The verification of accredited investors can be a significant hurdle for issuers who want to comply with Rule 506(c) under Regulation D and use general solicitation methods in their offering. The law requires that issuers take “reasonable” steps to verify that every purchaser is accredited.
What are “reasonable steps” to verify accredited status?
As we said last week, an individual investor may be deemed to be accredited in three ways: income, net-worth or knowledge. Rule 506(c) itself offers three non-exclusive methods to verify status:
- To verify income, the issuer may review the investor’s IRS forms showing income for the prior two years and obtain a written representation that the purchaser has a reasonable expectation in the current year of reaching the income level necessary to qualify as accredited;
- To verify net worth, the issuer may review certain financial information, obtain a credit report and obtain a written representation that the purchaser has disclosed all liabilities necessary to determine their net worth; or
- The issuer may rely on a written statement as to the investor’s accredited status from a registered broker-dealer, an SEC-registered financial adviser, a licensed attorney or a CPA.
Searching information in the public record is not sufficient to comply with Rule 506(c). Some investors may be reluctant to divulge the specific financial or tax information needed for the verification process. And, for some investors it may be challenging to determine their net worth, as many assets do not have an easily verifiable market value.
Persuading your investors to submit to the verification process is an essential component of Rule 506(c) compliance. If your business, as issuer, does not take reasonable steps to verify, your private offering will not be able to use general solicitation techniques and the registration exemption under Rule 506(c) will not be available for your offering.
Put your lawyers to work
You may rely on your legal representation to provide you with guidance at every part of the private offering process. Skilled private placement attorneys routinely advise clients regarding the specific requirements of Regulation D, including Rule 506(c) requirements.