Regulation D under the Securities Act of 1933 offers a crucial framework for private capital raising in the United States. It enables businesses to offer and sell securities without registering with the SEC, provided certain conditions are met. One of the key provisions under Regulation D—relating to Rule 506(c)—requires issuers to take “reasonable steps” to verify that investors are accredited. Understanding these requirements is vital for maintaining regulatory compliance and minimizing the risk of enforcement action.
What Is Regulation D?
Regulation D provides exemptions that allow private placements of securities to accredited investors. There are two commonly used exemptions:
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Rule 506(b): Prohibits general solicitation but allows issuers to rely on a “reasonable belief” that investors are accredited.
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Rule 506(c): Permits general solicitation and advertising but mandates actual verification of accredited investor status.
While both rules facilitate access to capital, Rule 506(c) places a greater burden on issuers to ensure that all investors meet the SEC’s definition of an accredited investor.
Who Qualifies as an Accredited Investor?
Accredited investors are individuals or entities that meet specific SEC defined criteria, enabling them to participate in higher-risk investment opportunities. The most often met qualifications include:
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Individuals with annual income exceeding $200,000 USD ($300,000 USD jointly) for each of the past two years prior to the review, with a reasonable expectation of the same income for the current year.
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Individuals with a net worth of over $1,000,000 USD, excluding the primary residence, but including any liabilities made against their primary residence within 60 days prior to the review
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Entities with assets/investments exceeding $5,000,000 USD or where all the equity owners are accredited investors.
Issuers must verify this status with a higher degree of diligence under Rule 506(c).
SEC Guidelines on Verification
The SEC outlines various methods to verify accredited investor status under Rule 506(c). These methods fall into two categories: documentation-based and third-party confirmation.
Documentation-Based Methods
Issuers may request and review documents such as:
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Tax returns or W-2s (to verify income)
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Account statements, investment documentation, property or vehicle valuations, etc. (to verify assets)
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Credit reports (to calculate liabilities)
It is important that these documents are the most current ones available, generally no older than 90 days, and that issuers keep sufficient records to prove compliance.
Third-Party Verification
Alternatively, issuers can obtain written confirmation from qualified professionals, such as licensed attorneys, CPAs, SEC-registered investment advisors, or registered broker-dealers, certifying that the investor has been verified as accredited within the past 90 days.
Reasonable Steps vs. Reasonable Belief
A critical distinction under Regulation D is the difference between the “reasonable belief” standard (under Rule 506(b)) and the “reasonable steps to verify” standard (under Rule 506(c)). The latter demands a more proactive and evidence-based approach. Merely checking a box on a questionnaire is not sufficient; issuers must obtain objective, 3rd party evidence or certification.
Best Practices for Issuers
To ensure compliance and avoid legal pitfalls, issuers should:
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Develop a consistent and repeatable verification process.
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Document and securely store all verification materials.
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Use a compliance checklist to monitor ongoing regulatory obligations.
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Consider contracting experienced professionals to assist in the verification process.
Navigating within the Regulation D sphere effectively requires a clear understanding of accredited investor verification requirements. By adhering to SEC guidelines and implementing rigorous verification procedures, issuers can confidently raise capital while minimizing regulatory exposure. In the complex world of private offerings, compliance is not just a legal necessity—it is a cornerstone of investor trust and long-term success.
