Third Party Accredited Investor Verification is Among the 4 Safe Harbors

According to SEC Rule 506(c) of Regulation D, general solicitation and advertising may be performed by private companies for the purposes of raising capital. However, each issuer depending on this rule must carry out “reasonable steps” to verify that their potential investors have reached accredited investor status. Third party accredited investor verification is one of several ways, or safe harbors, in which such a status may be evaluated and verified.

The SEC has set up 4 non-exclusive safe harbors in which an issuer can have confidence they have met the reasonable steps criteria. We begin a review of these harbors below with third-party verification.

Third Party

An issuer may utilize third-party accredited investor verification by obtaining written confirmation, dated within the previous three months, of their accredited investor status from one of the following individuals who have possessed verified accredited investor status within the previous three months: a licensed CPA who is duly registered and in good standing under the laws of the place of his or her residence or principal office, or a licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law, or a registered investment advisor with the Securities and Exchange Commission, or a registered broker-dealer.

Net Income

The net income verification test can be fulfilled by reviewing the individuals W-2, 1040, 1099, or K-1 for the last two most recent years, along with a written certification from the individual they have a reasonable expectation of the same income level in the current year to qualify as an accredited investor.

Net Worth

The net worth verification test can be performed by reviewing certain documents that are dated within the previous three months in addition to a written representation from the individual that all of their liabilities have been revealed. The documents include:

* Assets – brokerage statements, bank statements, statements of securities holdings, appraisal reports and tax assessments issued by independent third parties, and certificates of deposit, etc.

* Liabilities – credit report

Pre-Existing Accredited Investors

This pertains to a pre-existing investor under Rule 506(b) previously verified as accredited.

One important note: if joint assets with a spouse are used in the net worth calculation, the spouse’s documents must also be provided.

Depending on the particular information available from potential investors, issuers need to have the capability to utilize all of these methods for verification purposes.

For more information about third party accredited investor verification and other forms of verification incumbent upon issuers who are seeking accredited investors, contact an experienced company that offers investor verification services today.

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