SIFMA Provides Guidance on Verification of Accredited Investor Status by Broker-Dealers and Investment Advisers

by Goodwin

The Securities Industry and Financial Markets Association (SIFMA) issued a memorandum (the “Memorandum”) with guidance for registered broker-dealers and investment advisers on various non-exclusive means of verifying an investor’s accredited investor status so as to have a basis for submitting a written confirmation of that determination to an issuer seeking to rely on the private offering exemption in Rule 506(c) of Regulation D under the Securities Act of 1933 (the “Securities Act”).  Rule 506(c) provides four non-exclusive safe harbor methods for an issuer to meet the requirement that it take “reasonable steps” to verify that all purchasers in a Rule 506(c) offering are accredited investors.  (See the June 23, 2013 Financial Services Alert for a more detailed discussion of Rule 506(c).)  The Memorandum recognizes that two of the safe harbors may be not be attractive to purchasers who may not wish to provide personal financial information about their annual income or the amount of their assets and liabilities.  In order to facilitate reliance on the safe harbor method that permits an issuer to rely on a written confirmation of a purchaser’s accredited investor status provided by a registered broker-dealer, registered investment adviser, licensed attorney, or certified public accountant, when that party has taken reasonable steps to verify the purchaser’s accredited investor status before providing the confirmation, the Memorandum outlines reasonable steps that registered broker-dealers and investment advisers may take to verify the purchaser’s accredited investor status, while noting that the guidance in the Memorandum may also be useful to issuers and other market participants.  This article provides a brief summary of the methods discussed in the Memorandum, which provides important additional detail on the various elements of each method.

Verification - Natural Persons

Account Balance Method.  SIFMA believes that a broker-dealer or investment adviser will have taken reasonable steps to verify that its client meets the net worth test for accredited investor status (generally, individual net worth (or joint net worth with spouse) in excess of $1 million, not including primary residence) if (i) the client (a) has had an account with the firm for at least six months, (b) has (individually or jointly with the client’s spouse) at least $2 million in cash and marketable securities in the account prior to making the investment in the Rule 506(c) offering (net of any amounts borrowed to purchase securities on margin) and (c) has provided the representations in the form of accredited investor questionnaire attached to the Memorandum (the “Purchaser Representations”), including the representation that the client has not borrowed or guaranteed any business loans other than those disclosed to the firm; and (ii) the firm is unaware of facts indicating that the client is not an accredited investor.  The $2 million threshold reflects an assumption that the client has $1 million of liabilities.  (The basis for this assumption is discussed in more detail in the Memorandum.)  The Memorandum instructs that if the client has made any business loans or guarantees of business loans or drawn on a personal line of credit, and the amount of these obligations exceeds the fair value of the client’s assets posted as collateral, then the $2 million threshold should be increased by that excess amount.

Investment Amount Method.  SIFMA believes that a broker-dealer or investment adviser will have taken reasonable steps to verify its client’s accredited investor status under the net worth test if (1) the client (a) has been with the firm for at least six months, (b) (i) invests at least $250,000 in the Rule 506(c) offering or (ii) makes an unconditional commitment, callable in whole at any time, to invest at least $250,000 in the Rule 506(c) offering, and (c) has provided the Purchaser Representations, including the representation that the proposed investment is less than 25% of the client’s net worth (individually or jointly with the client’s spouse), (2) the firm is unaware of facts indicating that the client is not an accredited investor and (3) in the case where the client is making a capital commitment, the firm has knowledge that the client has fulfilled a call under a prior commitment.

Verification - Legal Entities

Accredited Investor Based on Entity Type.  If a legal entity claims to qualify as an accredited investor because it is one of various types of entities specifically identified as such in Regulation D (e.g., because it is a bank, an insurance company, or a registered broker-dealer), SIFMA believes that verification of that qualification at least annually will constitute reasonable steps to verify accredited investor status absent any facts indicating a change in status.  The Memorandum does not specify how to verify accredited investor status for these types of entities except to note that a broker-dealer or investment adviser’s registration with the SEC can be verified on the FINRA’s BrokerCheck website.

Accredited Investor Based on Entity Type and Assets.  If a legal entity claims to qualify as an accredited investor on the basis of a combination of entity type and assets (e.g., because it is a 501(c)(3) organization, corporation, Massachusetts or similar business trust, or partnership, not formed for the specific purpose of acquiring the securities offered, with total assets in excess of $5,000,000), SIFMA believes that a person will have taken reasonable steps to verify the entity’s accredited investor status if (a) it confirms that the entity is named on a broker-dealer’s or investment adviser’s current list of clients that qualify as “institutional accounts” as defined in FINRA Rule 4512(c)(3)22 or as Qualified Institutional Buyers as defined in Rule 144A under the Securities Act (which are required to have investible assets of at least $100 million), or (b) the entity makes an investment in the Rule 506(c) offering in excess of $5 million and the entity provides a written representation that it was not formed for the purpose of making that investment and has made at least one prior investment in securities (whether in a primary offering or in the secondary market).

Law Firm Support 

Exhibit C to the Guidance lists law firms, including Goodwin Procter, that believe that the procedures in the Memorandum provide reasonable guidance for registered broker-dealers and investment advisers to apply in their particular circumstances.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Goodwin | Attorney Advertising

Written by:


Goodwin on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Custom Email Digest
Privacy Policy (Updated: October 8, 2015):

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.


JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at:

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.