Reasonable Steps Verification Required When Raising Funds from Accredited Investors

For growing companies intending to raise capital, accredited investors are a prime source of this capital. In accordance with Rule 506(c) of Regulation D, the Securities and Exchange Commission (SEC) has created an opportunity for private companies to advertise and solicit potential investors. The financial eligibility of accredited investors is not indicated by any official license provided to these investors. Rather, issuers planning to utilize Rule 506(c) – for example, in Title II equity crowdfunding – must ensure that they take reasonable steps to verify that each of their investors is accredited.

An accredited investor is a person or entity who meets specific income or wealth requirements as specified by the SEC. Issuers can verify their investors’ accredited status by the following means:

Non-Exclusive Safe Harbor Verification
When verifying potential investors, investment experts and attorneys favor the use of this formal method which complies with the “safe harbor” rule of the SEC. The specific nonexclusive safe harbor methods comprising reasonable steps verification include:

  • Reviewing the investor’s IRS forms (i.e. Form W-2, Form 1040, Form 1099, Schedule K-1) from the previous two years for income verification. The issuer should also receive a written statement from the investor indicating him or her has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year.
  • Evaluating the investor’s bank statements, credit report, and appraisals from real estate professionals in order to calculate his or her net worth.

When evaluating the income of a purchaser not reported in U.S. dollars, issuers may use either:

  • The average exchange rate for that year, or
  • The exchange rate effective on the last day of the year in which the income is determined.

As part of reasonable steps verification, accredited investors must be shown to meet either a specified income or net worth requirement. The earned income of the investor must be at least $200,000 (or $300,000 with a spouse) for each of the last two calendar years. If using the Net Worth standard, the net worth of the investor must be at least $1 million (not including the value of the investor’s primary residence).

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