How you verify investor status depends on which Regulation D exemption your fund uses. Under Rule 506(b), investors self-certify their accredited status through representations in the subscription agreement. Under Rule 506(c), the fund must take "reasonable steps" to verify that every investor actually meets the accredited investor standard. Getting this wrong can void your exemption and expose you to rescission liability on every dollar raised.
Verification Under Rule 506(b)
Self-certification is sufficient. Under a 506(b) offering, the investor checks a box in the subscription agreement representing that they meet one or more of the accredited investor categories. Your fund has no affirmative duty to investigate beyond that representation.
That said, you cannot close your eyes to obvious problems. If an investor writes down an annual income of $40,000 on one form and checks the $200,000 income box on another, you have a red flag. When red flags exist, you must follow up or decline the investor.
A pre-existing substantive relationship with the investor strengthens your reasonable belief in their accredited status. If your placement agent or GP has known the investor for months, has discussed their financial situation, and has no reason to doubt their representations, that history supports the self-certification. Cold outreach to strangers with no prior contact does not.
Remember: 506(b) prohibits general solicitation. If you are advertising your fund publicly, you are not doing a 506(b) offering, and self-certification is not enough.
Verification Under Rule 506(c)
506(c) raises the bar. You must take reasonable steps to verify that each investor qualifies as accredited. Checking a box on a subscription agreement is not enough. The SEC has stated this explicitly: self-certification alone does not satisfy the 506(c) verification requirement, regardless of how detailed the questionnaire is.
The tradeoff is that 506(c) permits general solicitation. You can advertise your fund publicly, post on social media, and accept investors you have never met before. But every single investor must be verified through documented methods before they invest.
The SEC has provided non-exclusive safe harbor methods for verification. Using a safe harbor is not required, but it gives you the strongest defense if your exemption is ever questioned.
SEC Safe Harbor Methods for 506(c) Verification
Income Verification
The income test requires $200,000 in individual income (or $300,000 joint with a spouse or spousal equivalent) in each of the two most recent years, plus a reasonable expectation of reaching the same level in the current year.
To verify income, review IRS forms that report income: W-2s, 1099s, K-1s, or filed tax returns for the prior two completed years. You also need a written representation from the investor that they reasonably expect to meet the threshold in the current year.
Alternatively, obtain a written confirmation from a licensed CPA, an attorney, an SEC-registered broker-dealer, or an SEC-registered investment adviser stating that they have taken reasonable steps to verify the investor's income and that the investor qualifies.
Net Worth Verification
The net worth test requires individual or joint net worth exceeding $1,000,000, excluding the value of the investor's primary residence.
To verify on the asset side, review bank statements, brokerage statements, certificates of deposit, tax assessments, or independent appraisals for real property and other assets. All documents should be dated within the prior three months.
On the liability side, obtain a consumer credit report from at least one nationwide reporting agency, plus a written representation from the investor regarding any liabilities not reflected on the credit report. Mortgage debt on the primary residence only reduces net worth to the extent it exceeds the home's fair market value.
The same professional confirmation alternative applies: a written letter from a CPA, attorney, broker-dealer, or registered investment adviser.
Entity Verification
An entity can qualify as accredited if it holds more than $5,000,000 in assets and was not formed for the specific purpose of investing in your fund. To verify, review the entity's organizational documents and most recent financial statements.
Alternatively, if the entity does not meet the $5,000,000 asset threshold on its own, it may qualify if every equity owner is individually accredited. In that case, you must verify each equity owner using the individual methods described above.
Third-Party Verification Letters
A written confirmation letter from a qualifying professional is the most efficient verification path, particularly for investors who are reluctant to share tax returns or bank statements with the fund directly.
Qualifying professionals include SEC-registered broker-dealers, SEC-registered investment advisers, licensed CPAs, and licensed attorneys. The letter must state that the professional has taken reasonable steps to verify the investor's accredited status within the prior three months.
90-Day Rule
Third-party verification letters must be dated within 90 days of the investor's purchase. A letter dated four months before closing does not satisfy the safe harbor. Build a calendar reminder into your closing process.
Verification for Non-Natural Persons
Entity investors introduce additional complexity. Each type has its own verification path.
- Trusts: A trust with more than $5,000,000 in assets qualifies if the investment decision is directed by a "sophisticated person." Verify the trust's assets through statements and confirm who directs investment decisions.
- Joint accounts: Both holders can combine income ($300,000 threshold) or net worth ($1,000,000 threshold). Both must be verified individually.
- Self-directed IRAs: The IRA holder is the beneficial owner. Verify the individual account holder, not the IRA custodian.
- LLCs and corporations: Verify either the $5,000,000 asset test for the entity or the accredited status of each equity owner individually.
Record-Keeping Requirements
Maintain all verification documentation for at least five years after the termination of the offering. This includes tax documents, financial statements, credit reports, third-party letters, subscription agreements, and any correspondence about investor qualification.
Store records in a format that allows you to demonstrate your verification process to the SEC during an examination. A folder for each investor with dated documents and a verification checklist is the standard practice.
Common Mistakes
- Accepting self-certification under 506(c). The most frequent error. A detailed questionnaire is not a substitute for verification documentation. If you are running a 506(c) offering, you need documents or a professional letter.
- Not re-verifying for follow-on investments. If an investor made a subsequent investment more than three months after their last verification, you need updated documentation. Existing verification does not carry forward indefinitely.
- Using stale verification letters. A letter dated more than 90 days before the investment closes falls outside the safe harbor. Track letter dates against anticipated closing dates.
- Failing to verify entity investors. An LLC writing a $2,000,000 check still requires verification. Either confirm the entity's $5,000,000 asset threshold or verify each equity owner individually.
How Capital Company Helps
Capital Company provides digital investor onboarding, including subscription documents, investor questionnaires, and qualification verification. Schedule a demo to learn more.
This guide is for informational purposes only and does not constitute legal, tax, or investment advice. Regulation D requirements are subject to SEC interpretation and change. Consult qualified legal counsel before making compliance decisions for your fund.