Here is a question most real estate sponsors cannot answer precisely: if the SEC sent an examination request tomorrow asking how you verified each investor in your last offering was accredited, what would you show them?
Not what you collected. What you can prove. The difference between those two things is the difference between a defensible accreditation workflow and a file that looks complete until someone with authority looks closely.
Accreditation verification is one of the most frequently mishandled compliance functions in private real estate capital raises, not because sponsors do not understand that it is required, but because the mechanics of doing it correctly are more specific than most workflows reflect. A signed questionnaire is not verification. A checked box labeled ‘accredited investor’ is not verification. An email from the investor saying they meet the threshold is not verification. Verification is a documented process in which the issuer independently confirms, through specified methods, that each investor meets the applicable standard before the investment is accepted.
Sponsors who treat verification as a checkbox function discover the gap between their process and the legal standard at the worst possible moment: during an SEC examination, in response to an investor rescission demand, or after a wire from an investor whose eligibility was never actually confirmed. None of those moments is the right time to learn that the onboarding workflow had a sequencing problem.
This post addresses what a legally sound accreditation verification workflow requires, how the process differs depending on the offering exemption, what the March 2025 SEC no-action letter changed, how to structure a workflow that holds up across multiple closings and investor types, and what the recordkeeping system must preserve to make the process defensible when tested.
Why Accreditation Verification Is a Legal Compliance Function, Not an Onboarding Formality
Accreditation verification in a Rule 506(c) offering is a condition of the exemption. When a sponsor markets a real estate offering using general solicitation and then accepts subscriptions without completing the required verification, the offering may not qualify for the exemption it is relying on. An offering that does not satisfy the conditions of its intended exemption is an unregistered public offering, which creates securities law exposure that no subsequent correction fully resolves.
The consequences of verification failure go beyond the exemption question. Under Section 12(a)(1) of the Securities Act, purchasers in an offering that does not qualify for its exemption may have rescission rights allowing them to recover the amount paid, plus interest, less any income received, without needing to prove fraud or reliance. Those rights extend to every investor in the offering, not just the one whose verification failed, because the exemption’s validity is assessed for the offering as a whole.
For Rule 506(b) offerings, the stakes are structured differently but remain real. The verification standard is less demanding, requiring only a reasonable belief that each investor is accredited, but that reasonable belief must be grounded in actual review of the investor’s representations and profile, not in passive collection of a signed form. A sponsor who accepts a subscription knowing the investor’s representations are internally inconsistent, or who ignores obvious red flags about eligibility, has not formed a reasonable belief regardless of what the subscription agreement says.
The distinction between the two standards, and the operational consequences of each, is the threshold design question for any accreditation workflow. The strategic comparison between Rule 506(b) and Rule 506(c) shapes every element of how the verification process must be designed, because the exemption chosen determines the standard applied and the standard determines the process required.
The Accredited Investor Definition: What the Workflow Is Actually Confirming
A verification workflow can only be designed correctly once the sponsor understands precisely what each accreditation category requires. The applicable standard under Rule 501(a) of Regulation D varies by category, and the verification method must match the category the investor is claiming. Collecting the wrong documentation for a given category produces a file that looks like verification without actually constituting it.
Individual Income-Based Accreditation
An individual qualifies on an income basis if they have earned income exceeding $200,000 in each of the two most recent calendar years, or combined income with a spouse or spousal equivalent exceeding $300,000 in each of those years, with a reasonable expectation of reaching the same threshold in the current year. The income figure is generally gross income, not adjusted gross income. The two-year lookback is fixed: if either of the two prior calendar years falls below the threshold, the investor does not qualify on an income basis regardless of current-year earnings.
The verification requirement for income-based accreditation under Rule 506(c) is two years of IRS income-reporting forms, which can include W-2s, 1099s, K-1s, or Form 1040, combined with a written investor representation that they have a reasonable expectation of meeting the threshold in the current year. A single year of documentation is not sufficient. The documentation must cover both prior calendar years.
Individual Net-Worth-Based Accreditation
An individual qualifies on a net-worth basis if their individual net worth, or joint net worth with a spouse or spousal equivalent, exceeds $1 million at the time of the investment, excluding the value of the primary residence. The primary residence exclusion operates on both sides of the calculation: the value of the home is excluded from assets, and a mortgage on the primary residence up to its fair market value is excluded from liabilities. A mortgage that exceeds the fair market value of the home does create a negative adjustment to net worth for the excess amount.
Verification for net-worth-based accreditation requires documentation of both assets and liabilities. Asset documentation alone does not permit the net-worth calculation. The typical documentation set includes bank and brokerage account statements, certificates of deposit, tax assessments for real property other than the primary residence, and a credit report to surface liabilities. The verification must confirm that assets minus liabilities, with the primary residence excluded from both sides, exceeds $1 million at the time of investment.
Professional Certification-Based Accreditation
Individuals holding certain professional licenses recognized by the SEC qualify as accredited investors regardless of their income or net-worth position. The SEC has recognized the Series 7, Series 65, and Series 82 licenses as qualifying credentials. An investor with a current, valid license in one of those categories qualifies on that basis alone. Verification is straightforward: FINRA BrokerCheck provides publicly accessible license status, and a contemporaneous BrokerCheck search confirming the license is current constitutes adequate verification documentation.
Entity Accreditation
Entities can qualify under several pathways, and the verification method is different for each. A business entity qualifies if it has total assets exceeding $5 million and was not formed for the specific purpose of making the investment. A trust qualifies if it has total assets exceeding $5 million, was not formed for the specific purpose of making the investment, and its decisions are made by a sophisticated person. An entity in which all equity owners are themselves accredited investors qualifies regardless of asset size, but verification must extend to each equity owner individually using the applicable individual verification methods.
The entity-purpose question is one of the most frequently misapplied elements of entity accreditation. An LLC with two members, formed to hold a single investment in this offering, is an entity formed for the specific purpose of making this investment and cannot qualify on the $5 million total assets basis regardless of its members’ financial resources. It must qualify through all-accredited equity owners. That analysis must be completed before the subscription is accepted, not flagged as a follow-up item after the investor has already funded.
| 📌 The March 2025 No-Action Letter: What Changed and What Did Not On March 12, 2025, the SEC’s Division of Corporation Finance issued a no-action letter, in response to a request from Latham and Watkins LLP, that created a new verification pathway for Rule 506(c) offerings meeting specified minimum investment thresholds. The letter addressed the documentary burden that had made Rule 506(c) operationally cumbersome for many sponsors since the rule’s adoption. Under the no-action letter, a sponsor can satisfy the reasonable-steps verification requirement without documentary review when three conditions are all met. First, the offering requires a minimum investment of at least $200,000 for natural persons or at least $1,000,000 for legal entities. For entities qualifying solely because all equity owners are accredited, the minimum must be either $1,000,000 per entity or $200,000 per equity owner where fewer than five natural person equity owners are present. Second, each investor provides a written representation confirming accredited investor status and affirming that the minimum investment is not financed by a third party for the specific purpose of making this particular investment. Third, the issuer has no actual knowledge of facts indicating the investor is not accredited or that the investment was so financed. What the letter changed: for offerings at or above those minimum thresholds, sponsors no longer need to review tax returns, collect bank statements, or obtain third-party professional letters to satisfy the reasonable-steps standard. Written investor representations with the specified content are sufficient, provided the issuer has no contradictory knowledge. What the letter did not change: the antifraud framework continues to apply. A sponsor who possesses actual knowledge that an investor does not qualify cannot rely on written representations to proceed. The letter is not a license to ignore visible red flags or to treat written certification as conclusive when contradictory facts are present. It is also silent on offerings with investment minimums below the stated thresholds, where the traditional documentary and professional confirmation methods remain the operative verification framework. Practical implication: sponsors should evaluate whether their current offering’s minimum investment threshold meets the no-action letter’s conditions. If it does, the verification process can be simplified considerably without sacrificing legal adequacy. If it does not, the pre-2025 framework remains in effect. |
The Sequencing Requirement: Why Verification Must Precede Subscription Acceptance
The most consequential design decision in any accreditation verification workflow is sequencing. Verification must be completed before the investor is admitted to the offering, before the subscription is countersigned, and before funds are received and applied. A subscription accepted before verification is complete is a compliance failure. A subsequent successful verification does not cure it. The problem is the sequence of events, not the ultimate result, and the sequence cannot be retroactively corrected.
That requirement has a specific operational consequence: verification completion must be a condition precedent to subscription acceptance, not a parallel task running alongside subscription execution. A workflow that allows investors to execute subscription documents and wire funds while their verification is still processing has put the events in the wrong order, regardless of how quickly the verification is ultimately completed.
The practical implementation of this sequencing requirement is a verification gate, a defined point in the investor journey at which the system or process confirms that verification is complete and current before the investor can proceed to subscription execution or receive funding instructions. Without that gate, the sequencing depends on manual monitoring, which is inconsistently applied under the time pressure of an active capital raise with multiple investors in various stages of the onboarding process simultaneously.
In a technology-enabled workflow, the gate can be automated: the investor portal does not make subscription documents accessible until verification is confirmed as complete. In a manual workflow, the gate must be procedural: no subscription is countersigned and no funding instructions are released until a designated person confirms in writing that verification for that investor is complete. Both approaches work. What does not work is relying on general awareness among the team that verification should happen before closing, without a specific checkpoint that enforces it.
Verification Methods: Matching the Approach to the Exemption and the Investor
Rule 506(b): Establishing Reasonable Belief
For Rule 506(b) offerings, the issuer does not need to verify accreditation through documentary review. The standard requires only a reasonable belief that each investor qualifies. That reasonable belief is established through the investor’s representations in the subscription agreement and questionnaire, combined with the issuer’s review of those representations and the absence of red flags that would call the qualification into question.
Reasonable belief is not passive. It requires evaluation of the investor’s representations, not merely collection of a signed form. A questionnaire that reveals internal inconsistency in the investor’s accreditation claim, an investment amount that appears disproportionate to the stated net worth, or information from another source that contradicts the investor’s self-certification all undermine the reasonable belief standard. The workflow should include a review step in which someone with appropriate authority evaluates the questionnaire responses against the accreditation standard and flags inconsistencies before acceptance.
The reasonable belief standard also determines what the workflow must document. The file should show not just that the investor submitted a questionnaire but that someone reviewed it, that the representations were evaluated against the applicable standard, and that no red flags were identified or that identified red flags were addressed before acceptance. A file that contains a completed questionnaire but no evidence of review demonstrates collection, not evaluation.
Rule 506(c): Documentary and Professional Verification Below the No-Action Letter Threshold
For Rule 506(c) offerings with minimum investments below the no-action letter’s thresholds, the issuer must use documentary or professional verification methods that the SEC has described as satisfying the reasonable-steps standard. The method must match the accreditation category being verified.
For income-based verification: two years of IRS income-reporting forms combined with a written investor representation confirming reasonable expectation of meeting the current-year threshold. For net-worth verification: bank and brokerage account statements, property documentation, and a credit report, sufficient together to confirm that assets minus liabilities excluding the primary residence exceeds $1 million. For license-based verification: a contemporaneous BrokerCheck search confirming the license is current and active.
As an alternative to documentary review in any category, the issuer can obtain written confirmation from a licensed attorney, CPA, registered investment adviser, or registered broker-dealer who has independently reviewed the investor’s financial information and confirmed accredited status within the prior three months. The professional must have actually reviewed the documentation, not issued a form letter based on the investor’s own representations to the professional. A certification letter that states the professional confirmed accreditation based solely on information the investor provided, without independent document review, is not adequate.
Rule 506(c): The No-Action Letter Pathway at or Above the Threshold
For Rule 506(c) offerings with minimum investments at or above the no-action letter’s thresholds, the verification process is simplified to written investor representations containing specified certifications. The subscription documents should include, as part of the accreditation representation, the investor’s confirmation that they are an accredited investor and that the minimum investment amount is not financed by a third party for the specific purpose of making this investment. Those representations, combined with the absence of contradictory knowledge on the issuer’s part, satisfy the reasonable-steps standard without documentary review.
The practical workflow under this pathway requires two things: subscription documents that contain the no-action letter’s specific certifications rather than a generic accreditation checkbox, and a documented process for confirming that the issuer has no actual knowledge of facts contradicting the investor’s representations. The second element requires that the intake process actively screen for red flags, document the screening result, and confirm the absence of contradictory knowledge before accepting the subscription. A workflow that collects the representation but performs no screening does not fully implement the no-action letter’s conditions.
Third-Party Verification Services
Third-party accreditation verification services have become the operational standard for Rule 506(c) offerings below the no-action letter threshold. These services review investor documentation, form an independent accreditation determination, and issue a verification letter or digital confirmation that the sponsor can rely on as evidence of reasonable steps. Integration with investor portals allows verification to be completed as part of the digital onboarding flow, creating a natural gate before subscription access is granted.
Third-party verification letters are valid for approximately 90 days from the date of the underlying documentation review, tracking the SEC’s reference in Rule 506(c)(2)(ii)(C) to a professional confirmation made within the prior three months. Sponsors conducting multi-closing offerings must confirm that each investor’s verification remains current at the time of each closing they participate in. A verification obtained before an earlier closing that has since expired does not satisfy the reasonable-steps standard for a later closing.
The selection of a third-party service is a compliance decision that deserves deliberate evaluation. The service must genuinely review the documentation it receives and form an independent determination of accredited status. A service that issues verification letters based on investor self-certification submitted through a digital form, without reviewing underlying financial documentation, does not satisfy the reasonable-steps standard regardless of the letter it produces. The sponsor is responsible for taking reasonable steps; delegating that function to a service that does not actually perform the review does not transfer the compliance obligation.
Entity Investor Verification: The Two-Level Workflow
Entity investors require a verification workflow that operates simultaneously at two levels: the entity level and the individual level. The entity-level review confirms the entity’s formation, its qualification category, and the authority of the person signing on its behalf. The individual-level review confirms the accreditation of the natural persons who ultimately own or control the entity, which is required where the entity qualifies through all-accredited equity owners and is also relevant to the AML and beneficial ownership review described in the prior posts in this series.
As addressed in the discussion of what sponsors should collect during investor intake, the entity intake process must collect organizational documents establishing the entity’s existence and authorized signatories, the entity’s tax classification and identification information, beneficial ownership information identifying the natural persons who ultimately own or control the entity, and the specific documentation supporting the entity’s claimed accreditation category.
The verification workflow for entities should address three questions in sequence. First: which accreditation category is the entity claiming? Second: does the documentation support that category? Third: if the entity is claiming the all-accredited-equity-owner category, has each equity owner been individually verified using the applicable individual verification method?
The most common entity verification failures are: applying the $5 million total assets test to an entity formed specifically to make the investment, which disqualifies it from that test; failing to extend individual verification to each equity owner when the entity qualifies through all-accredited equity owners; and treating the entity’s own representations as verification without reviewing documentation supporting those representations. Each of those failures is preventable with a workflow that separates entity-level and individual-level review into defined sequential steps with documented outcomes at each step.
Multi-Closing Offerings: Verification Currency Across Multiple Closings
Real estate syndications frequently accept capital through multiple closings over an offering period extending several months. The verification workflow must account for that structure, because verification has defined currency and investors verified at the first closing may not be current by the time a second or third closing occurs.
For third-party professional verifications, currency is approximately 90 days from the date of the underlying documentation review. A verification completed six months before a subsequent closing is not current, and the investor must be re-verified before participating in that closing. The workflow should track each investor’s verification date and generate renewal requests before the expiration date, not after. A renewal process that begins when the letter has already expired creates a gap period during which the investor’s status is not current.
For Rule 506(b) offerings, the reasonable belief standard applies at the time each subscription is accepted. An investor who made an additional capital commitment at a later closing should have their eligibility confirmed at the time of the new commitment. Financial circumstances can change between closings in ways that affect eligibility, and the file from the first closing should not be treated as establishing current reasonable belief for the new transaction.
For Rule 506(c) offerings using the no-action letter pathway, a renewed written representation should be obtained at each closing as a best practice. The representation is brief and the administrative burden minimal. Having a current representation in the file for each closing is significantly more defensible than arguing that an older representation remains adequate because the investor’s circumstances are assumed unchanged.
| 📌 The Prior Investor Exception Under Rule 506(c)(2)(ii)(D): Scope and Limitations Rule 506(c) provides a specific exception for investors who previously invested in a Rule 506(c) offering by the same issuer. Under Rule 506(c)(2)(ii)(D), an issuer can treat a current written certification from such an investor as reasonable steps to verify continued accredited status, provided the issuer has no actual knowledge of contrary facts. The exception has a defined scope that sponsors frequently misapply. It applies only to prior Rule 506(c) investments with the same issuer. A prior investment in a Rule 506(b) offering by the same sponsor, even in a prior fund managed by the same team, does not establish the qualifying prior 506(c) relationship. An investor who has participated in the sponsor’s 506(b) offerings for years is a new investor for 506(c) verification purposes, regardless of the length of the relationship. The exception also requires a current written certification from the investor for the new offering. Relying on the subscription agreement from the prior 506(c) offering without obtaining a new certification for the current offering does not satisfy the exception. The certification must be current, meaning obtained in connection with the investor’s participation in the current offering, not simply on file from a prior transaction. Where the exception applies, it simplifies the process considerably: a written certification replaces documentary review. Where it does not apply because the prior investment was in a 506(b) offering, the full verification requirement for new investors applies, regardless of how long the investor has been known to the sponsor. |
Recordkeeping: What the File Must Preserve and Why
The verification file is the evidence of the verification process. A verification program without adequate records is a program that cannot defend itself, regardless of what the underlying process actually accomplished. The SEC’s guidance suggests retaining verification documentation for at least five years from the date of the last sale in the offering, though counsel should advise on the retention period appropriate for the specific offering structure and jurisdiction.
The records required for each investor include: the specific documents reviewed, identified by type and date; the date on which the review was performed; the name and credentials of the person or service who performed the review; the accreditation determination made; the category under which the investor qualifies; the basis for that determination stated with enough specificity that a future reviewer can understand what was evaluated; and any exceptions, follow-up actions, or escalations that occurred during the review. For entity investors, the records must also include entity-level documentation and the individual-level verification for each equity owner.
The subscription agreement and investor questionnaire are part of the verification file but are not the verification file. The subscription document package establishes the investor’s representations and eligibility basis, but neither document by itself demonstrates that verification was performed. The file needs both the documentation and the record of how it was reviewed, when, and by whom.
Version control matters for multi-closing offerings. The file must establish which version of the verification was current at the time of each closing and whether any renewal or update was performed between closings. An investor file containing multiple verification letters without clear dating and closing-assignment notation cannot establish what was current at any specific point in the offering.
The recordkeeping system should be established before the first investor subscription is accepted, not assembled retroactively as closings approach. A file built contemporaneously as verification is performed is more reliable and more defensible than one reconstructed from memory and email chains after the fact.
Written Verification Procedures: The Foundation of a Defensible Program
A verification workflow that exists only in the sponsor’s practice rather than in written procedures is a workflow that cannot be consistently applied, cannot be trained to new staff, cannot be audited against a stated standard, and cannot be demonstrated to an examiner. Written verification procedures are the foundation of a defensible program, not an administrative supplement to one.
The written procedures should specify: the acceptable verification methods for each accreditation category; the specific document types accepted under each method; the validity period for third-party verification letters and the process for renewal; the sequencing requirement, stating explicitly that verification must be confirmed complete before subscription acceptance and before funding instructions are released; the process for handling investors whose verification is pending when a scheduled closing date approaches; the exception-handling process for red flags, incomplete documentation, and borderline cases; who has authority to approve exceptions; and the recordkeeping requirements for each investor file.
Those procedures should be reviewed by securities counsel at the time they are drafted and updated when the regulatory framework changes. The March 2025 no-action letter is an example of a development requiring every sponsor conducting Rule 506(c) offerings to evaluate whether their written procedures reflect the current framework. A sponsor whose written procedures still describe the pre-2025 verification framework is operating under documented procedures that do not match current law, which creates its own problem when those procedures are examined.
Integration With the Full Onboarding Workflow
Accreditation verification does not operate in isolation. It is one component of an onboarding workflow that also includes AML and KYC review, beneficial ownership confirmation for entity investors, subscription document execution, and funding receipt. The AML and KYC obligations in real estate syndications draw on some of the same documentation as accreditation verification, particularly for individual identity confirmation and entity ownership analysis, and the two functions should be coordinated rather than siloed.
The integration point that most frequently produces errors is the relationship between verification completion and subscription acceptance. A workflow that tracks accreditation review and subscription execution as parallel processes, rather than sequential ones, will produce files where subscription documents were executed before verification was confirmed. That sequencing failure is a Rule 506(c) compliance problem, and a subsequent successful verification does not cure it.
The offering documents must also accurately describe the verification process being used. If the offering is conducted under Rule 506(c) using documentary verification, the subscription documents should reflect that. If the no-action letter pathway is being used, the investor representations in the subscription agreement must include the specific certifications the no-action letter requires, not a generic accreditation checkbox. The PPM and subscription package should be drafted to reflect the actual verification method so that the offering documents and the onboarding process are consistent with each other.
| ⚠️ The Six Accreditation Workflow Failures That Most Frequently Create Compliance Exposure 1. Treating a signed questionnaire or subscription agreement checkbox as verification in a Rule 506(c) offering. Self-certification is not verification. The investor’s representation that they are accredited does not satisfy the reasonable-steps standard without documentary review, professional confirmation, or satisfaction of the no-action letter’s specific conditions. 2. Accepting subscriptions before verification is complete. The sequencing requirement means verification must precede subscription acceptance. A subscription accepted before verification is confirmed is a compliance failure that subsequent successful verification does not cure. The problem is the order of events, not the ultimate result. 3. Applying the $5 million total assets test to entities formed specifically to make the investment. An entity created to hold a single investment cannot qualify on asset size. It must qualify through all-accredited equity owners, each of whom must be individually verified. Applying the wrong category is a verification failure regardless of the entity’s financial resources. 4. Failing to renew verification for investors in multi-closing offerings when the original verification has expired. A third-party verification letter more than approximately 90 days old may no longer constitute reasonable steps for a current closing. Verification currency must be tracked closing by closing, not assumed to carry forward indefinitely from the first closing. 5. Relying on the prior investor exception for investors whose prior investment was in a Rule 506(b) offering rather than a Rule 506(c) offering from the same issuer. The exception applies only to prior 506(c) investments with the same issuer. A longstanding investor relationship established through 506(b) offerings does not qualify, regardless of its duration. 6. Failing to document the specific process: what was reviewed, when, by whom, and with what result. A file that records only that the investor was approved as accredited, without preserving the documentation reviewed and the basis for the determination, cannot demonstrate that verification was performed. It demonstrates only that a conclusion was reached. |
A Verification Workflow Built as Evidence Is the Only One Worth Having
The question in the opening of this post, what you would show an SEC examiner about how each investor was verified, is not a hypothetical. The SEC’s FY 2025 examination priorities for private fund advisers identified accredited investor verification practices as an examination focus. The review looks at whether the verification method matched the exemption, whether verification was completed before subscriptions were accepted, and whether the records demonstrate a genuine process rather than a paper collection exercise.
The accreditation workflow that satisfies that examination is not necessarily the most elaborate one. It is the one designed correctly, applied consistently, and documented completely. A workflow that uses the right verification method for each investor category and exemption, sequences verification before subscription acceptance without exception, tracks currency across multiple closings, maintains records showing what was reviewed and by whom, and is reflected in written procedures that counsel has reviewed and staff can follow is a workflow that answers the examiner’s question with a complete file.
Sponsors who have not audited their verification workflows against these standards are worth having that conversation with counsel before the next offering launches. The cost of designing the process correctly at the outset is predictable. The cost of addressing a verification failure after investors have already been admitted is not.
Frequently Asked Questions
Can a sponsor accept self-certification of accredited investor status in a Rule 506(c) offering?
No. Self-certification alone, a signed questionnaire or checked box indicating accredited status, does not satisfy Rule 506(c)’s reasonable-steps verification requirement. The issuer must use documentary review, obtain professional confirmation, or satisfy the March 2025 no-action letter’s conditions, which require a minimum investment of at least $200,000 for natural persons or $1,000,000 for legal entities combined with specific written investor representations and the absence of contradictory knowledge on the issuer’s part.
What did the March 2025 SEC no-action letter actually change for verification?
The March 12, 2025 no-action letter from the SEC’s Division of Corporation Finance created a new verification pathway for Rule 506(c) offerings with minimum investments at or above specified thresholds. For those offerings, sponsors can satisfy the reasonable-steps standard through written investor representations confirming accreditation and the absence of third-party financing, without documentary review. For offerings below those thresholds, the pre-existing methods remain required. The letter did not change the antifraud framework or permit sponsors to proceed when they possess actual knowledge contradicting an investor’s representations.
How does accreditation verification work for an LLC investing in a Rule 506(c) offering?
An LLC can qualify as an accredited investor under multiple pathways. If the LLC has total assets exceeding $5 million and was not formed for the specific purpose of making this investment, it qualifies on asset size. If the LLC was formed specifically for this investment, it must qualify through all-accredited equity owners, requiring individual verification of each member. Verification requires both entity-level documentation confirming formation and the qualifying category, and, where applicable, individual-level verification of each member using the methods appropriate to that person’s qualifying basis.
How long does a third-party verification letter remain valid in a multi-closing offering?
Third-party verification letters are generally valid for approximately 90 days from the date of the underlying documentation review, based on the SEC’s reference in Rule 506(c)(2)(ii)(C) to professional confirmation made within the prior three months. In a multi-closing offering, each investor’s verification currency must be confirmed at each closing they participate in. A verification letter obtained before the first closing that has expired by the time of a second closing must be renewed before the investor can participate in the second closing.
What records must a sponsor maintain to document accreditation verification?
The verification file should preserve the specific documents reviewed, identified by type and date; the date of review; the name and credentials of the reviewer or verification service; the accreditation determination; the category under which the investor qualifies; the basis for the determination with enough specificity to allow reconstruction; and any exceptions or follow-up actions. The SEC’s guidance suggests retaining verification documentation for at least five years from the last sale in the offering. For entity investors, the file must also include entity-level documentation and individual-level records for each equity owner where applicable.
Can a sponsor use a prior investor’s verification from a prior fund for a new offering?
It depends on which exemption the prior offering used. Rule 506(c)(2)(ii)(D) permits reliance on a current written certification from an investor who previously invested in a Rule 506(c) offering from the same issuer, provided the issuer has no actual knowledge of contrary facts. A prior investment in a Rule 506(b) offering by the same sponsor does not qualify. For those investors, the full verification process required for new investors under Rule 506(c) applies, regardless of how long the sponsor has known the investor or how many prior investments they have made.