Verification under Rule 506(c) refers to the "reasonable steps" an issuer must take to independently confirm that each investor meets the accredited investor standard. Unlike Rule 506(b), where self-certification is sufficient, Rule 506(c) requires the issuer to go beyond the investor's own representations.
Why It Matters
Rule 506(c) allows general solicitation and advertising of an offering, but in exchange it requires that all investors be verified accredited investors. If an issuer fails to take reasonable verification steps, the entire exemption could be lost. Understanding the SEC safe harbor methods and maintaining proper records protects the offering from regulatory challenge.
Key Details
- SEC safe harbor methods for the income test include reviewing tax returns or W-2 forms for the two most recent years, plus a reasonable expectation of meeting the threshold in the current year.
- For the net worth test, safe harbor methods include reviewing bank statements, brokerage statements, and other asset documentation, combined with a credit report to check for undisclosed liabilities.
- Written confirmation from a licensed CPA, attorney, registered broker-dealer, or registered investment adviser that the person qualifies is an accepted safe harbor method.
- For existing investors who were previously verified within the last 90 days, the issuer may rely on a written re-certification of continued accredited status.
- Third-party verification services can handle the process on behalf of the issuer. Records of all verification steps should be maintained for five or more years.
For more, see Investor Verification Requirements.
Capital Company coordinates investor verification workflows and document collection as part of fund administration.
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.