Accredited Investor Verification

Welcome to our Accredited Investor Verification Services – designed to keep issuers in compliance with the securities laws. In Regulation D, Rule 506(c) offerings, issuers are required to take “reasonable steps” to determine whether investors meet the “Accredited Investor” definition. Our integration with InvestReady provides a fast, simple, and streamlined procedure for meeting this requirement.

What is an Accredited Investor?

Rule 501(a) of Regulation D under the Securities Act of 1933, as amended, sets forth the definition of an Accredited Investor.

For natural persons, there are 4primary categories that can be relied upon:

  1. A person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, exceeds $1 million;
  2. A person who had an individual income in excess of $200,000 in the two most recent fiscal years or joint income with that person’s spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same level of income in the current year;
  3. A person who in good standing holds either (i) the general securities representative license (Series 7), (ii) the investment adviser representative license (Series 65), or (iii) the private securities offerings representative license (Series 82); or
  4. A person who is a director, executive officer, or general partner of the company selling the securities.

For entities, there are generally 5 categories (some categories combined for ease of reference) that can be relied upon:

  1. Entities owning investments in excess of $5 million;
  2. Any of the following entities with assets in excess of $5 million:
    • Corporations;
    • Partnerships;
    • LLCs;
    • Trusts;
    • 501(c)(3) organizations;
    • Employee benefit plans;
    • A “family office” and any “family client” of that office.
  3. Entities where all equity owners are themselves Accredited Investors;
  4. Investment advisers (SEC- or state-registered or exempt reporting advisers) or SEC-registered broker-dealers; or
  5. Financial entities, including banks, savings and loan associations, insurance companies, registered investment companies, business development companies, small business investment companies or rural business investment companies.

In What Context are Accredited Investor Checks Required, and What is Required to Verify Accredited Investor Status?

In a Regulation D Rule 506(c) offering, the issuer of the securities must take “reasonable steps” to verify that prospective purchasers are Accredited Investors. Under the “reasonable steps” standard, an issuer is generally required to consider all relevant facts and circumstances to assess whether the verification steps taken are reasonable. In other words, the SEC adopted an objective, principles-based approach for assessing Accredited Investor status rather than a concrete set of rules.

The SEC provided a non-exclusive list of methods to determine whether a natural person is an Accredited Investor, and following one of those methods will conclusively satisfy the “reasonable steps” requirement. Furthermore, that list of verification methods can be applied similarly to entities as well. Those methods include:

  1. For issuers verifying Accredited Investor status of natural persons based on income, reviewing copies of IRS tax forms in which the purchaser reported their income for the two most-recent fiscal years and obtaining the purchaser’s written representation that the purchaser has a reasonable expectation of reaching the income level necessary to qualify as an Accredited Investor during the current year;
  2. For issuers verifying Accredited Investor status of natural persons based on net worth, reviewing one or more of the following types of documentation, dated within the prior three months, and obtaining the purchaser’s written representation that all liabilities necessary to make a determination of net worth have been disclosed:
    • for assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties; and
    • for liabilities: a credit report from at least one of the nationwide consumer reporting agencies.
  3. For issuers verifying Accredited Investor status of natural persons based on their expertise as an investment professional, reviewing FINRA BrokerCheck reports demonstrating the purchaser’s applicable licensure and good standing;
  4. For issuers verifying Accredited Investor status of entities with assets or investments in excess of $5 million, reviewing similar documentation to those used to verify Accredited Investor status of natural persons based on net worth; or
  5. For issuers who cannot obtain documentation demonstrating Accredited Investor status directly from the purchaser, obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an Accredited Investor within the prior three months and has determined that such purchaser is an Accredited Investor.