Common qualifications of accredited investors include the following:
- A natural person with an individual or joint (with spouse) net worth in excess of $1,000,000 (excluding the value of the primary residence);
- A natural person with an individual income in excess of $200,000 in each of the two most recent years or joint income (with a spouse) in excess of $300,000 in each of those years (and has a reasonable expectation of the same level of income in the current year). The same method must be used for all years unless marriage or divorce occurs during that time; and
- An entity in which all equity owners are accredited investors.
It is not enough for a company to assume that an investor is accredited. The company must perform its own due-diligence. This can be difficult to prove, as there is no certificate or award regarding investor accreditation; it is something that is simply determined by the company through evaluation. Companies will often look at:
- Financial statements
- Credit reports with net worth
- Tax returns
- W-2 forms/others showing earnings
Under Rule 506(c)(2)(ii) there are examples of investor verification methods that serve as safe harbors to prove that a company took the reasonable steps necessary to verify the investor as accredited.
It is important to verify the accreditation of an investor because the SEC wants to ensure that these individuals understand the risks that are involved with these types of securities.
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