and not scalable, our customers just sign a consent form, which is actually electronically teed up for them so they don't even have to sign anything, and within 48 hours, we can provide a response to our customers as to whether the investor qualifies and meets the standard for an accredited income," says Bob Carbone, the co-founder and CEO of CrowdBouncer.
The selling point for CrowdBouncer is that its verification system is entirely encrypted, meaning that neither the fundraising platform nor CrowdBouncer end up seeing the investor's financial documentation, says Carbone. Going forward, the investor's status is stored in CrowdBouncer's database, making it easier to confirm for the next platform.
Carbone is confident that he has a head start on this financial services market and will be able to stay ahead of the curve, but says he wouldn't be surprised to see the space become more crowded as general solicitation becomes legal and more widespread.
"We think that, in time, you are going to get more companies like us that are focusing on making the regulatory stuff painless and making it more fluid for investors to make investments and for issuers to meet the requisite compliance pain points. There are noble solutions to these problems provided that we use the ability of technology to solve them," says Carbone. "In the near term, while we are wrangling with these regulations, it is going to be a bit cumbersome, but I think over time, you will see private-sector solutions to a lot of these problems."