Under the provisions of Rule 506(c), issuers of unregistered securities are permitted to engage in general solicitation, but mneed to take reasonable steps to verify that all investors in the venture or project are in fact accredited investors. Rule 506(c) is a convenient way for owners and developers to reach investors outside of their immediate personal and business networks, but it requires investors to meet the SEC’s accredited investor verification requirements in order to participate.
Accredited Investor Requirement
An accredited investor is an individual of high net worth or income, an entity with sufficient assets, or an institution such as a bank or an investment company. An individual may qualify as an accredited investor by having a net worth (minus the value of the investor’s primary residence) of over $1 million USD, or earned income greater than $200,000 USD as an individual (or $300,000 USD with a spouse) in each of the two preceding years with a reasonable expectation of earning the same or greater in the current year. In addition, the issuer must take reasonable verification steps to ensure all their investors qualify.
Prior to the JOBS Act and the implementation of Rule 506(c), accredited investor verification was done by receiving a statement from the investor in which the investor would self-certify his or her accredited status. Under Rule 506(b), this verification method is still viable. However, additional verification is needed when operating under Rule 506(c) which allows general solicitation. The issuer is responsible for taking reasonable steps to ensure that all their investors meet the accredited investor standards. The SEC has provided a list of non-exclusive safe harbors to guide accredited investor verification:
- A review of documentation dated within the past three months, including brokerage account statements, bank statements, and/or credit reports from one of the three major credit bureaus along with a written statement provided by the investor that verifies his or her net worth;
- A review of copies of IRS forms, including Form 1040, Form 1099, or W-2 in order to verify annual income; or
- Confirmation in written form from a CPA, a licensed attorney, a registered broker dealer, or a SEC registered investment adviser the reasonable steps were conducted to verify an investor is an accredited investor – this is defined as third-party verification. This third-party verification may also be provided through a third-party accredited investor company.
As an issuer, if you depend on the safe harbors mentioned above, it is important to carefully follow the requirements of those safe harbors.
Using a third-party SEC accredited investor verification service can be the easiest way to fulfill the reasonable steps required as mentioned above. To pursue this option, contact an experienced and reliable investor verification service today.