Accredited Investor Verification Providers in Regulation CF Offerings (2024)

Accredited Investor Verification Providers in Regulation CF Offerings (1)

Accredited Investor Verification – Accredited Crowdfunding Under Rule 506(c)

Accredited investor verification is a critical part of the Rule 506(c) also known as the Accredited Crowdfunding exemption. Rule 506(c) of Regulation D of the Securities Act of 1933, as amended allows issuers to engage in general solicitation and advertising of their exempt offering if specific requirements are met. One such requirement is that the issuers comply with accredited investor verification procedures because sales under the rule can only be made to purchasers who are “accredited investors“. Even one sale to a non-accredited investor in a Rule 506(c) offering will prevent the issuer from relying upon the exemption.

Rule 506(c) Generally

Both public and private companies can rely upon Rule 506(c) for their securities offerings. The exemption is commonly used in going public transactions to raise initial capital and obtain a shareholder base. Rule 506(c) allows issuers to raise an unlimited amount of capital and there are no limitations on the number of non-accredited investors who can invest. Issuers may only advertise their Rule 506(c) offering if they verify that sales are made only to accredited investors. One method of doing this is by hiring a third party accredited investor verification provider.

Rule 506(c) Securities Offerings l Verifying Accredited Investor Status

Since Rule 506(c) was adopted and Accredited Crowdfunding has grown in popularity, third party service providers have popped up offering accredited-investor verification services. In order for verification to be comply with Rule 506(c)’s requirements, a third party service provider must review sensitive financial information about the investor’s financial condition. This review and the lack of regulation concerning third party verification providers has raised significant concerns among market participants. The accredited investor verification segment is still relatively new and there are few if any, barriers to entry. It is no surprise to find that there are numerous verification providers readily available through the internet who tout their services but fail to provide meaningful background information.

If the issuer does not want to use a third party verification provider then the issuer should consider all relevant facts and circ*mstances to determine what methods of verification of accredited investor status are reasonable. Rule 506(c) requires the issuer to undertake an objective verification process to determine accredited investor status. This should include:

♦ the nature of the purchaser and the type of accredited investor that the purchaser claims to be;

♦ the amount and type of information that the issuer has about the purchaser;

♦ the nature of the offering, such as the manner in which the investor was solicited to participate in the Offering, and the terms of the Offering, such as a minimum investment amount.

The SEC has provided a nonexclusive list of verification methods that issuers can use to accredited investor status. These include:

♦ verification based on income, by reviewing copies of any Internal Revenue Service form that reports income, such as Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040 for the two most recent fiscal years and obtaining the investor’s written representation that it has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year;

♦ a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a securities attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor; and

♦ reviewing certain documentation, dated within the prior three months, and obtaining the purchaser’s written representation that all liabilities necessary to make a determination of net worth have been disclosed including:

(i) for assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties; and

(ii) for liabilities: a credit report from at least one of the nationwide consumer reporting agencies;

♦ for an accredited investor who purchased prior to the effective date of Rule 506(c) and remains an investor of the issuer at the time of the Rule 506(c) offering conducted by the same issuer, obtaining the purchaser’s written certification that the purchaser is an accredited investor.

Issuers who don’t comply with the accredited investor verification rules could find themselves the subject of an SEC investigation. It is important that these procedures be established prior to the offering to ensure appropriate compliance.

For further information about thissecurities law blogpost, please contactBrenda Hamilton,Securities Attorney at 101 Plaza Real S, Suite 202 N, Boca Raton, Florida, (561) 416-8956, by email at[emailprotected]or visitwww.securitieslawyer101.com. Thissecurities law blog postis provided as a general informational service to clients and friends ofand should not be construed as, and does not constitute, legal and compliance advice on any specific matter, nor does this message create an attorney-client relationship. Please note that the prior results discussed herein do not guarantee similar outcomes.

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Brenda Hamilton, Securities Attorney
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Boca Raton, Florida 33432
Telephone: (561) 416-8956
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Accredited Investor Verification Providers in Regulation CF Offerings (2024)

FAQs

Who can verify accredited investor status? ›

Advisers typically verify someone's accredited investor status in one of three ways: 1. The investor attests to meeting the criteria; 2. The adviser reviews documents supplied by the investor (such as tax returns, W-2s, etc.); or 3. The adviser hires a third party to do the job.

How do I get an accredited investor verification letter? ›

The simplest way to attain “accredited investor” status is to ask for a 3rd party verification letter from a registered broker dealer, an attorney or a certified public accountant.

What are the 3 criteria that must be meet to be an accredited investor? ›

In the U.S., an accredited investor is anyone who meets one of the below criteria: Individuals who have an income greater than $200,000 in each of the past two years or whose joint income with a spouse is greater than $300,000 for those years, and a reasonable expectation of the same income level in the current year.

Is VerifyInvestor legit? ›

Confidential. Companies can rest assured that use of VerifyInvestor.com meets the new federal requirement of taking “reasonable steps” to verify their investors. Investors can always rely on us to securely manage their confidential information—safe from any unauthorized and prying eyes.

Who can certify you as an accredited investor? ›

To gain accredited status, you only need to satisfy SEC's criteria about income, net worth, knowledge level or affiliations. However, per SEC regulation under Rule 506(c), the onus of proving your accredited investor status falls on the issuer of the securities offering. They cannot simply rely on the investor's word.

What documents are needed for accredited investor verification? ›

To confirm their status as an accredited investor, an investor can submit official documents for net worth and income verification, including:
  • Tax returns.
  • Pay stubs.
  • Financial statements.
  • IRS forms.
  • Credit report.
  • Brokerage statements.
  • Tax assessments.

Can you self-certify as an accredited investor? ›

With VerifyInvestor.com, you can obtain accredited investor self certification, submit accredited investor proof, get verification of accredited investor status, and get an eligible accredited investor certificate quickly, confidentially, and cost-effectively.

Can a CPA write an accredited investor letter? ›

Can a CPA issue a accredited investor letter? You can use a third party letter to obtain an InvestReady certificate as long as the letter is no older than 90 days and it was written by a licensed attorney, CPA, investment advisor, or Broker Dealer.

Can an enrolled agent write an accredited investor letter? ›

Certified Public Accountant OR. SEC- or state-registered Investment Adviser OR. FINRA member Broker-Dealer. This does not include IRS Enrolled Agents.

What is the new accredited investor rule? ›

The SEC in 2020 issued rules in Release No. 33-10824, Accredited Investor Definition, allowing investors holding certain professional licenses, such as a Series 7, to qualify as accredited, even if they fall short of meeting the income or asset tests.

How does an LLC qualify as an accredited investor? ›

Requirements for Accredited Investors

An entity is considered an accredited investor if it is a private business development company or an organization with assets exceeding $5 million. Also, if an entity consists of equity owners who are accredited investors, the entity itself is an accredited investor.

What is an accredited investor questionnaire? ›

The questionnaire, typically provided by the issuer, allows the investor to identify the manner and basis of its accredited status and requires the investor to represent that the information provided is accurate.

What is a third party accredited investor verification letter for a rule 506 C offering? ›

A letter to be delivered by a registered broker-dealer, registered investment adviser, licensed attorney, or certified public accountant to assist the issuer in a Rule 506(c) offering in taking the necessary "reasonable steps" to verify the accredited investor status of a prospective purchaser.

What is the rule 506 C accredited investor verification? ›

Rule 506(c) permits issuers to broadly solicit and generally advertise an offering, provided that: all purchasers in the offering are accredited investors. the issuer takes reasonable steps to verify purchasers' accredited investor status and. certain other conditions in Regulation D are satisfied.

What is the rule 506 C? ›

The SEC created Rule 506(c) to outline the requirements investors must meet to participate in those offerings. 506(c)'s defining feature: A GP can perform general solicitation and advertising without any limitation on how much capital they can raise.

How do you prove accreditation? ›

To prove accreditation as a US individual, you can provide income evidence, net worth confirmation, professional license certification, or third-party attestation letters. Consider using income evidence as it is generally the most straightforward method for verification.

Do you need proof to be an accredited investor? ›

It's common for accredited investments to request income and net worth verification, such as bank and investment statements, proof of securities licensing or employment, and tax returns. Keep in mind that the value of your primary residence can't be counted toward net worth requirements.

Can CPA provide an accredited investor letter? ›

An accredited investor letter can be provided by a CPA, attorney, or financial advisor. They must have a professional relationship with the investor and be familiar with their financial situation.

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