There are various options available to verify the accredited investor status of investors for companies raising capital through Rule 506(c). Most offerings of securities depend on Rule 506(b) which permits accredited investors to self-verify using a simple questionnaire. As a result, business owners may not necessarily be as familiar with the Rule 506(c) verification process.
Easiest Way to Comply With Reasonable Steps Requirement under Rule 506(c)
The biggest obstacle to successfully using Rule 506(c) is complying with the “reasonable steps” requirement to verify the status of accredited investors. However, accredited investors can be verified using SEC “safe harbors” laid out in Rule 506(c). Using one of the enumerated methods, the issuer is deemed to have taken reasonable steps to verify an investor is an accredited investor if they use one of the methods below:
• With the accredited investor status based on net worth, the issuer would review particular documents indicating the investor’s assets and liabilities, dated within the previous three months, and get written representation from the investor that they have revealed all liabilities required to make a determination of net worth. (Note that the value of the investor’s primary residence cannot be considered an asset when qualifying under net worth.)
• With the status determined according to income, an issuer of securities would need to review documentation of an investor’s income for the past two years ($200,000 yearly income for an individual, or $300,000 combined with a spouse) and get written representation that the investor reasonably expects to meet the required income level during the current year. This usually involves reviewing IRS forms, although other forms of third party evidence may be accepted if tax documents are not available..
• Regardless of whether the status is based on net worth or income, the issuer may get a written confirmation from the individual (via a CPA, attorney, SEC-registered investment adviser, or registered broker-dealer) that he or she has conducted reasonable steps to verify the investor is accredited based on net worth or income within the previous three months and has determined that the investor is an accredited investor.Although Rule 506(c) has particular advantages, the accredited investor status verification process can still prove to be challenging. Using a professional verification service for investors and issuers can simplify the process significantly.
