SEC Rule 506(c) allows the use of general solicitation provided the issuer of securities performs “reasonable steps” to verify the accredited status of investors. This Rule establishes a principle-based method for verifying investors. It requires the issuer to objectively determine whether the Rule 506(c) accredited investor verification steps taken are reasonable in view of the circumstances and facts involving every one of the purchasers and transactions.
Three Methods of Verification Under Rule 506(c)
The safe harbors established under Rule 506(c) permit issuers to perform accredited investor verifications using one of three methods:
- Conducting a review of the previous two years of the investor’s income tax returns and obtaining a written certification from the investor that he or she has a reasonable expectation of earning the required income level or greater in the current year, which is $200,000 USD for an individual or $300,000 USD for spouses or spousal equivalents.
- Performing a review of the investor’s assets within the previous three months through brokerage or bank statements, appraisal reports, or other documents, and evaluating the investor’s credit report for liabilities. The assets must exceed $1 million USD, not counting the value of the investor’s primary residence.
- Receiving a written confirmation from the investor’s attorney, CPA, investment advisor, or broker-dealer that the investor meets the qualifications for accredited investor status based on the information verified from the last three months.
Investors have found these Rule 506(c) accredited investor verification requirements burdensome, particularly if they were investing in more than one 506(c) offering. In addition, issuers with limited staff can have difficulty analyzing the financials of investors.
As a result, some businesses have created investor verification services to address these concerns. For a price, these services review investor documents and provide verification of investors’ accredited status. Even though these services have helped make the process of investor verification more efficient, the safe harbor was still posing a burden on investors and issuers, who were required to update the verifications once every three months for recurring investors. Thus the SEC amended Rule 506(c) for accredited investor verifications.
Modified Rule 506(c) Accredited Investor Verification
Although Rule 506(c) has been updated, the safe harbor verification process remains intact. Investors are still required to provide documents such as financial statements, brokerage statements, and tax returns, or have a broker-dealer, accountant, or other professional certify the accredited status of the investor.
However, under the amended Rule, investors only have to undergo a verification of their financial situation once every five years. Investors are permitted to self-certify during the five-year period that they continue to meet the qualifications of an accredited investor and that the issuer has no information to the contrary.
