Since the enactment of Title II of the JOBS Act in 2012, accredited investor verification for private securities offerings has significantly changed. The current requirements reflect a balance between expanding investor access to private markets and maintaining regulatory safeguards to ensure participation by qualified individuals and entities. This article examines how verification methods have progressed from basic self-certification to sophisticated, technology-driven approaches, and how the SEC’s 2020 updates to accredited investor definitions have influenced these practices.
Early Practices: The Limits of Self-Certification
Before Title II, issuers relied on investors to self-certify their accredited status, often by simply checking a box to confirm their income or net worth. The introduction of Title II, lifted the ban on general solicitation, which changed this long-established paradigm. The SEC mandated that issuers take “reasonable steps” to verify accredited status, rendering self-certification inadequate for offerings using public advertising. This shift emphasized active verification over passive acceptance, setting the stage for more robust methods.
Defining “Reasonable Steps”
The SEC provided non-exclusive guidance on accredited investor verifications, suggesting methods like reviewing tax returns, bank statements, or obtaining written confirmation from professionals such as brokers or accountants. While these approaches offered a starting point, they posed challenges. Handling sensitive financial documents was time-consuming and raised privacy and security concerns for investors and issuers alike. The SEC’s principles-based stance—requiring issuers to consider each offering’s unique context—left some uncertainty, pushing the industry toward innovative solutions.
The Emergence of Third-Party Verification
To address these hurdles, third-party verification services gained prominence. These providers, often rooted in legal or accounting expertise, offered issuers a streamlined, secure way to confirm investor eligibility. Outsourcing accredited investor verifications reduced compliance burdens and limited the risk of engaging non-accredited investors. Over time, these services evolved, adopting digital platforms where investors could upload documents for professional review. Advances like data-analyzing algorithms further enhanced efficiency, marking a leap from manual processes to technology-driven solutions.
The 2020 SEC Updates: A New Layer of Complexity
In 2020, the SEC expanded the accredited investor definition to include, individuals based on either specific professional certifications (e.g., Series 7, 65, or 82 licenses) or employment positions (“knowledgeable employees” of private funds, but only for investments of that fund). Entities with over $5 million in investments were also added to this investor category. This broadened eligibility required verification processes to adapt. For instance, confirming certifications might involve liaising with licensing bodies, while verifying employee status could demand employment records. These changes underscored the need for flexible, comprehensive verification frameworks.
Looking Ahead: Challenges and Opportunities
Principles-based “reasonable steps” requirement remains a challenge, as issuers must tailor verification to each offering’s specifics. However, this highlights the value of partnering with experienced accredited investor verification providers. As private securities markets grow, verification practices will likely continue evolving, integrating new technologies and responding to regulatory shifts.
In summary, accredited investor verification under Title II has moved from the simple self-certification to a robust, technology-enabled process. The 2020 SEC updates added complexity and emphasized the need for adaptability in the private offering investment sphere. For issuers and financial professionals, staying informed and leveraging reliable accredited investor verification solutions is paramount to thriving in this dynamic landscape.
