Accredited Investor Verification Guide
Verifying accredited investor status is a critical compliance requirement for many real estate offerings. Getting it right protects both sponsors and investors while ensuring securities law compliance.
Why Verification Matters
Legal Requirements
For Rule 506(c) offerings:
- Must take "reasonable steps" to verify
- Self-certification not sufficient
- Documentation required
- Liability for non-compliance
For 506(b) Offerings
- Reasonable belief standard
- Self-certification may suffice
- Still need to confirm status
- Documentation recommended
Accredited Investor Qualifications
Natural Persons
Income Test Individual income exceeding $200,000 in each of the two most recent years, or joint income with spouse exceeding $300,000, with reasonable expectation of reaching the same level in the current year.
Net Worth Test Net worth exceeding $1,000,000, either individually or jointly with spouse, excluding the value of primary residence.
Professional Certifications Holders of Series 7, Series 65, or Series 82 licenses in good standing.
Knowledgeable Employees Knowledgeable employees of the fund being offered.
Entities
Certain Financial Institutions
- Banks
- Insurance companies
- Registered investment companies
- Business development companies
- Small business investment companies
Certain Employee Benefit Plans
- Plans with >$5 million in assets
- Plans with qualified professional fiduciary
Private Business Development Companies
Organizations
- Any entity with >$5 million in assets not formed for the specific purpose of acquiring the securities
- Any entity in which all equity owners are accredited
Trusts
- Trusts with >$5 million in assets
- Not formed for the specific purpose of acquiring the securities
- Directed by sophisticated person
Verification Methods for Income
Tax Returns
Reviewing IRS forms:
- Form 1040 (individual returns)
- K-1s (partnership income)
- W-2s (wage income)
- 1099s (various income)
Requirements
- Two most recent years
- All schedules included
- Review total income against threshold
Written Confirmation
From third parties:
- Licensed CPA
- Licensed attorney
- Registered broker-dealer
- Registered investment adviser
Letter should confirm
- Income exceeds threshold
- Based on document review
- For specific time period
W-2 and Tax Documentation
Combined approach:
- W-2 forms from employer
- Additional 1099s if applicable
- Bank/brokerage statements
Verification Methods for Net Worth
Asset and Liability Review
Documentation showing:
- Bank statements
- Brokerage statements
- Real estate appraisals
- Retirement account statements
- Liability disclosures
Third-Party Verification
Written confirmation from:
- Licensed CPA
- Licensed attorney
- Registered broker-dealer
- Registered investment adviser
Credit Report
To verify liabilities:
- Recent credit report
- Cross-reference disclosed debts
- Identify potential omissions
Professional Certification Verification
FINRA Licenses
Verify through:
- BrokerCheck website
- Direct confirmation
- Documentation of license
Requirements
- License in good standing
- No pending actions
- Current registration
Entity Verification
Qualifying Entities
Confirm entity type:
- Formation documents
- Operating agreements
- Financial statements
Look-Through Rule
For entities relying on owner accreditation:
- Verify all equity owners
- Document each owner's status
- Maintain complete records
Documentation Best Practices
What to Collect
- Completed questionnaire
- Supporting documentation
- Third-party verifications
- Signed representations
Record Retention
Maintain records:
- Duration of investment
- Plus required retention period
- Organized and accessible
- Secure storage
Updating Verification
Consider re-verification:
- For additional investments
- Periodically for ongoing funds
- When circumstances change
Using Third-Party Verification Services
Benefits
- Expertise in verification
- Standardized processes
- Reduced sponsor burden
- Professional documentation
Selecting a Provider
Look for:
- Experience and reputation
- Compliance focus
- Efficient process
- Clear documentation
- Reasonable costs
Sponsor Responsibilities
Even with third parties:
- Oversee the process
- Review documentation
- Maintain records
- Ultimate responsibility remains
Common Verification Mistakes
Insufficient Documentation
- Accepting self-certification alone
- Incomplete records
- Missing time periods
- Unclear verifications
Process Failures
- No standard procedure
- Inconsistent application
- Poor record keeping
- Delayed verification
Calculation Errors
- Including primary residence in net worth
- Miscalculating income
- Missing liabilities
- Timing issues
Building a Verification Process
Standard Workflow
- Investor completes questionnaire
- Determine verification method
- Collect required documentation
- Review and verify
- Document conclusions
- Maintain records
Creating Efficiency
- Clear investor instructions
- Multiple verification options
- Quick turnaround
- Digital document collection
Proper accredited investor verification is non-negotiable for 506(c) offerings and best practice for all private placements. Build a robust process, maintain thorough documentation, and protect your offering from compliance issues.