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If you are raising money through a private placement, you will need to verify whether or not interested investors are Accredited Investors.  How you structure your private offering will determine whether or not all of your investors need to be accredited.  For example, if you use Reg D Rule 504 or 505 you can accept a limited number of non-accredited investors.  If you issue the offering under Rule 506(b), your investors must be either sophisticated or accredited.  Under Rule 506(c) you can work with accredited investors only.  In order to stay in compliance, you must obtain and keep information on your investors that attests to their accreditation status.

Here is what you need to know about how to verify accredited investors and stay in compliance:

Reg D Rule 504 and Rule 505

A limited number of non-accredited investors may participate in your offering.  They still need to be given all of the same disclosures as accredited investors and you need to maintain investor information on everyone, including:

  • Personal Information. Create a form to capture their name, birth date, social security number, address, phone number, email, occupation, and work contact information.
  • Accreditation Form. Have them fill out a form with their assets on one column and their liabilities on the other.  Calculate their total net worth by subtracting their total liabilities from their total assets.  Their primary residence is not included on either side of the form, unless they owe more than their home is worth.  In another area of this form, have them list how much money they made individually and with their spouse over the past two years along with what they anticipate their income to be this year. Include a line at the bottom where they can say that they are (or aren’t) an accredited investor.  The form needs to be signed and dated.
  • Investment Information. This form should identify the first day that they received information about the offering, when they completed their accreditation form, how much they invested, when they invested it, and the corresponding number associated with their shares.  This form should also state that they received all of the information they needed in order to make an informed investor decision.  Have them sign and date it.  You can also have them initial each line.

Verifying accredited investors for Rule 504 and Rule 505 is fairly simple.  These forms should be sufficient for staying in compliance.  For further information or tips, contact your securities attorney.

Rule 506

Under Rule 506, you are not allowed to accept investment dollars from non-accredited investors.  They must be either “sophisticated” or accredited.  Sophisticated means that they must have sufficient financial knowledge to make the decision of whether or not to invest, even though they do not have the capital to do so.  In order to document this, adjust the personal information form to include a section for their investor history and why they are a sophisticated investor.  In addition, you will need the following:

  • Personal Information. See above.
  • Investment Information. The data you need to collect for this is the same as above.
  • Accreditation Information. This is where the process differs greatly.  They are not allowed to self-certify under Rule 506(c).  There assets, liabilities, and income needs to be verified either by you or a third party.  Include sections on the form to reference the documents that were viewed to verify the information and attach a copy of them.  This can be tax returns, W2s, bank statements, credit reports etc.  If a third party is providing the verification that they are accredited, they need to provide a signed and dated letter attesting to that fact.  The third party can be their CPA, a licensed broker dealer, or financial adviser.

Keep all of this information on file for the duration of their investment.

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