In private securities offerings, verifying an investor’s accredited status is a critical compliance obligation. Under Title II of the JOBS Act, issuers using the exemption that allows general solicitation must take reasonable steps to verify that investors meet the accredited investor criteria. This article offers a practical guide to streamline this process, balancing compliance, efficiency, and investor trust.
Understanding Accredited Investors
Accredited investors most often are individuals or entities that meet SEC mandated financial thresholds—such as a net worth over $1 million USD (excluding primary residence, but including any liabilities made on the primary residence in the 60 days prior to the review) or an annual income exceeding $200,000 USD ($300,000 USD for spouses or spousal equivalents s). These parameters indicate the investor’s ability to handle sophisticated, high-risk investments. Proper verification protects both investors and issuers from serious legal and financial consequences in the event of an SEC audit.
Verification Methods
The SEC outlines the following non-exclusive methods to confirm accredited investor status:
- Financial Documentation: For income, review IRS forms (e.g., W-2s, 1099s, etc.) from each of the two years prior to the review, paired with a certification made by the investor of their expected current-year income meeting the income criteria (as an individual or for spouses/spousal equivalents). For net worth, review 3rd party generated asset evidence submitted by the investor, along with liabilities. These may include recent bank or brokerage statements, property ownership and valuation evidence, etc.
- Third-Party Confirmation: Review and verify a written attestation from a registered broker-dealer, investment advisor, attorney, or CPA verifying the investor’s status, certifying that the investor is an accredited investor.
Best Practices for Effective Verification
- Develop a Clear Policy: Create a written verification process detailing acceptable documents, steps, and data handling. This ensures consistency and signals diligence to regulators.
- Communicate Clearly: Explain the verification purpose and requirements to investors upfront. Offer simple submission instructions and reassure them about data privacy.
- Validate Documents: Check financial records for authenticity—ensure they’re recent (within three months), consistent across periods, and free of tampering indicators like unexplained transactions.
- Secure Data: Use encrypted online portals for document submission. Robust cybersecurity protects sensitive information and builds investor confidence.
- Keep Records: Retain verification records—documents and certifications—for at least five years to address potential regulatory inquiries.
- Leverage Questionnaires: While not sufficient alone, initial questionnaires can guide investors toward providing the right documentation.
The Value of Third-Party Services
Collaborating with specialized verification providers can enhance efficiency and compliance. These services bring expertise, advanced technology, and secure systems, reducing the issuer’s workload. They often deliver a streamlined process, from document collection to status certification. However, issuers remain accountable for accuracy and should partner with reputable providers while understanding their methods.
Verifying accredited investor status is essential for regulatory compliance and investor protection. By establishing clear policies, ensuring transparent communication, validating documents, securing data, maintaining records, and considering third-party support, issuers can manage this process effectively. Educating investors about the process and staying updated on regulatory changes further strengthens trust and compliance. These practices enable issuers to confidently navigate verification while fostering a professional, efficient experience.
