How to Verify Accredited Investor Status

An accredited investor is an individual or entity meeting financial criteria established by the U.S. Securities and Exchange Commission (SEC), permitting investment in private securities offerings. These offerings, such as private equity, venture capital, and hedge funds, are not SEC-registered and often carry increased risk with less regulatory oversight than publicly traded securities. The designation ensures investors in these less-regulated opportunities possess the financial sophistication and capacity to absorb potential losses.

Accredited investor status primarily stems from exemptions from SEC registration requirements, particularly under Regulation D. Regulation D allows companies to raise capital through the sale of equity or debt securities without extensive disclosure and registration processes. Issuers must take reasonable steps to verify an investor’s accredited status to comply with SEC regulations. This article focuses on the verification process for issuers, outlining criteria, methods, and compliance measures.

Understanding Accredited Investor Criteria

Accredited investor status is determined by financial thresholds or professional qualifications. For individuals, two primary tests exist: income and net worth. An individual can qualify with an annual income exceeding $200,000 for the two most recent years, with a reasonable expectation of maintaining it. Alternatively, an individual can qualify with a joint income exceeding $300,000 with a spouse or spousal equivalent for the same two-year period, expecting to continue it.

The net worth test for individuals requires a net worth exceeding $1 million, either alone or jointly with a spouse or spousal equivalent. This calculation excludes the value of the individual’s primary residence. These thresholds identify individuals presumed to have the financial capacity to bear the risks of unregistered investments.

Beyond financial metrics, professional certifications or designations also qualify individuals. These include holding a Series 7, Series 65, or Series 82 license, if in good standing. Knowledgeable employees of a private fund can also qualify for investments in that fund or other funds managed by their employer.

Entities can also qualify based on asset levels or type. Examples include trusts, corporations, and partnerships with total assets exceeding $5 million, provided they were not formed to acquire the securities being offered. Financial institutions, such as banks, savings and loan associations, insurance companies, and registered investment companies, automatically qualify. An entity where all equity owners are accredited investors also qualifies.

Verification Methods

Issuers must take reasonable steps to verify potential investors’ accredited status. While self-certification can be a component, it is insufficient as a standalone method. Issuers must develop a “reasonable belief” that the investor is accredited, not solely relying on a questionnaire checkbox. Self-certification serves as an initial indication, requiring corroboration through other verification processes.

A common method is a third-party verification letter. These letters can be provided by registered broker-dealers, investment advisers, attorneys, or CPAs. The letter should confirm the professional has verified the investor’s accredited status within 90 days. It should also state the basis for their determination, such as income or net worth documentation.

Issuers can directly review financial documentation from the investor. For income verification, acceptable documents include W-2s, tax returns (Form 1040), or pay stubs from the two most recent years. Pay stubs can confirm current income levels and continued income expectation. The issuer must ensure reported income meets or exceeds required thresholds.

For net worth verification, documents can be requested. These include bank statements, brokerage statements, and other securities holdings. A recent credit report can determine liabilities, identifying outstanding debts. The issuer must review these documents thoroughly to confirm the investor’s assets, minus liabilities (excluding the primary residence), exceed the $1 million net worth threshold.

Verification of professional certifications involves confirming the investor holds a Series 7, Series 65, or Series 82 license. This can be done by checking publicly available databases maintained by regulatory bodies like FINRA or state securities regulators. For entities, public information regarding their assets or registration status can be verified through government or industry registries. The issuer must ensure the license is current and in good standing.

Documentation and Compliance

Maintaining thorough records of accredited investor verification is important for issuer compliance. These records demonstrate the issuer has taken reasonable steps to confirm investor status, essential for relying on SEC registration exemptions. Issuers should retain all verification documents for five years from the final sale of securities in the offering.

Documents to be retained include investor questionnaires. Third-party verification letters from broker-dealers, investment advisers, attorneys, or CPAs should also be kept. If the issuer directly reviewed financial documentation, W-2s, tax returns, bank statements, brokerage statements, and credit reports must be securely stored.

Internal memos or notes detailing the issuer’s verification process, including follow-up questions or additional due diligence, should be part of the records. This documentation provides a clear audit trail. Proper record-keeping is important for demonstrating compliance if the offering is questioned.

Confidentiality is important given the sensitive financial information collected during verification. Issuers must implement measures to protect investor data from unauthorized access or disclosure. This includes secure storage of physical and electronic documents, limiting access to personnel, and adhering to data privacy regulations. Safeguarding this information helps maintain investor trust and avoids legal or reputational issues.