The final rule established by the SEC requires issuers to implement reasonable steps to verify accredited investor status. In addition, the SEC also added a non-exclusive list of methods issuers may utilize to fulfill the investor verification requirement.
What Constitutes “Reasonable” Steps
The circumstances and facts of every transaction will be derived from an objective determination and will dictate whether the steps taken to verify accredited investor status are reasonable. Issuers should consider various factors when performing an analysis of the facts and circumstances. These include:
- The type and amount of information the issuer has obtained about the investor.
- The nature of the investor and in the type of accredited investor they claim to be.
- The terms and nature of the securities offering, i.e., minimum investment requirements and type of solicitation.
Fewer steps to verify accredited investor status are necessary; it is more likely an investor meets the accredited investor requirements. It is also reasonable for an issuer to rely on verification of accredited status by a trusted third-party.
Information Issuers Review to Verify Accredited Investor Status
The various types of information that issuers of securities analyze to verify accredited investor status include:
- Third-party information such as W-2 forms, tax returns, pay stubs, etc.
- Public filings with state, federal, and local governing bodies – examples include mortgages, deeds, other public recorded documents, public property records, and Exchange Act reports.
- Information from third-party entities that provide accredited investor verification services
Issuers need to keep accurate records, regardless of the methods used to verify accredited investor status. The burden is on the issuer to prove they took reasonable steps to verify an investor’s accredited status at the time of the sale if the exemption is challenged.
Non-Exclusive Methods to Verify Accredited Investor Status
In its final rule publication, the SEC also included several other non-exclusive, specific methods natural persons may use to verify accredited investor status. These methods will satisfy verification requirements provided the issuer does not have personal knowledge that the investor is non-accredited. However, the SEC does not require issuers to use these verification methods. Issuers may apply their standard of reasonableness to the particular facts and circumstances at hand.
