Businesses that depend on Rule 506(c) to raise capital in securities offerings have access to various options to verify their investors’ accredited investor status. Many securities offerings depend on Rule 506(b), which means many investors are familiar with the self-verifying procedure via a straightforward questionnaire. The process of verifying a Rule 506(c) accredited investor is not as well known.
When an issuer is selling securities strictly to accredited investors, Rule 506(c) generally provides an exemption from the requirement to register the offering with the SEC as long as the issuer conducts reasonable steps to ensure each investor is an accredited investor.
Reasonable Steps Under Rule 506(c)
One of the main obstacles to successfully utilizing Rule 506(c) is fulfilling the requirement to take reasonable steps to verify each potential purchaser’s accredited investor status. Rule 506(c), often referred to as a safe harbor, provides various methods. To comply with the safe harbor to verify a 506(c) accredited investor, one of three ways generally may be used. These include the following:
- Suppose the accredited status of the investor is to be based on net worth. In that case, the issuer will be required to review particular documents that indicate the investor’s liabilities and assets, all dated within the past three months. This will include a consumer report showing liabilities in addition to a written representation from the investor of the disclosure of all liabilities required to determine the investor’s net worth properly.
- Suppose the accredited status of the investors to be based on income. In that case, the issuer must look at IRS forms that reveal the investor’s income over the two previous years and receive a written representation that the investor has reasonable expectation to make the same income level in the current year.
- Regardless of whether the accredited investor status of the investor is based on net worth or net income, an issuer may be provided with a written confirmation from a CPA, attorney, or other persons referred to in the rule that the issuer has taken reasonable steps to verify the investor’s accredited status. This verification must be based on net worth or net income over the previous three months. The written confirmation must include the determination that the investor is an accredited investor.
Complying With Rule 506(c)
In practical terms, issuers can comply with Rule 506(c) accredited investor requirements, fitting into one of the safe harbors in the following ways. One way is for the issuer to verify the accredited investor status of each investor. A second way is to utilize a third-party verification service to conduct the verification of each investor’s status. A third way is for the investor’s attorney, accountant, or other professional to verify the potential investor’s accredited status.
The second way mentioned above – utilizing a third-party verification service – is an easy way to fulfill your verification requirements. If you are ready to move forward with verifying yourself as an investor or verifying other potential investors in your offering, contact an experienced investor verification service today.
