The most difficult type of accredited investor to verify is the natural person who meets the income or asset requirements. As discussed in a prior post, an accredited investor includes a person who has a net worth that exceeds $1,000,000.00 (without taking into account the value of a primary residence), or an individual who made $200,000.00 in the prior two years, or joint income with a spouse exceeding $300,000.00 in the prior two year, with a reasonably expectation of making the same income in the current year. To facilitate the application of the rules to such situations, the SEC has provided specific, non-exclusive ways to meet the requirement.
First, an issuer is deemed to have met the requirement by reviewing the most recent past two years of IRS documentation such as W-2s, 1099s, Schedule K-1s or 1065s, and 1040s and obtaining a statement by the investor of their reasonable expectation of reaching the required income in the current year.
Second, the issuer is deemed to have met the requirement by reviewing documents from the last three months related to the net worth of the investor such as bank statements, brokerage statements, certificates of deposit, and tax assessments and appraisals issued by third parties along with a consumer report from at least one nationwide reporting agency. Because this may not give a complete picture, the SEC also requires the investor provide a statement that all documents necessary to make a determination regarding net worth have been disclosed.
Third, the issuer is deemed to have satisfied the requirement by obtaining a written confirmation by a third party such as a registered broker-dealer, an SEC-registered investment advisor, a licensed attorney, or certified public accountant (CPA) that such person has taken steps within the prior three months to verify that the purchaser is an accredited investor. It seems this method, while potentially more expensive, will have the benefit of maintaining the confidentiality of the investor’s financial information and activities.
And fourth, the issuer is deemed to satisfy the requirement for investors who invested in the issuer previously as an accredited investor, and remains an investor of the issuer for an offering conducted by the same issuer, by obtaining a certification from the investor at the time of sale that he or she qualifies as an accredited investor.
While these methods are not exclusive, they are the ones that the issuer can most confidently rely upon.
In summary, while the allowance of public solicitation will certainly change the ways in which private investment can be found, it is unclear exactly how the rules for public solicitation will work in practice. As issuers and investors move forward in that arena, the rules are likely to be tested by actual examples of cases in which investment took place due to public solicitation. The SEC has noted that the fact actual investors may be accredited investors does not necessarily mean the issuer will have met its obligation to take reasonable steps to verify the investor is accredited before the sale. As a result, issuers will need to exercise caution as they endeavor to meet the requirements.