Reasonable Steps Needed to Verify Accredited Investor Status

According to the SEC, an accredited investor must meet a very specific set of requirements. For individuals, they generally must qualify under either a high income or high net worth test. The income test requires that the individual earns an annual income of $200,000 individually or $300,000 with a spouse. The net worth test requires that the individual have a net worth either individually or with a spouse exceeding $1,000,000. However, while these traits are enough to qualify as an accredited investor, there’s a little more that must be done to verify your status. For some deals, before you can invest in that company or deal, they must first verify that you are an accredited investor.

How Does Reasonable Steps Verification Work?

There are two types of reasonable steps verifications.

The first is to use a principles-based method of verification where one looks at the facts and circumstances to make a reasonable determination of accredited investor status. Unfortunately, this method does not give concrete assurance that reasonable steps verification was properly conducted.
The second type of reasonable steps verification provides certainty that verification was properly conducted. The SEC outlined four safe harbor methods of verification which they clearly indicated were to be considered non-mandatory and non-exclusive. However, if these methods of verification were followed, then one would be assured that they had properly conducted the verification. Since the consequences of improper verification are so dire, most companies opt to take the safe harbor approach toward verification.

A Safer Safe Harbor?

Not all safe harbors are created equal. While there are a number of safe harbors, two of them stand out as being safer than the others. There are four safe harbor methods for reasonable steps verification: 1) one that only applies to the income method, 2) one that only applies to the net worth method, 3) one that applies to all methods, but requires a qualified third party professional, and 4) one that applies only to pre-existing investors of a certain type. While all are safe harbor methods of verification, the first and second one could create a higher amount of liability as they must still be properly conducted. The latter two are easier to comply with (but unfortunately, the last one has limited use as it would only apply in very few circumstances). The gold standard for verifications will be the one that requires a qualified third party professional.

Verification is burdensome and frustrating, but it’s required by federal law. Understanding how to get verified easily will help ease the pain of verification while making transactions smoother.

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