Why Choose a Third-Party Reviewer to Validate an Investor?

When you need to obtain verification for an accredited investor, or wish to request self-verification, a third-party review company may be the right choice for you. Consulting a third-party reviewer that you have a reasonable basis to rely upon is one of the “reasonable steps” validation methods approved by the United States Securities and Exchange Commission (SEC). To ensure Rule 506(c) private offerings are lawful and SEC-compliant, issuers are obligated to take action and obtain proof of investor accreditation. The proper third-party reviewer can provide safe, reasonably-priced, and speedy services, allowing purchasers and issuers to cover their bases and continue with securities sales and purchases securely.

Methods of Verification

If you’re looking to verify the status of an investor, the SEC provided a list of options issuers can review before proceeding with the sale of private securities. The method of verification you select is up to you, as there are no mandatory guidelines to follow so long as you can later prove that you took “reasonable steps.” However, to safeguard your right to publicly fundraise in the future, it's important not to accept funds in private offerings through general solicitation until an investor's accredited status has been verified. To do this, you can collect financial documents from an investor and verify their income, net worth, assets, or already-established accredited status.

Security for Investors

Consulting a third-party review company is also a SEC-approved method of accreditation verification and offers several advantages. It is only approved, however, if one has a reasonable basis to rely on the third-party’s verification. When it comes to providing proof of accreditation, many investors aren't comfortable giving issuers access to their personal financial documents, such as bank statements, tax information, etc. Reliable third-party review organizations offer complete confidentiality for investors, which lessens security concerns and sense of invasiveness. If you're an investor, you can rest easy knowing your information will be reviewed by a licensed third-party attorney or accountant.

Fast, Cost-Efficient Services

Another benefit of third-party review services is the fact a company may be able to avoid the liability of improperly handling the verification internally. Additionally, third-party review services often can provide quick delivery and turnaround of the verification reviews. In many cases, the cost of using a third-party review service will be less than the cost of handling the compliance internally as well. Companies seeking to conduct Rule 506(c) offerings should certainly investigate the various ways of verification they can use, and strongly consider outsourcing the compliance to reasonably reliable third-party review services that specialize in accredited investor verification reviews.

Updated 3/3/2022

Using a third-party reviewer for accredited investor verification remains an important way to stay compliant with the SEC. The SEC constantly updates and amends the accredited investor definition, so it becomes increasingly difficult to keep up with the latest version as time goes on. We always stay ahead of the curb and implement all new changes to the law the day they become law.

Additionally, VerifyInvestor.com’s costs remain low, much lower than hiring and retaining a third-party expert to conduct reviews. With an easy-to-use interface and online-oriented process, getting investors reviewed in the age of remote business is the best possible option for most funds.

The Importance of “Reasonable Steps” Verification

Do you need to verify yourself as an accredited investor, or are you looking to validate a purchaser before selling private securities? The "reasonable steps" outlined by the United States Securities and Exchange Commission guide and instruct issuers on how they should verify prospective purchasers. Only accredited investors are permitted to engage in private offerings through general solicitation. For this reason, it's important that businesses and small startups make it a point to adhere to the provisions of the Securities Act and JOBS Act by first validating investors' statuses.

JOBS Act & Rule 506

Since September of 2013, small startups and businesses have had the freedom to engage in general solicitation while still conducting private offerings. However, to accommodate the new provisions outlined in Title II of the JOBS Act, the SEC made some additions to Rule 506 of Regulation D. Rule 506(c) was implemented to aid purchasers and issuers in the process of securities sales and purchases. To use Rule 506(c), issuers need to acquire proof of an investor's alleged accredited status – the use of self-certification through signed statements is not sufficient. Reasonable steps verification helps protect sellers and purchasers, and ensures that private offerings are SEC-compliant.

Why Accreditation is Crucial  

The definition of an investor who's accredited by SEC standards is given under Rule 501 of Regulation D. Accreditation can be achieved by individuals or entities who meet certain income and asset requirements. Self-surveys and self-validations are longer sufficient methods of proving an investor holds an accredited status. Therefore, whether you're a purchaser or issuer, it's necessary to request verification services for yourself or for a potential investor before proceeding with a transaction involving private securities. Not obtaining verification before conducting private offerings can lead to having to return money to investors and/or a temporary ban from certain types of fundraising.

SEC’s Validation Guidelines

In light of general solicitation becoming available to startups, the SEC released a set of guidelines issuers can follow to verify an investor before selling private securities. The actions outlined in these guidelines are not mandatory, but are considered acceptable forms of accreditation validation. For example, if an investor is willing to provide personal financial information, you can verify their income and net worth by reviewing W-2s, bank statements, appraisal reports, etc. Third-party reviewers are a great way to verify, but it’s important to note that the SEC only allows third party reviewers that one has a reasonable basis to rely upon.  For the gold standard, make sure your third-party reviewer utilizes licensed attorneys to perform the verification reviews.

Updated 2/23/22

 Nearly 10 years later Rule 506 funds are only increasing in total. This is a direct result of the great freedom to raise funds privately that these exemptions provide. As more and more firms use Rule 506(c) to generally solicit, the SEC has cracked down more and more on firms not performing the reasonable steps required to ensure all their investors are accredited investors.

We are proud to say we were there at the beginning and have continued to provide outstanding service alongside our fully compliant accredited investor verification letter. Not only are you taking the reasonable steps necessary to verify your investors, but you are also utilizing a team dedicated to your fund's success and your investors’ happiness.