Accredited Investor Verification Process
This article will define what it means to be an accredited investor, describe the accredited investor verification process and highlight the easiest way to complete i
This article will define what it means to be an accredited investor, describe the accredited investor verification process and highlight the easiest way to complete i
Being an accredited investor is the only way an individual or an entity can invest in certain higher risk and less regulated opportunities in the United States.
To be an accredited investor, you must meet specific SEC criteria and follow certain guidelines. Often, investors are asked to provide demonstrable evidence that they do, in fact, qualify as an accredited investor.
This article will define what it means to be an accredited investor, describe the accredited investor verification process and highlight the easiest way to complete it.
An accredited investor is an individual or entity that meets certain SEC thresholds that permit them to invest in less regulated investment opportunities, like hedge funds or oil wells.
A person is considered to be an accredited investor by meeting the following SEC criteria:
Meeting these guidelines shows the SEC that you have the necessary financial know-how, resources and risk tolerance for investing in less regulated investment opportunities. An estimate in 2020 found nearly 13,665,475 or 10.6% of all US households qualify for this investor status.
An individual who doesn’t meet this criteria doesn’t attain this accredited investor status and is known as a non accredited investor.
The SEC does not certify you as an accredited investor, nor can you apply to them to get a certification.
To gain accredited status, you only need to satisfy SEC’s criteria about income, net worth, knowledge level or affiliations.
However, per SEC regulation under Rule 506(c), the onus of proving your accredited investor status falls on the issuer of the securities offering. They cannot simply rely on the investor’s word. Instead, the issuer must take “reasonable steps” to verify this status (not to be confused with the “reasonable belief” standard from Rule 506(b)).
Issuers can verify an investor’s status through any of the following three methods:
If someone is a director, executive officer, or general partner of the securities issuer, they’re considered an accredited investor.
The issuer should have this information readily available, but they can also point to publicly available or internal information such as securities filings, research reports, governing documents, resolutions or other certificates to confirm.
[Certain funds choose to only verify the status of an accredited investor once (or once per calendar year).]((/blog/SEC-rule-changes/)
Demonstrating that one has an income that exceeds $200,000 (alone or $300,000 with a spouse) and reasonably expects a similar level of income in the future will is sufficient to grant a potential investor an accredited status.
Some documents that can prove an investor’s accredited status include:
Confirming that an individual’s (or a spousal couple’s) joint net worth is in excess of $1M (not including the value of one’s primary residence) is also sufficient for earning accredited status.
However, the potential investor must provide documentation revealing all of their asset and liability information to accurately calculate net worth.
This may include their:
For investors with no liabilities and a single large bank account, this method could be very easy. But for people with multiple assets or liabilities, this could be very complicated and time-consuming.
Accredited investor verification is a relatively new process for issuers and investors alike. This leads to a lot of confusion about the exact process requirements on both sides.
More importantly, since the investor needs to prove their accredited status with each new opportunity, it results in a ton of duplication and wastage of time and money.
Additionally, from the issuer’s perspective, having to go through each new investor’s credentials manually can be just as time-consuming and inconvenient.
However, Rule 506(c) offers a solution to these problems by way of the third-party verification method.
As an alternative to the issuer manually reviewing each investor’s documents, they can instead obtain a letter from a third-party attesting as to the investor’s accreditation status. This letter allows the issuer to fall into a “safe harbor” so long as the grantor of the letter is one of the following:
There is no specific verification requirement for what the letter should look like, but these third-party verification letters typically indicate which test the investor meets, how the signatory on the letter qualifies as an evaluator and the date on which the evaluator made their review.
Instead of opting for the tedious, traditional verification methods, you easily get accredited via Parallel Markets.
Parallel Markets is an investor identity company that helps securities issuers validate investor credentials and authenticate their user base.
For individuals, Parallel Markets supports three methods of accreditation:
Issuers can integrate the entire Parallel Markets experience into their own site with a single line of JavaScript and can access information via an API. They can then track each investor on a single dashboard at one glance.
The best part? Parallel Markets issues investors a Parallel Passport, a secure, end-to-end investor identification solution.
Investors can use their Parallel Passport to log into any partner website, verify their accredited investor status and begin investing in any private securities offering in no time.
Here’s how Parallel Markets’ accredited investor verification process benefits both issuers and investors:
Benefits for issuers
Benefits for investors
While the process of becoming an accredited investor is now easier than ever, why should you get accredited in the first place?
Becoming an accredited investor offers you several benefits such as:
Accredited investors can access a broad range of high-risk, high-reward investment options that non-accredited investors cannot.
Many of these (like energy, real estate, and other private placement options) tend to be alternative investments with low correlations to the stock market. This can help a prospective investor like you build a diversified portfolio that won’t be adversely affected by specific market trends.
Most high-risk and less-regulated investments set a limit on how much a non-accredited investor can invest.
For example, Regulation CF and Regulation A+ offerings require companies raising money via individual investors to limit the investment to a percentage of income or net worth.
However, the same regulation places no restrictions on how much money accredited investors can put in.
This is because regulatory authorities deem accredited investors as being aware of the high risks involved, capable of evluating the merits of the investment and absorbing any potential losses.
Hence, there are many fewer barriers to how much money they can invest. This lets accredited investors make the most of their significant resources and grow wealth faster.
Publicly traded instruments such as mutual funds and ETFs have a broad base of non-accredited investors. As a result, they tend to be too low risk and only offer moderate returns.
Less regulated securities, such as the ones available to accredited investors, come with significantly higher risks. However, they can also generate far higher returns. It’s one of the reasons why hedge funds and private equity can often far outperform mutual funds and ETFs.