After the stock market crash of 1929, Congress passed a law named ‘The Securities Act of 1933’. Term accredited investor originated from this act of 1933. This act aimed to create a transparent financial system to overcome fraud and investor misrepresentation. It became necessary to uphold specific measures for accredited investor verification to establish financial security and account transparency. It is necessary to identify whether an investor meets accredited investor legal criteria.
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Accredited Investor – Definition
Under Rule 501(a) of The Security Act 1933, there are various criteria to meet for verified accredited investors. This set of parameters involves the following major 4 categories for a person.
| 1 | An accredited investor is a person whose individual or with that person’s spouse’s net worth exceeds $1 Million. |
| 2 | An accredited investor can hold individual income in excess of $200,000 in the two most recent fiscal years. |
| 3 | An individual with good standing holding one of the following licenses:
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| 4 | A person who is an executive officer, a partner of the company selling securities, or a director is an accredited investor. |
For entities, the following are different categories to be verified as accredited investors:
| 1 | All those entities that own investments in excess of $5 million are accredited investors and may involve corporations, trusts, 502 (c)(3) organizations, and Limited Liability companies(LLCs). |
| 2 | State Registered and Exempt Reporting Advisors. |
| 3 | SEC Registered brokers and dealers come in a list of accredited investors. |
| 4 | Firms where all equity owners are accredited investors themselves. |
| 5 | Financial sectors such as loan associations, insurance firms, banks, investment corporations, and business development organizations can also be accredited investors. |
Accredited Investor Verification Service for Business
Businesses need effective measures to confirm individual eligibility for those who claim to be accredited investors before getting them on board. There are various financial standards that regulatory authorities establish to overcome fraud and financial terrorism. An accredited investor is required to meet criteria for transparency and the financial security of an organization or business.
However, requirements to verify accredited investors may vary depending on the jurisdiction. Investor verification service is a primary requirement of every business and organization to overcome legal complications and establish secure business relations. Know Your Investor (KYI) is the best service for financial security and transparency. There are various companies providing KYI services and ensuring enhanced business security from fraud attacks.
Process for Accredited Investor Verification
The accredited investor verification process mainly involves the confirmation of whether an individual entity meets the parameters set by the regulatory authorities of a country. For example, the regulatory authority regarding investor verification in the US is the Securities and Exchange Commission ( SEC), which sets various criteria for being an accredited investor. However, there are two main methods: self-verification and third-party verification.
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- In self-verification, individuals undergo checking to ensure that they meet a certain level of income or net worth. However, it is not enough; hence, individuals and entities need to go further for third-party verification.
- Accredited investor verification processes involve compliance assurance by the side of a third party. It may involve legal professionals, accountants, and specialized verification companies.
Process of Third-Party Verification
The third third-party verification process mainly involves the following steps:
| 1 | Document collection: Financial documents such as tax returns, bank statements and proof of assets are collected to verify investor’s net worth and income. |
| 2 | Professional License Proof (if applicable): Companies qualify investors through licenses including Series 7, 65, or 82. It works as evidence of an individual or entity’s good standing. |
| 3 | Verification / Review: A third-party professional such as accountant, attorney, or verification service reviews the submitted documents and details to verify accredited investors. |
| 4 | Verification letter: If potential investors meet all the requirements , a letter is issued which is valid for 80 days as being accredited investor. |
Final Words
Businesses must employ significant measures for accredited investor verification. It is crucial to maintain financial transparency and legal security. There are regulatory authorities in every country that determine the criteria of accredited investors, which need to be met for real-time business security from fraudsters.
There are various criteria to meet for persons and entities who claim to be accredited investors whose businesses are verified through the Know Your Investor (KYI) service. There are various companies offering KYI services to protect businesses from legal complications and financial terrorism.
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