# Accredited Investor Verification Guide

## Verification Requirements by Offering Type

### 506(b): Self-Certification

The issuer may rely on an investor's representation of accredited status. The standard approach is an accredited investor questionnaire included in the subscription agreement.

**Minimum requirements for a defensible self-certification:**

1. The questionnaire lists ALL current accredited investor categories (natural person income test, net worth test, professional certifications, entity tests)
2. The investor selects the SPECIFIC qualification basis (not a generic "I am accredited" checkbox)
3. The investor makes an affirmative representation and warranty of accredited status
4. The questionnaire is signed and dated by the investor
5. The issuer retains the signed questionnaire in the investor file indefinitely
6. If any information known to the issuer suggests the investor may not qualify, the issuer must follow up (cannot "look the other way")

**When self-certification is insufficient even for 506(b):**

- The issuer has actual knowledge that the investor is not accredited
- The investor's investment amount is disproportionately large relative to the minimum investment or typical investor profile (suggests the investor may be stretching to participate)
- The investor asks questions suggesting unfamiliarity with the investment type or inability to bear loss
- A third party (e.g., another investor, a financial adviser) informs the issuer that the investor may not qualify

In these situations, the issuer should request supporting documentation even though 506(b) does not technically require it.

---

### 506(c): Third-Party Verification Required

The issuer must take "reasonable steps" to verify each investor's accredited status. The SEC has provided non-exclusive safe harbors. Using a safe harbor method creates a presumption of compliance. Using a non-safe-harbor method shifts the burden to the issuer to demonstrate reasonableness.

---

## Verification Methods by Investor Type

### Natural Person -- Income Test ($200K/$300K)

**Qualification criteria:**
- Individual income exceeding $200,000 in each of the two most recent calendar years, with reasonable expectation of reaching the same level in the current year, OR
- Joint income with spouse or spousal equivalent exceeding $300,000 in each of the two most recent calendar years, with reasonable expectation in current year

**Safe harbor verification methods:**

```
METHOD 1: Tax Return/IRS Form Review (most common)
  Documents required:
    - IRS forms for the 2 most recent years showing income:
      W-2 (wages)
      Schedule K-1 (partnership/S-corp/trust income)
      1099 series (independent contractor, investment income)
      Individual tax return (Form 1040) -- pages 1-2 showing AGI
    - Written representation from investor regarding reasonable expectation
      of meeting income threshold in current year

  Verification process:
    1. Collect copies of income documents for 2 most recent tax years
    2. Confirm income meets $200K individual or $300K joint threshold in BOTH years
    3. Obtain signed written representation for current year expectation
    4. Document verification date and conclusion in investor file
    5. Retain copies of all documents

  Practical notes:
    - Investors may be reluctant to share full tax returns; W-2s and K-1s
      showing qualifying income are sufficient
    - For joint qualification, both spouses' income documents are needed
    - For self-employed individuals, Schedule C income from 1040 is relevant
    - Stock option exercises or one-time capital gains that inflated income
      in prior years may not support "reasonable expectation" for current year

METHOD 2: Third-Party Letter (CPA, Attorney, BD, RIA)
  The investor obtains a letter from a licensed CPA, attorney, registered
  broker-dealer, or registered investment adviser confirming that the
  professional has taken reasonable steps to verify the investor's income
  meets the accredited investor threshold.

  Letter must:
    - Be dated within 90 days of the investment
    - Identify the specific accreditation basis (income test)
    - State that the professional has taken reasonable steps to verify
    - Be signed by the professional with license/registration information
    - Be on the professional's letterhead

  Template language:
    "I, [Professional Name], a [licensed CPA / attorney admitted in [State] /
    registered representative of [BD name, CRD#] / investment adviser
    representative of [RIA name, CRD#]], have taken reasonable steps to verify
    that [Investor Name] meets the accredited investor definition under
    Rule 501(a) of Regulation D based on [his/her/their] income. Based on
    my review, [Investor Name] had individual income in excess of $200,000
    [or joint income with [his/her/their] spouse/spousal equivalent in excess
    of $300,000] in each of the two most recent calendar years and has a
    reasonable expectation of reaching the same income level in the current year."
```

### Natural Person -- Net Worth Test ($1M Excluding Primary Residence)

**Qualification criteria:**
- Net worth (or joint net worth with spouse/spousal equivalent) exceeding $1,000,000
- Primary residence is EXCLUDED from the asset calculation
- Mortgage or HELOC on primary residence is excluded from liabilities UNLESS it exceeds the fair market value of the residence (the excess is treated as a liability)
- Any increase in mortgage debt within 60 days prior to the investment is treated as a liability (anti-abuse rule)

**Safe harbor verification methods:**

```
METHOD 1: Document Review (assets and liabilities)
  Asset documentation (one or more):
    - Bank statements (checking, savings, money market) -- within 90 days
    - Brokerage/investment account statements -- within 90 days
    - IRA/401(k)/retirement account statements -- within 90 days
    - Certificates of deposit
    - Real property appraisals or tax assessments (for non-primary real estate)
    - Business ownership valuations (audited financial statements of owned business)

  Liability documentation:
    - Credit report from at least one national credit reporting agency
      (Equifax, Experian, TransUnion) -- within 90 days
    - Credit report shows all outstanding liabilities including mortgages,
      auto loans, student loans, credit cards, lines of credit

  Verification process:
    1. Sum qualifying assets from statements (exclude primary residence)
    2. Sum liabilities from credit report
    3. Subtract primary residence mortgage ONLY if it exceeds FMV of residence
    4. Confirm net worth > $1,000,000
    5. Check for any mortgage increase within 60 days (anti-abuse rule)
    6. Document calculation and conclusion
    7. Retain copies of all documents

  Practical notes:
    - Investors often have assets in multiple accounts across institutions;
      ensure comprehensive asset capture
    - Privately held business interests are difficult to value -- use
      conservative estimates and document methodology
    - Unvested stock options and restricted stock units are generally not
      counted until vested
    - Trust assets are included if the investor is a beneficiary with
      withdrawal rights

METHOD 2: Third-Party Letter (CPA, Attorney, BD, RIA)
  Same professional categories as income verification.
  The letter must specifically address net worth calculation
  and confirm exclusion of primary residence.

  Template language:
    "I, [Professional Name], a [licensed CPA / attorney admitted in [State] /
    registered representative of [BD name, CRD#] / investment adviser
    representative of [RIA name, CRD#]], have taken reasonable steps to verify
    that [Investor Name] meets the accredited investor definition under
    Rule 501(a) of Regulation D based on [his/her/their] net worth. Based on
    my review, [Investor Name] has a net worth (or joint net worth with
    [his/her/their] spouse/spousal equivalent), excluding the value of
    [his/her/their] primary residence, in excess of $1,000,000."
```

### Natural Person -- Professional Certification

**Qualification criteria (added in 2020 amendment):**
- Holder of a Series 7 (General Securities Representative) license in good standing
- Holder of a Series 65 (Investment Adviser Representative) license in good standing
- Holder of a Series 82 (Private Securities Offerings Representative) license in good standing

**Verification method:**

```
Public record verification:
  - FINRA BrokerCheck (https://brokercheck.finra.org/) for Series 7 and Series 82
  - State securities regulator for Series 65
  - Confirm license is active and in good standing
  - No third-party letter required -- public record is sufficient
  - Document the verification search results (screenshot or printout)
  - Retain verification documentation in investor file
```

### Natural Person -- Knowledgeable Employee of Private Fund

**Qualification criteria (added in 2020 amendment):**
- "Knowledgeable employee" of a private fund, for investments in that specific fund
- Includes executive officers, directors, trustees, general partners, advisory board members, or persons serving in a similar capacity
- Also includes employees who participate in the investment activities of the fund for at least 12 months

**Verification method:**

```
Employer confirmation:
  - Written confirmation from the fund (employer) that the individual is a
    "knowledgeable employee" as defined in Rule 3c-5(a)(4) under the
    Investment Company Act
  - Confirm the investment is in the specific fund where the individual
    is a knowledgeable employee (does not apply to other funds)
  - Document the employer confirmation in investor file
```

### Entity -- Asset Test ($5M)

**Qualification criteria:**
- Entity with total assets in excess of $5,000,000
- Entity was NOT formed for the specific purpose of acquiring the securities being offered
- Includes: corporations, partnerships, LLCs, trusts (with exceptions), 501(c)(3) organizations

**Verification methods:**

```
METHOD 1: Financial Statement Review
  - Most recent audited financial statements showing total assets > $5M
  - If unaudited, most recent balance sheet certified by an officer or principal
  - Bank/investment account statements if entity assets are primarily cash/securities

METHOD 2: Third-Party Confirmation
  - CPA, attorney, or auditor letter confirming entity assets exceed $5M

ANTI-ABUSE CHECK:
  - Confirm the entity was not recently formed specifically to participate
    in this offering
  - Review formation date vs. offering date
  - If entity was formed within 6 months of the offering AND has no
    operating history or business purpose beyond this investment,
    the entity test may not be satisfied
  - In that case, apply the "all owners accredited" test instead
```

### Entity -- All Equity Owners Accredited

**Qualification criteria:**
- Entity (any type) in which EVERY equity owner is individually accredited
- Most common for: family LLCs, investment clubs, small partnerships formed to invest together

**Verification method:**

```
1. Obtain the entity's formation documents (articles, operating agreement, partnership agreement)
2. Identify all equity owners from the ownership schedule
3. Verify each individual owner's accredited status using the applicable individual method
4. For nested entities (LLC owned by another LLC), trace through to ultimate individual owners
5. ALL owners must qualify -- if even one does not, the entity does not qualify under this test
   (it may still qualify under the $5M asset test)
```

### Institutional Investors

**Categories (automatically accredited, minimal verification needed):**

```
Banks (FDIC-insured)           -> Verify FDIC certificate
Insurance companies            -> Verify state insurance department registration
Registered investment companies -> Verify SEC registration (EDGAR)
Business development companies -> Verify SEC/SBA registration
SBICs                          -> Verify SBA license
Employee benefit plans:
  - If > $5M in assets         -> Verify plan assets (Form 5500 or plan statements)
  - If directed by registered  -> Verify adviser/bank/insurance co registration
    adviser, bank, or insurance co
501(c)(3) with > $5M assets    -> Verify 501(c)(3) determination letter + financial statements
State/municipal pension plans  -> Verify government entity status
```

---

## Re-Verification for Returning Investors

For syndicators with returning investors across multiple offerings, the SEC permits streamlined re-verification under certain conditions.

**5-Year Lookback Rule:**

```
If an investor was verified as accredited within the prior 5 years:
  1. The issuer may rely on the prior verification
  2. PLUS a current written representation from the investor that
     they continue to meet the accredited investor criteria
  3. The issuer must have no information suggesting the investor's
     status has changed

Requirements for the written re-certification:
  - Signed and dated by the investor
  - References the specific accreditation basis previously verified
  - Affirms continued qualification under that basis
  - Acknowledges that the investor will notify the issuer if status changes
  - Dated within a reasonable time before the current investment

Template language:
  "I, [Investor Name], previously verified as an accredited investor in
  connection with [Prior Offering Name / Date], hereby represent and warrant
  that I continue to meet the accredited investor definition under Rule 501(a)
  of Regulation D on the basis of [income / net worth / professional
  certification]. I will promptly notify the issuer if my accredited investor
  status changes. I understand that the issuer is relying on this representation
  in offering and selling securities to me."
```

**Practical implementation for repeat syndicators:**

```
Investor database should track:
  - Investor name and contact information
  - Accreditation basis (income, net worth, professional, entity type)
  - Last verification date
  - Verification method used
  - Verification documents on file
  - Next verification due date (5-year lookback expiration)
  - Investments made since last verification

For each new offering:
  - Investors verified within 5 years: collect signed re-certification letter
  - Investors verified > 5 years ago: full re-verification required
  - New investors: full verification required
```

---

## Investor File Checklist

For each investor in any Reg D offering, maintain a file containing:

### 506(b) Investor File

```
REQUIRED:
  [ ] Signed subscription agreement
  [ ] Signed accredited investor questionnaire
  [ ] Copy of investor's government-issued ID (for KYC/AML)
  [ ] Wire transfer confirmation or check copy
  [ ] Signed operating agreement (or joinder/signature page)
  [ ] Pre-existing relationship documentation:
      [ ] Date relationship was established
      [ ] Context of relationship establishment
      [ ] Nature of substantive financial discussions
      [ ] Prior investment history with sponsor (if any)
      [ ] Interaction log entries

RECOMMENDED:
  [ ] Investor suitability questionnaire (net worth, investment experience,
      risk tolerance, liquidity needs)
  [ ] Copy of PPM receipt acknowledgment
  [ ] Email/letter confirming acceptance of subscription
  [ ] Notes from any investor discussions about the offering
```

### 506(c) Investor File

```
REQUIRED (everything in 506(b) file PLUS):
  [ ] Accredited investor verification documentation:
      [ ] Verification method used (income/net worth/professional/entity)
      [ ] Supporting documents:
          For income: W-2s/K-1s/1099s/tax returns (2 years) + current year rep
          For net worth: Asset statements + credit report (within 90 days)
          For professional: FINRA BrokerCheck printout or state verification
          For entity: Financial statements or formation documents + owner verification
      OR
      [ ] Third-party verification letter:
          [ ] From qualified professional (CPA/attorney/BD/RIA)
          [ ] Dated within 90 days of investment
          [ ] Specifies accreditation basis
          [ ] On professional's letterhead
          [ ] Includes professional's license/registration info
      OR
      [ ] Re-verification documentation (for returning investors):
          [ ] Prior verification file reference
          [ ] Signed re-certification letter
          [ ] Dated within reasonable time of current investment

  [ ] Verification date
  [ ] Name and title of person who conducted/reviewed verification
  [ ] Conclusion documented (qualified / not qualified / pending)
```

---

## Common Verification Mistakes

### Mistake 1: Accepting self-certification in 506(c)

**The error:** Sponsor uses the same subscription agreement for 506(b) and 506(c) offerings. The accredited investor questionnaire includes only a self-certification checkbox. This is sufficient for 506(b) but NOT for 506(c).

**The fix:** Use separate subscription documents for 506(b) and 506(c) offerings. The 506(c) subscription must include a verification requirement section and a mechanism for collecting supporting documentation.

### Mistake 2: Verifying the wrong accreditation basis

**The error:** Investor claims accreditation on the basis of net worth, but the verification letter from the CPA addresses only income. The verification does not match the claimed basis.

**The fix:** The verification method and documentation must correspond to the specific basis on which the investor claims accredited status. If the investor qualifies on net worth, verify net worth. If on income, verify income.

### Mistake 3: Stale verification documents

**The error:** Investor provides bank statements from 8 months ago and a credit report from last year. Both are outside the 90-day safe harbor window.

**The fix:** Asset statements and credit reports should be dated within 90 days of the investment date. If documents are older, request updated versions. For the 5-year lookback, the re-certification letter must be current even if the original verification was years ago.

### Mistake 4: Incomplete entity verification

**The error:** An LLC invests $500,000. The sponsor verifies the LLC manager's personal accredited status but does not verify all LLC members (equity owners).

**The fix:** If the entity qualifies under the "all equity owners accredited" test, EVERY equity owner must be individually verified. If the entity qualifies under the $5M asset test, verify entity assets instead -- but also confirm the entity was not formed specifically to invest in this offering.

### Mistake 5: Ignoring spousal equivalent

**The error:** Investor claims joint income of $310,000 with an unmarried partner. Sponsor does not verify the partner's income because they are "not married."

**The fix:** The 2020 amendment added "spousal equivalent" to the joint income and joint net worth tests. An unmarried partner who shares a residence and financial relationship qualifies as a spousal equivalent. Both partners' income/assets should be included in the joint calculation if the investor claims joint qualification.

### Mistake 6: Counting primary residence equity as net worth

**The error:** Investor's net worth statement includes $600,000 in primary residence equity. Total net worth with residence = $1,200,000; without = $600,000. Investor does not qualify but the verification was conducted incorrectly.

**The fix:** Primary residence value must be EXCLUDED from the net worth calculation. The mortgage on the primary residence is also excluded from liabilities UNLESS it exceeds the home's fair market value (in which case the excess is a liability). This is the single most common computational error in net worth verification.

---

## Verification Timeline and Process Flow

```
TIMELINE FOR A TYPICAL 506(c) OFFERING:

Day -60:  Select verification method (internal review vs. third-party service)
Day -45:  Prepare verification request packets for prospective investors
Day -30:  Begin sending verification requests to investors who have expressed interest
Day -21:  Follow up with investors who have not responded
Day -14:  Review completed verifications; flag any issues
Day -7:   Final verification deadline for first close investors
Day 0:    First close -- accept only verified investors
Day +1:   File Form D (begin 15-day clock)
Day +15:  Form D filing deadline

For rolling closes:
  - Each new investor must be verified BEFORE acceptance
  - Do not accept subscription and then verify after the fact
  - File Form D amendment if material changes occur between closes
```