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Blog

‘Reasonable Steps’ and the Safe Harbor for Accredited Investor Verification

Mihir Gandhi

The SEC’s Rule 506(c) of Regulation D permits advertising and general solicitation when private companies are raising capital. The catch is that every issuer relying on a Rule 506(c) offering must take “reasonable steps” to verify that all investors are accredited.

SEC guidelines outline two different ways that an issuer can demonstrate a reasonable effort has been made to verify investors’ accreditation status.

Principles-based ‘Reasonable Steps’

As an issuer of securities relying on Rule 506 (c) it is permissible to determine accredited investor status by looking at:

  • The nature of the purchaser and what type of accredited investor the purchaser purports to be

  • How much and what kind of information you have about the purchaser

  • What your offering is and how you reached the purchaser, and

  • The minimum investment amount and other terms of the offering.

Taking this principle-based approach to investor verification means you are relying on your judgment. The risk is that if at any point the SEC determines your judgment was flawed, and that even a single investor has not been properly verified, you could lose your entire Rule 506(c) exemption and the consequences could be dire.

Non-Exclusive Safe Harbor Verification

Many investment advisors, brokers and attorneys recommend one of the more formal verification methods, because there is clarity that verification through these methods falls under SEC safe harbors. These methods include:

  • Analyzing a natural person’s US tax documentation to verify income in the past two years combined with obtaining a written statement of the investor’s expectation for income in the current year,

  • Reviewing an investor’s consumer credit report and bank and brokerage statements, US credit reports, or real estate appraisals to confirm net worth, or

  • Using a third-party registered or licensed professional, such as a securities attorney or certified public accountant to provide written confirmation that the investor is indeed verified as accredited.

In general, the safest method is to use a third-party licensed professional, especially an attorney, to conduct this review. VerifyInvestor.com follows this guidance, and all of its reviews are conducted by licensed attorneys.

Accredited Investors

For most individuals, or natural persons, to be verified as an accredited investor, they must either demonstrate earned income of at least $200,000, or $300,000 combined with a spouse, in each of the last two years and must reasonably expect the same for the current year or possess a net worth of more than $1 million, not including their primary place of residence. Entities can also be considered accredited investors if they have assets in excess of $5 million or fall under certain types of entities.

VerifyInvestor.com safely and securely provides ‘reasonable steps’ verification for Rule 506(c) compliance for issuers and their investors.