Verifying accredited status: his word is not enough

Under Rule 506(c), the lane that lets you advertise, you cannot take an investor’s word for it. “He told me he was accredited, and I believed him” is not a defense, because 506(c) requires you to take reasonable steps to verify accredited status, and a self-certification is not a reasonable step. This is the single obligation that separates the loud lane from the quiet one, and getting it wrong is how sponsors bust a 506(c) offering.

There are two broad ways to satisfy it. Confirm the specifics against 17 CFR 230.506(c) and the SEC’s guidance before relying on any one method.

The traditional methods verify the individual test directly. For the income test, you review the investor’s IRS forms, such as a W-2 or 1099 or tax return, for the two most recent years, plus a written representation that they reasonably expect to hit the threshold again this year. For the net-worth test, you review recent statements of assets, bank and brokerage records or a tax assessment, together with a credit report to capture liabilities, and a written representation that all liabilities are disclosed. Or you obtain a written confirmation from a qualified third party, a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a CPA, stating that they have verified the investor’s accredited status. These methods work for any investor, at any investment size, but they are paperwork-heavy and some investors resist handing over tax returns.

Reasonable steps is a standard, not a checkbox, and the size of the investment changes how many steps are reasonable.

The second way is newer and, for the right deal, far lighter. A March 12, 2025 SEC no-action letter established a high-minimum path. Confirm it against the primary letter, but the substance is that a sponsor is deemed to have taken reasonable steps to verify if three conditions all hold. The investor commits at least $200,000 if a natural person, or at least $1 million if an entity, and a binding capital commitment counts toward the minimum. The investor provides written representations that they are an accredited investor and that the minimum investment is not being financed, in whole or in part, by a third party for the specific purpose of making this investment. And the sponsor has no actual knowledge of any fact indicating the investor is not accredited or that the investment was third-party financed.

Notice what the third-party financing representation is doing. Without it, someone could borrow the $200,000 specifically to clear the minimum and manufacture the appearance of the wealth the minimum is meant to signal. The representation closes that door, which is why it is a required condition and not boilerplate.

The seam here is worth naming, because it is where the verification decision meets the capital-raising decision. The high-minimum path does not just simplify paperwork; it puts a floor under your raise. You can only use it for investors writing at least $200,000, so leaning on it reshapes who is in your deal. A sponsor who wants $50,000 checks from a wide base of accredited investors cannot verify them through the high-minimum path and is back to reviewing tax returns or buying third-party letters for each one. The choice of verification method and the choice of minimum investment are the same choice, made once.

The fatal mistake is mixing the lanes. Self-certification, taking the investor’s own representation and stopping there, is a 506(b) behavior, and 506(b) forbids the advertising that defines 506(c). If you advertise, which puts you in 506(c), and then verify your investors by self-certification, which is a 506(b) practice, you have run a 506(c) offering without doing 506(c)‘s verification. That is a busted exemption, and as covered in the lane comparison, a busted 506(c) after solicitation usually has no fallback. Pick the lane, then use the verification method that lane actually requires, on every investor, without exception.