When a company offers unregulated securities for sale to an investor, it has the responsibility under SEC regulations to perform “reasonable steps” to verify the accredited status of the investor. Each investment fund is responsible to conduct the accredited investor verification process, as there is no official federally mandated approval process involved.
There are multiple ways that issuers of securities offerings can verify the accredited status of investors.
Net Worth and Income Verification
To perform accredited investor verification, an investor can provide official documents that verify required income and/or net worth, such as pay stubs, tax returns, certain IRS forms, brokerage statements, credit reports, financial statements, and tax assessments.
When calculating net worth, liabilities are subtracted from total assets to get the value, and the assets cannot include the value of the individual’s primary residence. Liabilities may not include a mortgage unless the loan value is greater than the fair market value of the residence, or if the debt was incurred in the last 60 days.
The investor seeking accredited status may also provide the issuer with a letter from their employer, accountant, or registered broker confirming their status as accredited.
3rd-Party Accredited Investor Verification
With a third-party investor verification letter, the investor’s accredited status can be verified by the certification of an investment advisor, registered broker, CPA, or licensed attorney.
Common methods include financial requirements such as high income or high net worth.
Tangible evidence should be disclosed to prove the investor meets the specifically required thresholds during the verification process. For income that is $200,000 USD (or $300,000 USD when combined with a spouse or spousal equivalent) in the last two years with a reasonable expectation to maintain or exceed that amount in the current year. For net worth, an individual (or combined with a spouse or spousal equivalent) must exceed $1,000,000 USD in net worth, not including their primary residence’s value as an asset.
Businesses issuing securities offerings may also hire a third-party verification service to perform the accredited investor verification.
Persons who hold Series 7, 65, or 82 licenses in good standing may also now qualify as accredited investors. The SEC has the option to add other designations and certification moving forward as it chooses to which may enable accredited investor status.
Knowledgeable employees of private funds also now may be considered accredited investors.
Therefore, companies issuing securities offerings can verify the accredited status of investors based on financial and various other pertinent and documented qualifying factors.
