The sponsor of a securities offering is required to verify if a potential investor is an accredited investor if that individual will lawfully invest in a private placement offering. What defines accredited investor status is specified by the Securities and Exchange Commission (SEC) in Regulation D, Rule 501.
To use the income test method of verifying accredited investor status, two things are required of the investor. Those include evidence of income, which is documented and signed statements to the issuer of the securities (the sponsor) to verify the potential investor’s income. The income level requires to qualify is $200,000 USD as an individual and $300,000 USD jointly with a spouse or spousal equivalent. The income must have been made in each of the past two years with a signed statement asserting a reasonable expectation that the income level will be at least the same in the current year. The investor may provide paystubs, W-2s, or 1099s to show proof of income.
Net Worth Test
The investor must provide three things to satisfy the net worth test method of verifying accredited investor status. These include:
- Documentary evidence in the form of brokerage statements, bank statements, loan statements, third-party appraisals or BPOs, or other relevant documents.
- Credit report from a trusted credit reporting agency listing liabilities.
- A signed statement verifying the investor has disclosed all liabilities.
Whether or not you have a spouse or spousal equivalent, as a potential accredited investor, you need to demonstrate a net worth greater than $1 million USD that does not include the value of your primary residence. However, if any mortgage debt has accumulated in the previous 60 days or if the home is underwater, these count against the net worth.
Verifying accredited investor status through a third-party takes the risk and burden off the shoulders of the sponsor of the securities offering. It places it on the professional third party service. The investor also benefits from the method by not revealing certain aspects of his or her net worth or income. Also, the investor can use the same service to verify his or her status for various private placement memorandums rather than having to forge through differing requirements and forms from each sponsor.
Third-party providers, per the SEC, may be registered investment advisers, broker-dealers, certified public accountants, or attorneys. One of these professionals is to provide and sign a safe harbor evidence letter that confirms that the third party is verifying the investor as an accredited investor.
It is important to choose the method of investor verification that works best based on your situation, whether you are the sponsor or investor.