How to Verify Accredited Investor Status – Satisfying the Requirements
In July 2013, the SEC established a rule that lifted the prohibition on general solicitation and advertising in Rule 506 offerings for accredited investors. As well, the SEC added a section Rule 506(c) that allows general solicitation and advertising with a securities offering provided that the issuer conducts reasonable steps to verify the accredited investor status of securities’ purchasers. Therefore, it is important for issuers to understand how to verify accredited investor status.
The old rule now has subsection (b) and requires issuers to develop a reasonable certainty as to the accredited status of investors but does not require review of actual evidence supporting an investor’s claim of accreditation. It does permit up to 35 non-accredited investors. However, due to the cumbersome disclosure requirements under Rule 502, your attorney may not allow any non-accredited investors into the agreement.
Meeting the Income Requirement
As it concerns how to verify accredited investor status, the issuer may review 1040s, W-2s, K-1s, and 1099s that detail the purchaser’s income for the previous two years. The SEC also requests the purchaser (and the spouse of the purchaser) to provide a written representation verifying that he or she has a reasonable expectation of earning the required income level to meet the accredited investor status during the current year.
Meeting the Net Worth Requirement
The issuer might review statements from brokerages, banks, certificates of deposit, securities holdings, appraiser reports, and tax assessments. Reports from credit agencies should be reviewed to determine liabilities. Evidence should generally be no older than three months. In addition, the issuer needs to secure a written confirmation from the purchaser that all liabilities required to evaluate net worth have been revealed.
Third Party Confirmation
Another option regarding the question of how to verify accredited investor status involves the issuer alternatively requesting a written confirmation from particular third parties that they have taken reasonable steps over the previous three months to verify the accredited investor status of the purchaser based on either the net worth or income requirements. These third parties may include licensed attorneys, SEC registered investment advisors, registered broker-dealers, and certified public accountants.
High Minimum Investment Requirements
When a particular agreement requires a high minimum investment amount and the purchaser has the financial capability to meet the required terms, it may be sufficiently reasonable to assume that the purchaser qualifies as an accredited investor absent any information that refutes this assumption. Therefore, fewer steps may be required from the issuer to verify the purchaser’s accredited investor status, except to verify that investment provided by the purchaser is not financed by third-party.
Grandfathering of Existing Investors
In subsequent rounds, certain investors who purchased a Rule 506 securities offering as accredited investors prior to the establishment of the new rule could certify they currently hold accredited investor status.