The 506c Accredited Investor Test

February 22, 2017 - 4 minutes read

If you’ve ever invested in a Reg D, rule 506b offering before, you may remember the standard for qualifying as an accredited investor. This standard is a little bit different in the 506c space.  The 506(c) accredited investor test is slightly more rigorous and we’ll explore this variation in this blog.

The 506b Accredited Investor Test

Under the Reg D, rule 506(b) exemption, both accredited investors and sophisticated investors are invited to invest in an offering as far as the U.S. SEC is concerned.  To qualify as an accredited investor for this provision, you must make some declarations to the sponsor.

The *official definition of an accredited investor* basically centers around income or net worth.  Income must be at or above $200,000 (or $300,000 for a couple) for the last two years and be expected to be the same in the coming year.  If the income test is not met, an investor must have a net worth of $1M or more, excluding their personal residence.  There are other corollaries, but the basic premise is higher income and/or higher net worth to qualify.

The 506c Accredited Investor Test

Especially relevant to our discussion is the fact that the income and net worth criteria are not different between rules 506(b) and 506(c).  The very same limitations apply whether you are referring to a 506(b) offering or a 506(c) offering.

The difference between the two rules lies with the verification process.

The 506b Verification Process

A potential investor looking to participate in a 506(b) offering has to demonstrate that they meet the accredited investor standard.  This demonstration normally takes the form of a questionnaire.

In Waypoint Property Group’s case, we offer an investor the ability to complete a *’suitability questionnaire’ electronically*.  This may or may not be the case for every sponsor.

The main thrust of the suitability questionnaire is to drill down to the income and net worth questions that will determine accredited status.  These forms typically do not require any additional backup to the claims made.  In other words, they are self-declarations.

The 506c Verification Process

Compared to the 506(b) verification process, the 506(c) process is slightly more rigorous.

Unlike with 506(b) offerings, self-declaration is not allowed.

In the place of self-declaration is a more strict verification process.  This process essentially means that a verification of your claims of accredited investor status must be made by a third party, and not the sponsor.

Two Verification Methods

Essentially, there are two ways to complete this verification process:

1.  Submit tax returns.
2.  Third party verification.

The first option is just like how it reads.  Submission of tax returns showing your income and/or your assets meet the standard of accredited investor would suffice.  If you are attempting to qualify using the income standard, two years of tax returns would be necessary.

The second option is a letter written by your accountant or attorney verifying your financial assets and/or  income.

In either case, a third party would collect these verification documents and clear you for participating in a 506(c) offering.

In Conclusion

All 506(c) offerings must be subscribed by accredited investors.  It is therefore important to understand the variation from one rule to the next regarding accredited investor verification.

And although the third party verification process that comes along with rule 506(c) can seem cumbersome on the front end, once completed, many new and outstanding offerings will be available to the accredited investor.

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