3rd Party Verification Letter for Accredited Investors 

Becoming an accredited investor opens up a wide range of potentially lucrative opportunities for higher net worth and investment-savvy individuals. The simplest way to attain “accredited investor” status is to ask for a 3rd party verification letter from a registered broker dealer, an attorney or a certified public accountant.  Other paths require cumbersome documentation that can deter would-be investors from profitable investments, such as InvestinKona.com. 

Investors wishing to enter private equity funds must meet specific benchmarks outlined in Rule 506 (C) of the Security Exchange Acts (SEA). This rule covers asset classes exempt from SEA registration and who they define as investors financially savvy/competent enough to evaluate investment risks. The latter, therefore, are free to commit their capital to opportunities outside strict Securities Exchange Commission (SEC) controls.

Sponsors of private investment opportunities not covered by strict SEC regs must perform due diligence to ensure potential investors are allowed to participate. For example, private real estate equity funds, hedge funds, and venture capital opportunities are obligated to show that investment applicants meet one of two categories:

  • Accredited investors (formally recognized)
  • Entities regarded as qualified purchasers (i.e., pension funds, endowments, insurance organizations, and others with substantial assets under management.)

Private fund investments are a popular option for both accredited investors and qualified purchasers based on the high financial reward potential. Meeting the benchmark requirements is not a traditional “test”. Rather, an investment sponsor must:

  • Ask the right questions
  • Record details of interactions with candidates
  • Follow SEC guidelines

However, these investment sponsors aren’t required to submit findings to any regulating body. As a result, the only time accreditation may come under focus again is in the future, mainly if the investor  (or anyone) makes a complaint to the SEC that the sponsors circumvented compliance and the due diligence fell short of expected standards. 

Investor misrepresentation may become an issue, but it's not the sponsor's responsibility to go to extraordinary lengths to verify candidates' declarations. Moreover, the company will likely request investors sign waivers, protecting the general partners or managing members from any future liabilities.

Let’s look at what accredited investors must do to get the nod from investment sponsors. We will cover the net worth/net income requirements, other entry channels, and the 3rd party verification letter.

The Net Income Method

Without a 3rd party letter, accredited investors individually must prove that their income for the last two years equaled or exceeded $200,000 and that they’ll repeat the same in the current year. If making an application as a couple, the benchmark rises to $300,000. Proving one meets the set standards rests on providing relevant documentation such as tax filings or pay stubs. It generally involves accumulating all the forms the IRS calls for, including:

  • W-2s.
  • 1040s.
  • 1099s.
  • K-1s.
  • Any other documentation relevant to income reporting.

When opting for the net income method, there are two things to keep in mind:

  1. It’s not permissible to switch from individual to the couples category (or vice versa) in the three years under review unless the applicant can show a marriage or divorce entered the equation.
  2. You only have to pass one benchmark, not all of them. Therefore, if net income works, get it together and forget the rest.

The Net Worth Method

Proving net worth requires significantly more documentation than the net income test. First, the benchmark is $1 million (individuals or couples), but it excludes the primary residence from the calculation. The big problem facing accredited investor candidates is the little word “net” before “worth,” which implies revealing liabilities. For example, ownership of assets totaling $7 million and liabilities of $6.1 million cancels out this option.

Moreover, verification of asset valuation is another challenge. Here are some examples of the evidence you need to gather to satisfy the set protocols: 

  • IRS forms
  • A consumer credit report listing all outstanding liabilities
  • Property deeds or other evidence of real estate holdings ownership
  • A licensed appraiser’s valuation of property holdings
  • Quoted securities’ latest valuations
  • Value of private company securities holdings
  • Proof of other assets with valuations including:
    • Cryptocurrencies
    • Art, precious metals, and minerals (like diamonds) with official valuation certificates.

Alternative Qualifications for “Accredited Investor” Status

Those considered to have met certain thresholds for investment knowledge may also qualify, including: 

  • Directors,  executive officers, or general partners in the LLP (Limited Liability Partnership), LLC (Limited Liability Company), or a private REII holding entity offering the unregistered proposition (commonly referred to as “insiders.”) 
  • A parallel situation to the above in entities carrying on the same line of business and around similar asset classes (i.e., creating the designation “knowledgeable employee.”
  • Anyone with SEC or FINRA specified certifications, such as Series 7, 62, or 82, gets automatic accredited investor status.
  • Finally, demonstrate that you are a famously wealthy person documented by reliable sources such as Forbes and other reputable publications.

The 3rd Party Verification Letter

On the other hand, accredited investor status is immediately given with a signed third-party letter from:

  • A registered broker-dealer
  • Registered investment advisor
  • An attorney
  • A licensed accountant (i.e., a CPA).

One page does the trick, as long as it categorically confirms the individual or couple qualifies under the net income or net worth benchmarks. In short, the letter should show:

  • The date of verification.
  • A little background on why the author can effectively confirm accredited status.
  • Precisely which benchmarks the candidates measure up to.

The Benefits of Choosing 3rd Party Verification 

A letter doesn't require accompanying documentation or a detailed explanation; it only requires a simple stamp of approval from a professional who knows their clients well within the channel of their advisory expertise. As a result, it’s less invasive to one’s privacy along with saving significant time, hassle, and aggravation.

If a 3rd party verification letter is not an option, we suggest navigating the protocols via online assistance sites like VerifyInvestor.com. These provide cost-effective processes to get the documentation ready to go. To protect your confidentiality,  these sites use robust encryption to protect data and information confidentiality.

Conclusion

The article covers the accredited investor qualification from end to end, recommending that the 3rd party accredited investor verification letter is the method that convincingly avoids unnecessary frustration, followed closely by internet guidance. The crucial thing is to search for private fund investments with all your ducks in a row. You need a running start so that when you find the right opportunity, you dictate the pace, not the sponsors.