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A Comprehensive Guide to the Accredited Investor Verification Process

30 October, 2023

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Investment is undoubtedly a complex initiative, especially concerning private investment opportunities. However, it’s even more challenging to identify which business or individual qualifies as an accredited investor. These investors are wealthy and powerful entities with access to specific hidden deals and can sponsor unregulated securities. 

Since financing in securities that aren’t handled by a financial administration such as the Securities and Exchange Commission (SEC) can be dangerous, the US regulations require people or commodities to meet certain prerequisites before investing. Nevertheless, the accredited investor verification process is an absolute element of financial regulation and securities law, developed to protect investors and issuers. This comprehensive guide discusses who accredited investors are, their verification process, and the best practices to ensure compliance with standard regulatory requirements.

What is an Accredited Investor?

An accredited investor refers to the person or an entity holding permission to invest in unregistered private security offerings. Nevertheless, an accredited investor must meet the following three requirements as per SEC:

  • Skills: The individual must be a knowledgeable person regarding certain investment funds and have a valid series of 7, 65, or 82 licenses.
  • Income/Earning: The investor must have an annual income of a minimum of $2,00,000 to $3,00,000. At the same time, the income level must be sustained every year.
  • Net Worth: An accredited investor must have a net worth of $1 Million or more, whether individually or with a spouse. 

The strict requirements are implemented to protect investors who may not have enough funds to bear significant failures. Nevertheless, the SEC believes that inexperienced investors can be at a disadvantage, especially considering that these investments often require substantial initial investments. In addition, investing in early-stage startups or hedge funds carries higher risk as they only disclose basic information to investors.

Suggested Read: KYB for Global Operations: How to Create Cross-Border Business Verification?

Securities that Require Accredited Investor Verification

The demand for accredited investor verification comes in several investment scenarios. However, having a basic understanding of such strategies is essential for both investors and developers. Following are the types of securities requiring accredited investor verifications:

  • Hedge Funds

Hedge funds usually demand accredited investors. These funds utilize complicated and higher-risk investment plans, eventually making it fundamental that investors must be financially qualified enough to take part.

  • Private Placements

Private placements include the sales of securities to a particular class of investors without any need for public offerings. Businesses seeking to boost capital via private placements can limit their offers to accredited investors. 

  • Crowdfunding

Accreditation matters even in the world of crowdfunding. The SEC’s Regulation D allows crowdfunding offerings to accredited investors. Additionally, this also enables startups and established enterprises to boost their revenues with the help of these investors.

  • Venture Capital Investments

Venture investments generally involve funding early-stage and high-potential startups. In this space, investors are normally required to be accredited because of the high level of danger associated with these investments.

An Overview of the Accredited Investor Verification Process

Accredited investor verification is an essential process before onboarding. Nevertheless, the methodology may vary depending on the nature of the investment opportunity. However, some key components of the verification process are as follows:

Pre-Verification Phase

The following are some essential pre-verification actions that need to be carried out before the actual verification process begins:

  • Identification of potential Investors: Businesses must determine whether a potential investor qualifies for accredited investor status. This is the first step in ensuring that eligible participants have access to investment possibilities.
  • Gathering Necessary Documents: As part of the verification process, investors must provide relevant financial documents for authenticity. Statements from investment accounts, bank accounts, tax return records, and, if required, professional qualification certificates are all included in these records.

Significant Accredited Investor Verification Methods

The following are the main approaches to verifying the status of accredited investors:

  • Self-Certification: Investors can attest to their accreditation status by themselves using this verification technique. In order to verify that they are fulfilling the necessary requirements, the process involves filling out a statement or questionnaire.
  • Third-Party Verification: Many issuers choose third-party verification options. These firms are able to independently confirm an investor’s financial data and issue a report attesting to their accredited status.
  • Written Verification via Professionals: If an investor has professional certificates, any accredited expert can attest to their accreditation through documented verification.

Primary Documents Required During Investor Onboarding

The main documents required to verify investor background are as follows:

Bank Statements

During the investor onboarding process, bank statements are used to authenticate financial assets and analyze an individual’s net worth.

Tax Returns

In investor due diligence, tax returns confirm the income and sometimes net worth. In most cases, investors are demanded to show the tax returns of the past two years in order to prove their ability. 

Statements of Investment Accounts

Statements from investment accounts are advantageous for documenting ownership of assets such as bonds or other securities.

Best Practices for Accredited Investor Verification

There are certain steps businesses and financial institutions must take to ensure and maintain a successful accredited investor verification process:

Investor Due Diligence

Mere investor verification is not enough during their onboarding process. In fact, thorough due diligence is necessary, requiring the verification and cross-referencing of all the information given with the provided documentation.

Ongoing Monitoring

Investor verification is a continuous process. Therefore, it is imperative for businesses and financial institutions to establish continuous monitoring mechanisms to verify that authorized investors consistently fulfil the requirements.

Employing Professional Service Providers

One easy way to improve accuracy and expedite the process is to hire verification service providers with expertise. The KYB is experienced in managing the intricate process of accredited investor verification.

Ensuring Regulatory Compliance

Regulations regarding accredited investor onboarding can change over time. Therefore, businesses and investors need to stay informed about relevant modifications to ensure compliance.

Wrapping Up

For companies and financial institutions involved in the world of private investments, understanding and adhering to the accredited investor verification process is a legal requirement. In fact, it’s a relevant component of responsible investing and capital formation. The KYB helps businesses and financial institutions with investor onboarding while empowering businesses to make knowledgeable decisions efficiently. Contact our experts today and foster your business partnerships effectively.

Read More: Sanctions and PEP Screening: Ensuring Compliance with KYB Regulations

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