"Reasonable steps"... a liability in verifying investor accreditation status?

Question

Hey everyone.

For the issuer of a security to a group of accredited investors, what exactly qualifies as 'reasonable steps' in verifying an investor's 'accreditation' status? Can the issuer for instance be held liable if he relied on an investor's statement that he/she is an accredited investor? Or does that issuer have a burden to actually take on verification responsibilities? (whatever these specific steps might be). Does requiring the issuer to nag the investor for financial statements sort of encumber to the process? any ideas here?

Account Closed · Answer

Thank you for the information.  The 505 and possibly 506(B) angles do seem to be interesting routes but will be in contact as things evolve.

Bryan Hancock · Answer

Getting paperwork certainly is a barrier to having people invest in your project.  That's the price you pay for 506(c) and being able to advertise though.  Fortunately Title IV will allow for self-certification again, but the major tradeoff there is having to deal with audited financial statements.

Simply getting investors to self-certify is NOT enough under 506(c).  The SEC has made this abundantly clear and has put their enforcement money where their mouth is in this regard.  Yes, the issuer has the burden of proving their steps were reasonable.  Here are common ways that services like VerifyInvestor, Crowdentials, Crowdbouncer, etc. do accreditation as a service:

[] I’ll send you proof and email or fax either my tax returns (most recent 2 years), my bank statement, my brokerage statement, my financial statement (prepared by a CPA), or other document(s). Send them to <email address> or fax to (XXX) XXX-XXXX.  Allowing for submission through the portal is also common.

There are new services springing up that provide for more liberal accreditation reasonableness via broker-dealers that will assume the risk.  Just make sure it doesn't get carved out in your agreements with them.  These include, but are not limited to the following:

[] I previously invested in this issuer’s earlier 506(b) offering(s) as an accredited investor and hereby state and confirm that I am still an accredited investor.

[] Google me and you’ll find enough information about me to see that it’s reasonable to assume I’m an accredited investor. Here’s some of what you’ll find: [big text box]

è And here’s my linkedIn profile (if any): [text box]

[] Look at our website and you’ll see it’s reasonable to consider us accredited – url: [text box]

[] I’m investing $100,000 or more into this offering using free cash or securities and am not taking a loan out to make this investment, something that an unaccredited investor couldn’t reasonably do.

[] Call my accountant, he/she will tell you I’m accredited – Their contact info: [text box]

[] Call my broker/registered investment adviser, he/she will tell you I’m accredited – Their contact info: [text box]

[] Call my lawyer, he/she will tell you I’m accredited – Their contact info: [text box]

Getting people to send in their financial statements is a high friction proposition.  Getting people's professionals to send in a letter vouching for them puts the professional at odds with their E&O insurers like Camico.

There is much more to all of this.  For instance, at what point does a (c)-qualified investor become a (b)-qualified investor if the issuer chooses to change exemptions on a later syndicated deal?  What if you wish to mix (b) and (c) deals on the same portal?  What if you wish to mix in Title IV deals or other projects with state exemptions?  Yeah....it gets really hairy quickly.

Hope this helps....I speak about this stuff nationally so feel free to reach out if you have questions or need assistance finding the best of breed vendors for your offering.