Accredited Investor Verification

Almost anyone can invest in traditional financial instruments such as stocks, bonds, and mutual funds. However, there are a number of assets that are inaccessible to ordinary investors. Examples include startups, specific real estate projects, private equity, and venture capital funds.

In the United States, being an accredited investor is the only way for an individual or entity to invest in certain higher-risk and less-regulated opportunities. Accredited investors must meet specific SEC criteria and adhere to strict guidelines.

Investors are frequently asked to provide documentary proof that they do, in fact, meet the criteria for accredited investors.

Earning your accredited investor status is not as simple as going to the SEC to be certified. In any case, the SEC does not provide these certification services. What's important is that you are able to meet the SEC's requirements for income, net worth, knowledge level, or affiliations.

Pass all these tests and your goal of obtaining accredited status becomes achievable.

That being said, the onus of demonstrating your accredited investor status rests with the issuer of the securities offering. This is in accordance with SEC regulation under Rule 506(c). Of course, they can't just take the investor at his word.

Not to be confused with the "reasonable belief" requirement from Rule 506(b), the issuer must instead take "reasonable steps" to confirm this status.

How to Confirm Your Status as an Accredited Investor

There are several ways to confirm your accredited investor status. Indeed, you may already have met the requirements for the accredited investor designation. Your accredited investor status is verified by demonstrating one of the following:

1. The seller of the unregistered investment must self-verify.

2. Status is verified by an independent third party (such as a CPA or accountant).

Which of these two options you choose will depend on the Regulation D exemption that the investment's seller is using to sell the securities.

Generally speaking, if you are filling out a questionnaire, they are performing a Reg D 506 (b). While they are conducting a Reg D 506(c) offering if you are required to upload a letter from a third party.

Rule 506(b) exemptions, which account for 4/5 of all Regulation D placements and are simpler because they permit investors to self-certify their accredited status, have remained the private placement exemption of choice for most small issuers.

The Verification Process

While the requirements for becoming an accredited investor are stringent, there is no federal verification process in place for accredited investors. It is instead the responsibility of each company to ensure that prospective partners are accredited investors before allowing them to invest.

Proof of income and net worth are frequently required by accredited investments, including tax returns, bank and investment statements, and documentation of securities licensing or employment. Keep in mind that you cannot use the value of your primary residence to satisfy the net worth requirements.

Any one of the following three approaches allows issuers to confirm an investor's status:

1. Insider Method: An individual is regarded as an accredited investor if they are a director, executive officer, or general partner of the securities issuer.

The issuer should have easy access to this data, but they may also cite other internal or external sources, like securities filings, research reports, governing documents, resolutions, or other certificates, to offer additional assurance.

2. Income Method: A potential investor will be granted accredited status if they can prove they currently earn more than $200,000 (alone, or $300,000 with a spouse) and that they can reasonably expect to continue earning at least that much in the future.

Documents that can be used to prove an investor's accredited status include: Tax filings or pay stubs; A letter from an accountant or employer confirming their actual and expected annual income; or IRS Forms like W-2s, the 1040s, 1099s, K-1s, or other tax documents that report income.

3. Net Worth Method: Accreditation also requires proof that an individual's (or spousal couple's) joint net worth exceeds $1 million (excluding the value of one's primary residence).

To accurately calculate net worth, the potential investor must provide documentation revealing all of their asset and liability information.

This could include:

- Report on credit.
- IRS forms.
- A consumer credit report lists all outstanding liabilities.
- Real estate holdings require deeds or other proof of ownership.
- Property holdings are valued by a third party.
- The market value of a private company's securities holdings.
- Vehicle ownership documentation.

This method may be very simple for investors who have no liabilities and a single large bank account. However, for people who have multiple assets or liabilities, this could be extremely complicated and time-consuming.

Issues with Traditional Investor Verification Methods

For both issuers and investors, the effective verification process for accredited investors is still in its early stages. Understandably, this can frequently lead to a great deal of confusion on both sides regarding the exact process requirements.

Additionally, accredited investors are required to provide proof of their accreditation for every new opportunity. It goes without saying that this can quickly result in a lot of duplication, frustration, and time and money wasted.

From the issuer's perspective, it can also be inconvenient and time-consuming to manually review each new investor's credentials. However, the third-party verification method provided by Rule 506(c) provides a solution to these issues.

Instead of manually reviewing each investor's documents, the issuer can obtain a letter attesting to the investor's accreditation status from a third party. This letter provides the issuer with "safe harbor" protection if the grantor is one of the following qualified individuals:

● A registered broker-dealer

● a registered investment advisor

● an attorney

● a certified public accountant

There is no set format for the letter that must be followed for verification. However, these third-party verification letters typically include information on the investor's compliance with each test, how the letter's signatory meets the requirements to serve as an evaluator, and the date the evaluator completed their review.

Who Qualifies as an Accredited Investor?

Individual accredited investor requirements have been discussed thus far. Certain entities, however, can also claim accredited investor status. The SEC defines accredited investors in Regulation D Section 501.

Accredited investor status is available to the following entities that meet the requirements outlined in this document:

● Banks

● Firms that provide brokerage services

● Employer-sponsored pension plans

● Various trusts

● Firms that provide Registered Investment Advisor (RIA) services

● Assets totaling $5 million in limited liability companies

● Investment advisers who are both SEC and state-registered

● Reporting advisers are exempt

● Companies that invest in rural businesses

● Indian tribes, governmental bodies, funds, and entities governed by foreign law.

● The Investment Advisers Act defines "family offices" and their "family clients" as having at least $5 million in assets under management

The Most Convenient Way to Obtain Accreditation

Instead of the time-consuming, traditional verification methods, you can easily get accredited through Verify Investor. Verify Investor is an investor identity company that assists securities issuers in validating and authenticating their user base.

Verify Investor provides simple, dependable, and secure verification and certification services. As a result, businesses and investors can concentrate on raising capital and investing.

Services Offered:

● Accredited Investor Verification

● Qualified Purchaser Verification

● Qualified Client Verification

● Custom Verification

Benefits of Using A Verification Service

1. Simplicity: Companies simply register, enter the email addresses of the investors they wish to verify, and pay. Investors must fill out a short questionnaire, sign a few forms, and upload supporting documentation. The majority of users will finish the process in under 5 minutes.

2. Highly Confidential: The protection of your confidential information is of the highest priority. Verify Investor’s security measures include a wide range of hardware, software, and procedural protocols, including data encryption, communication over SSL, vulnerability/malware scanning, a system of firewalls, and routine security testing and reviews.

3. Solid Reliability: Businesses can be confident that using VerifyInvestor.com satisfies the new federal requirement of taking "reasonable steps" to verify their investors. Investors can always rely on their team to keep their confidential information secure and away from prying eyes.

Three Advantages of Becoming an Accredited Investor

● Better Portfolio Diversification: Non-accredited investors do not have access to a wide range of high-risk, high-reward investment options available to accredited investors.

Many of these exempt investments, such as energy and real estate, are alternatives with low correlations to the stock market. This can assist a prospective investor like you in developing a diversified portfolio that will not be negatively impacted by specific market trends.

● Increased investment limits: There are usually restrictions on how much a non-accredited investor can invest in high-risk and less regulated investments. The same regulation, however, imposes no limitations on the amount accredited investors may invest.

● The potential for higher returns: Securities that are less regulated, such as those available to accredited investors, carry significantly higher risks. They can, however, generate significantly higher returns.

Get Your Accreditation Today

Accreditation is the first step in broadening your investment horizon and gaining access to lucrative opportunities that you would not otherwise be able to invest in. However, the lengthy verification process and information barriers tend to stymie progress.

Those who can meet SEC requirements may benefit greatly from the expanded universe of investments and the possibility of much higher returns.