Under 506(b), investors self-certify through representations in the subscription agreement. The fund is entitled to rely on those representations unless it has reason to believe they are false. No independent verification is required. This is why most private funds use 506(b): it is simpler, less intrusive for investors, and does not require you to collect sensitive financial documents like tax returns or bank statements.
"Reason to believe" is a meaningful caveat. If an investor tells you they earn $50,000 per year but checks the accredited investor box anyway, you cannot simply rely on the representation. You have a duty to follow up on obvious red flags.
Under 506(c), self-certification is not sufficient. You must take reasonable steps to independently verify that each investor meets the accredited investor standard. The SEC has published specific safe harbor methods:
- Review federal tax returns (W-2s, K-1s, or 1040s) for the two most recent years for income verification
- Review bank and brokerage statements for net worth verification
- Obtain a written confirmation from a licensed CPA, attorney, registered broker-dealer, or SEC-registered investment adviser
If you fail to verify even one investor in a 506(c) offering, you may lose the entire exemption for that offering.
See Investor Verification Requirements for Private Funds for the complete verification framework.
This content is for informational purposes only and does not constitute legal, tax, or compliance advice. Consult qualified counsel for guidance specific to your situation. Capital Company is not a law firm and does not provide legal advice.