An issuer of securities offerings under Rule 506(c) is responsible for carrying out proper verification to confirm the accredited investor status of each investor before selling exempt/unregistered securities. There are several options available to companies raising capital funds and operating under Rule 506(c) when it comes to verifying investor accreditation.
The Main Reason for Investor Accreditation
The rules established by the SEC regarding the accreditation of investors are designed to protect investors by making sure they possess a basic knowledge at a minimum of the possible risks connected with applicable investments and can handle financial loss if the investment is not successful.
There are no independent bodies or government agencies that determine or announce that someone is now an accredited investor. There are also no documents or exams that certify someone has attained accredited investor status. Companies that issue unregistered securities are required to perform due diligence on the status of the investor before selling the investor the securities.
Ways to Verify Investor Accreditation
There are multiple ways to verify the accredited status of a prospective investor. These are:
1. Verifying Through Bank Statements, Tax Returns, etc.
The process often begins by having the prospective investor complete a questionnaire about his or her financials (income or net worth) that qualify the investor for accredited status.
2. Verifying Through a Third-Party
The issuer can have the prospective investor obtain a letter of accreditation from a third-party, such as an SEC-registered investment advisor, CPA, registered broker-dealer, or licensed attorney who has relevant knowledge about the financials of the investor. This can be a simple, fast, and painless process that maintains some level of financial privacy for the investor.
3. Using a Third-Party Verifier Service
This outsourcing method can prove to be very time-saving and cost-efficient. This is especially beneficial for prospective investors who may be uncomfortable providing an issuer, or even some third-party financial or legal professionals their personal financial information. Using a verification service allows the investor to send this information anonymously. The third-party will then send the issuer a confirmation letter, verifying investor accreditation.
The last two options mentioned above relieve the investor of some of the potentially laborious work of independently checking the accredited status of each prospective investor, and instead enable a professional service to handle any labor-intensive work of the investor.