In Rule 506(c) offerings, companies are required to take reasonable steps to verify the accredited investor status of any purchasers in their offering. There is no per se way in which a company must take reasonable steps to verify such status, as it largely is a facts and circumstances determination. Companies, however, can take steps to ensure compliance with the requirement to take reasonable steps to verify, including reviewing documentation about potential investors, such as W-2s, tax returns, bank and brokerage statements, credit reports. In certain circumstances, a company may rely on written confirmations from third parties to verify accredited investor status. Additionally, it should be relatively easy for companies to verify an individual’s status as an accredited investor where the individual qualifies by virtue of holding a Series 7, Series 65, or Series 82 license as these credentials should be discoverable on FINRA and SEC website databases.
In Rule 506(b) offerings, companies are required to have a reasonable basis to believe that purchasers (investing as accredited investors) are accredited investors at the time of sale.
In any event, potential investors are not required to provide information that they are not comfortable sharing with the company. But, failure to provide the requested information may result in an inability to invest in the offering.
If a company offering securities does not take steps to verify accredited investor status of purchasers or if it allows participation in the offering even though investors do not meet the definitional requirement of an accredited investor, this is likely a warning sign that the company is not complying with the federal securities laws. Seems like something worth considering before investing.
Other requirements may apply for determinations as to status of “accredited investor” status in other exemptions from registration, including Regulation A and Regulation CF.
If you enjoyed this, you may find the SEC’s recently provided and proposed additional guidance interesting.