The Securities and Exchange Commission (SEC) does not provide formal certification of someone as an accredited investor. In order to achieve accredited investor status, you simply need to fulfill the criteria set by the SEC. Generally, the criteria involve the prospective investor’s net worth, income, professional affiliations, or level of knowledge. Per Rule 506(c), the issuer of securities has the responsibility to know how to check if someone is an accredited investor and take “reasonable steps” to verify their accreditation status.
The issuer is responsible for taking “reasonable steps” to verify the accredited status of the investor. This can be done by the following methods:
1. Net Worth Test
An individual or married couple having a net worth greater than $1 Million USD (excluding the value of the primary residence) qualifies as having accredited investor status. The prospective investor must provide the necessary documentation that reveals their assets and liabilities, which allows an accurate calculation of net worth.
2. Income Test
An individual with an income greater than $200,000 USD (or $300,000 USD with a spouse or spousal equivalent) with the reasonable expectation of earning the same or greater income in the current year qualifies the prospective investor as an accredited investor. The prospective investor will need to provide certain documents to prove his or her annual income, including IRS forms, tax filings or pay stubs, or a letter from an employer or accountant confirming the individual’s actual and expected yearly income.
3. Insider Status
An individual who is a general partner, executive officer, or director of an issuer of the securities qualifies as an accredited investor. How to check if someone is an accredited investor, in this case, involves the issuer having easy access to the relevant information. The issuer may also direct attention to publicly available information or internal company info, such as governing documents, securities filings, resolutions, research reports, or other certificates to provide verification.
4. Third-Party Verification
Rule 506(c) allows an alternative option to a manual evaluation of investor documents. Instead, issuers can obtain a letter from a third party that confirms the accredited status of the investor. The issuer enters into a “safe harbor” as long as the entity providing the letter is a registered investment adviser, registered broker-dealer, certified public accountant, or licensed attorney.
The letter will usually identify which test the investor fulfills, the date of the evaluator’s review, and how the individual who signed the letter is qualified to evaluate the accredited status of the prospective investor.
5. Investor Verification Service
The issuer may use a professional investor verification service that handles all of the necessary contacts, document reviews, and evaluations in order to verify the accredited status of the prospective investor.
As an issuer, knowing how to check if someone is an accredited investor is vital if you are operating under Rule 506(c). One of these methods described above can help you achieve this objective.
