Proving Accredited Investor Status Through Verification Methods

To qualify for accredited investor status, the SEC generally requires its criteria for net worth, income, affiliations, or knowledge level to be met. According to Rule 506(c) of the SEC regulations, the issuer of securities is responsible for proving the accredited status of investors in its securities offerings. The issuer may not just depend on the word of the investor. The issuer is required to perform “reasonable steps” to verify this status.

The methods by which issuers may verify the status of an investor (as accredited or not accredited) include:

  1. Insider Method
    A general partner, director, or executive officer of an organization issues securities, they are considered an accredited investor. To confirm this status, the issuer can show governing documents, securities filings, certificates, research reports, or resolutions; or they may have the information as readily available proof of accredited investor status.
  2. Net Worth Method
    This method involves confirming the net worth of an individual (or jointly as a couple) exceeding $1 million (not including the primary residence). The prospective investor must provide documents that prove their net worth by their assets and liabilities. These documents may include IRS forms, credit reports, deeds, other evidence of real estate holdings ownership, consumer credit report showing all current liabilities, proof of vehicle ownership, value of private company securities holdings, and third-party property holding valuations.

As an investor with multiple assets and/or liabilities, the net worth method can be very time-consuming and complicated. However, for the investor with a single bank account and no liabilities, this method can be quite simple.

  1. Income Method
    This method involves confirming that an individual has an annual income of greater than $200,000 or $300,000 with a spouse) with the reasonable expectation of making the same or greater income in the current year. The various documents that can prove the accredited investor status of a prospective investor relying on the income method include:

* Tax documents such as 1040s, W-2s, 1099s, and K-1s that report income
* Pay tubs or tax filings
* Letter from an employer or accountant verifying the investor’s actual or anticipated yearly income

The issuer has the option to obtain a letter from a third-party that confirms the accredited status of the investor instead of manually evaluating the documents of each investor. This letter will let the issuer operate under a “safe harbor” provided that the grantor of the letter is one of the following:

* Registered investment advisor
* Registered broker-dealer
* Certified public accountant (CPA)
* Attorney

Although there is no specific rule stating what the letter should say, usually a third-party verification letter will state the test the investor fulfills, on what basis the signatory on the letter is qualified to operate as an evaluator of accredited investor status, and the date of the review performed by the evaluator.

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