For issuers and financial professionals navigating private placement regulations, demonstrating that an investor qualifies as “accredited” is paramount. This process, often referred to as Reasonable Steps Verification, relies primarily on two core financial measures: income and net worth. Understanding the documentation and methodologies for each is crucial for ensuring compliance.
The Income Approach
The income verification method is straightforward, focusing on an individual’s earnings over a specified period. The standard criterion often requires the investor to have achieved a specific minimum annual income, usually over the past two years, with the expectation of meeting the same level in the current year.
Required Documentation for Income Verification
To satisfy Reasonable Steps Verification requirements under the income standard, documentation must be robust and reliable. Typical acceptable documents include:
- Tax Returns: Copies of tax returns (e.g., Form 1040) are a primary method, providing official records of adjusted gross income for the requisite past years.1
- W-2s or K-1s: For salary and investment income verification, W-2 forms (Wage and Tax Statements) or K-1s (Schedule K-1 for partnership/S-corporation income) are commonly requested.
- Pay Stubs: Recent pay stubs or other reliable evidence of current employment and salary can help substantiate the expectation of continued income for the current year.
A comprehensive review of these documents helps establish a clear historical and projected income trajectory, fulfilling the verification burden.
The Net Worth Approach
The net worth verification method assesses the investor’s overall financial health, requiring a minimum threshold for the total value of assets minus liabilities. Importantly, the value of the investor’s primary residence is typically excluded from this calculation. This method offers flexibility for individuals whose wealth accumulation may be through assets rather than high annual income.
Required Documentation for Net Worth Verification
Verifying net worth involves aggregating evidence for both assets and liabilities as of a recent date.
- Assets:
- Bank/Brokerage Statements: Recent statements (usually within the last three months) for checking accounts, savings accounts, Certificates of Deposit (CDs), and investment/brokerage accounts are essential.
- Appraisals/Valuation Reports: Documentation for non-liquid assets, such as real estate (excluding the primary residence), private equity holdings, or significant collectibles, may require recent, qualified appraisals or third-party valuation reports.
- Liabilities:
- Credit Reports/Statements: A recent credit report can help identify outstanding liabilities, such as credit card balances, personal loans, and installment debt.
- Mortgage/Loan Statements: Statements for any debts related to non-primary residence real estate or other significant loans must be provided.
The documentation must clearly support the calculation that the investor’s verifiable assets exceed their verifiable liabilities by the specified minimum amount.
Key Takeaway for Issuers
Both the income and net worth methods are valid pathways for satisfying Reasonable Steps Verification. Utilizing a third-party service provider can streamline the collection and objective review of these sensitive financial documents, helping issuers meet their compliance obligations efficiently and with appropriate security.
