Rule 506(c) as it stands has a general mandate that issuers go through reasonable steps to verify accredited investor status, in addition to a list of methods (non-exclusive) that can be used to satisfy this requirement. As proposed at the outset, Rule 506(c) did not require any particular verification method, nor did it mention a set of safe harbor procedures that would be considered “reasonable.”
The methods that are considered “reasonable” minus any contrary knowledge all pertain to the status of individuals. The requirements include:
Income
An issuer may verify someone’s accredited investor status based on income by looking at copies of forms from the IRS that reveal income, such as 1099s or W-2s usually filed by an employer or a third-party payor, or 1040 forms filed by the buyer of securities.
Net Worth
Another way to take reasonable steps to verify accredited investor status is through the net worth method. In this method, the issuer of securities must review brokerage or bank statements, or appraisal reports from third parties to determine the assets of the purchaser, along with a credit report that shows liabilities. In each case, these documents must be dated within the last three months with a written representation from the potential purchaser that all of his or her liabilities have been revealed.
Existing Accredited Investors
If an accredited investor bought securities while having the status of accredited investor in a past offering under Rule 506(b) (which means no general solicitation allowed) and still holds those securities, the issuer may continue to deal with the person as an accredited investor if it acquires a certification from the individual at the time of the Rule 506(c) purchase that he or she has accredited investor status. This method may be used only if the Rule 506(b) offering made previously occurred prior to the effective date of Rule 506(c).
Third Parties
An issuer is considered to have fulfilled the verification requirement if the issuer gets a written confirmation from an investment advisor registered with the SEC, registered broker-dealer, certified public accountant, or licensed attorney who within the previous three months has taken reasonable steps to verify accredited investor status of the purchaser and determined that the purchaser is indeed an accredited investor.
