SEC Clarifies Proper Verification Methods for Accredited Investors Under Rule 506(c)

The Securities and Exchange Commission recently released comments that further clarified specific proper verification methods for determining the accredited investor status of prospective purchasers in a Rule 506(c) offering. Recall that the four safe-harbor methods for verifying status are: Verification of the purchaser’s income through IRS forms that report the purchaser’s income Verification of the purchaser’s net worth through bank accounts, brokerage accounts, and other statements of the purchaser’s assets and liabilities. Third-party verification of a purchaser’s income or net worth by a licensed broker-dealer, CPA, or attorney Self-verification for purchasers who were accredited investors in a previous Rule 506 offering by the company. As to income-verification, the SEC has clarified that issuers must review IRS forms from the two most recent years — in the early part of a year where an individual may have yet to file their returns, the issuer must rely on other verification methods, as IRS forms for the most recent year are not available. The SEC also clarified that if an investor is not a US taxpayer (and therefore does not file IRS returns), the income-verification method is not available. The SEC also reiterated that documents used to provide net worth-verification must be dated within the three prior months. Furthermore, a consumer report must be from a U.S-based consumer reporting agency. Additionally, the SEC clarified that if annual income is not reported in U.S. dollars, the exchange rate on the last day of the year being reviewed, or the average exchange rate for the year being reviewed may be used. Finally, the SEC ruled that assets in joint accounts or property not held with the purchaser’s spouse may be added into net worth, but only to the extent of the purchaser’s percentage ownership of the account or property.

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