A Guide for Business to Verify Accredited Investors

Rule 506(c) of Regulation D was made effective by the SEC as mandated by the JOBS Act. It allowed companies to generally solicit when raising capital subject to the condition that they only allowed investors that they had verified were accredited investors to invest. While there were some safe harbors identified for how businesses can verify accredited investors, there was little guidance from the SEC how it might interpret the regulations. Since then, the SEC has released a series of non-exclusive, non-mandatory compliance and disclosure interpretations (CD&I Questions). The following six, providing additional guidance on proving income and net worth, were released on July 3, 2014.

1. Use of income-based verification method relying on IRS form – CD&I Question 260.35 says that if investor does not have tax forms available for the most recent year, then the investor may be able to use the two prior years combined with written representations regarding income in the missing year.

2. The Investor is not a U.S. taxpayer (CD&I Question 260.36) – If no U.S. tax returns are available, then the investor may be able to use tax records from the foreign country.

3. Annual tax assessments are more than three months old (CD&I Question 260.37) – Although net worth verification generally requires evidence to be dated no later than the prior three months, annual tax assessments might be acceptable even though they may be older than three months.

4. Only U.S. consumer reporting agency documentation is acceptable (CD&I Question 260.38) – An investor who does not have a United States consumer report may be able to evidence liabilities as part of the net worth verification by using a consumer report from a comparable foreign consumer credit agency.

5. Annual income is not reported in U.S. dollars (CD&I Question 255.48) – An investor’s annual income reported in non-U.S. dollars can be converted to U.S. dollars by using the exchange rate from the last day of the income reporting year. It is also permissible to use an average annual exchange rate.

6. Non-spouse jointly owned assets (Question 255.49) – Investors who own assets jointly held in an account, and the other person is not a spouse, can report the assets based on the percentage ownership.

The SEC expects issuers to take reasonable steps to prove that their investors are accredited investors. Issuers that need to verify accredited investors will help satisfy their obligations by ensuring the sources of the investor documentation are timely and meet the intent of the rule and guidance.

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