Verifying Accredited Investor Status in a General-Solicitation Private Placement

The Regulation D exemption you cover in a separate unit lets a general-solicitation private placement advertise publicly, which is exactly why its investor screening has to be stronger than a private placement that never solicits the public. This unit covers the verification standard itself, not the offering structure it attaches to.

When Does an Issuer Have to Verify Accredited Investor Status?

• A general-solicitation private placement requires the issuer to take reasonable steps to verify that every purchaser in that offering is an accredited investor.
• This duty attaches specifically to general-solicitation private placements, which by definition allow advertising to the public.

Exam Tip: Gotchas

• A bare, unverified self-certification from the investor does not by itself satisfy the verification duty in a general-solicitation private placement. That contrasts with a no-solicitation private placement, where the issuer may simply reasonably believe a purchaser is accredited without an affirmative verification duty.

What Methods Satisfy the Verification Requirement?

These five methods are deemed to satisfy the duty when the purchaser is a natural person. Where the purchaser is an entity, such as a trust or a corporation, the issuer still owes the general duty to take reasonable steps, but none of these five methods is deemed sufficient on its own.

• Income basis: review the purchaser's Internal Revenue Service (IRS) forms (Form W-2, Form 1099, Schedule K-1, Form 1040) for the two most recent years, plus a written representation that the purchaser reasonably expects to reach the qualifying income level in the current year.
• Net worth basis: review asset documentation (bank and brokerage statements, certificates of deposit, tax assessments, third-party appraisals) together with a consumer report from a nationwide credit reporting agency covering liabilities, all of it dated within the prior three months, plus a written representation that all liabilities have been disclosed.
• Third-party written confirmation, dated within the prior three months, from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney in good standing, or a certified public accountant (CPA) who is duly registered and in good standing.
• Grandfathered certification: for a purchaser who bought as an accredited investor in the same issuer's earlier no-solicitation private placement before September 23, 2013 and still holds those securities, a certification at the time of the new sale that the purchaser still qualifies.
• Prior verification on file: a written representation relying on a verification the issuer already performed for that same person remains good for five years from the date of that earlier verification.

Exam Tip: Gotchas

• These five methods are non-exclusive and non-mandatory. An issuer may use any reasonable method to verify status, these are just the ones that automatically satisfy the duty.
• Using one of these methods does not create an absolute safe harbor. An issuer that has actual knowledge a purchaser is not really accredited cannot rely on the method anyway.
• The five-year reliance window only runs from the date of the original verification, not from the date of the current sale. A verification performed six years ago has expired even if nothing about the investor changed.

What Should You Check on Exam Day?

• Match the verification duty to the offering type: mandatory reasonable steps for a general-solicitation private placement, reasonable belief for a no-solicitation private placement.
• Confirm a scenario names one of the five non-exclusive methods rather than a bare investor self-certification, which does not satisfy the verification duty in a general-solicitation private placement on its own.
• Check document dating: net worth documents including the credit report, and third-party confirmations, must all be within the prior three months.
• Watch for an issuer with actual knowledge contradicting a verification; actual knowledge always overrides a completed method.