The accredited investor verification process is a vital compliance requirement for issuers engaging in general solicitation under Regulation D, Rule 506(c). While this exemption allows for broader marketing of private offerings, it also imposes stricter obligations on issuers to take “reasonable steps” to verify each investor’s accredited status. Navigating this regulatory landscape presents multiple challenges, but there are also practical solutions that can streamline the process and reduce compliance risks.
Common Challenges in Accredited Investor Verification
1. Interpreting the “Reasonable Steps” Standard
Unlike Rule 506(b), where self-certification may suffice, Rule 506(c) requires issuers to make an objective determination using verifiable evidence. However, the SEC provides only non-exclusive methods, leaving room for interpretation. Issuers often struggle to determine which documents and procedures fulfill the “reasonable steps” requirement without overburdening investors.
2. Investor Privacy Concerns
Many investors are hesitant to share sensitive financial documents, such as tax returns or brokerage statements, due to privacy and data security concerns. This can delay onboarding or result in incomplete submissions, especially when no secure systems are in place.
3. Manual Review and Administrative Overload
For issuers handling verification in-house, managing document intake, reviewing financials, and storing records securely can be time-consuming and error-prone. Staff may not be equipped to analyze complex financial documentation or assess income streams from multiple sources.
4. Inconsistent or Incomplete Submissions
Investors unfamiliar with the requirements may submit outdated documents, incomplete forms, or unqualified professional attestations. This creates back-and-forth communication that prolongs the process and frustrates both parties.
5. Legal Risk and Non-Compliance
Improper verification not only jeopardizes the exemption but can also lead to costly enforcement actions, reputational damage, and investor disputes. Without a consistent and defensible process, issuers risk falling out of compliance.
Practical Solutions to Streamline the Process
1. Adopt Standardized Verification Procedures
Establish clear, repeatable guidelines based on the SEC’s safe harbor methods, such as income verification (via tax returns) or net worth calculations (using third-party statements and liabilities disclosures). Ensure your procedures include timestamps, documentation retention policies, and internal audit trails.
2. Leverage Third-Party Verification
Outsourcing the verification process to experienced, independent professionals—such as attorneys, CPAs, or registered investment advisers—can provide a compliant, arms-length assessment. These third parties can issue written confirmations that satisfy SEC requirements while relieving issuers from document analysis duties.
3. Implement Secure, Investor-Friendly Portals
Using encrypted online portals to collect and store sensitive documents helps build trust with investors and ensures GDPR- and SOC 2-compliant data handling. A guided digital flow can also reduce submission errors and improve turnaround times.
4. Offer Multiple Verification Pathways
Not all investors are alike. By allowing verification through income, net worth, or professional accreditation (for Series 7, 65, or 82 holders), issuers improve completion rates while meeting compliance obligations.
5. Regular Training and Compliance Oversight
Ensure internal teams understand regulatory requirements and maintain documentation best practices. Periodic compliance reviews can identify gaps and reinforce accountability, especially during audits or fundraising due diligence.
Conclusion
Accredited investor verification for general solicitation requires more than a checkbox approach—it demands diligence, transparency, and adaptability. By addressing common pain points with structured processes and secure technologies, issuers can not only comply with Rule 506(c) but also create a more professional and investor-friendly experience. Whether managed in-house or through trusted third parties, a robust verification framework is essential to unlocking the benefits of general solicitation while maintaining regulatory integrity.
