RCBJ Perspectives: When Verification of Accredited Investor Status is Required and How to Verify Accredited Investor Status of EB-5 Investors
By Catherine D. Holmes | Partner, Chair, Investment Capital Law Group, Jeffer Mangels Butler & Mitchell
This article originally appeared in the April 2025 edition of IIUSA’s Regional Center Business Journal.
READ THE FULL SPRING 2025 EDITION OF THE RCBJ
This article explains when an EB-5 offering is required to verify an EB-5 investor’s accredited investor status under Securities and Exchange Commission (“SEC”) Regulation D, and how a new commercial enterprise (“NCE”) conducting an offering of securities to EB-5 investors can verify an EB-5 investor’s status as an accredited investor. First, the article provides a brief background of what it means to be an accredited investor and under what circumstances accredited investor status is required under U.S. federal securities laws. Next, the article explains the difference between EB-5 offerings that require verification of accredited investor status and those that do not. Finally, the article describes methods that may be used by NCEs to satisfy the verification requirements for those EB-5 offerings that do require verification of an EB-5 investor’s accredited investor status.
1. What is an accredited investor?
Under the federal securities laws, only persons who are accredited investors may participate in certain securities offerings made under SEC Regulation D, which offerings are exempt from registration with the SEC. One reason these offerings are limited to accredited investors is to ensure that all participating investors are financially sophisticated and able to fend for themselves or sustain the risk of loss, thus rendering unnecessary the protections that come from a registered securities offering.
An accredited investor, in the context of an EB-5 offering, is required to be a natural person (as opposed to an entity) because of the eligibility requirements of the EB-5 program. For a natural person, an accredited investor is anyone who:
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- earned annual gross income that exceeded $200,000 (or $300,000 together with a spouse or spousal equivalent) in each of the prior two years, and reasonably expects the same for the current year, OR
- has a net worth over $1 million, either alone or together with a spouse or spousal equivalent (excluding the value of the person’s primary residence), OR
- holds in good standing a Series 7, 65 or 82 securities professional license.[1][2]
2. When is an EB-5 offering required to be made to accredited investors?
All EB-5 offerings that are not registered with the SEC and that accept any EB-5 investors who are residents of the United States or present in the United States at the time they receive or sign EB-5 offering documents are required to comply with the exemption from SEC registration under SEC Regulation D.[3] Due to the reduced availability of H-1B and other visas, it is becoming more common for NCEs to market to investors who are already US residents on temporary visa status and are seeking permanent residency status. There are several types of offerings that may be made under Regulation D, but substantially all EB-5 offerings are made under SEC Rule 506 of Regulation D. There are two types of offerings that may be made under SEC Rule 506:
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- Rule 506(b), for offerings in which the NCE does not use any form of general solicitation of its offering to the public, including any seminars, websites, publications, trade shows or other types of communications to investors, and limits all contacts to prospective investors with whom the NCE or its management has pre-existing personal or business relationships. Offerings conducted under Rule 506(b) can be sold to up to 35 investors who are not accredited investors, but all additional investors are required to be accredited investors. However, most issuers choose to sell only to accredited investors, because the informational requirements under Rule 506 for offerings made to any non-accredited investors are greater than those that apply to offerings made only to accredited investors.
- Rule 506(c), for offerings in which the NCE uses any form of general solicitation of its offering to the public, including seminars, websites, publications, trade shows and other types of communications to prospective investors with whom the issuer and its management have no pre-existing personal or business relationship. Offerings conducted under Rule 506(c) can only be sold to accredited investors.
3. When is an NCE required to obtain verification of accredited investor status?
Only EB-5 offerings conducted under SEC Rule 506(c) using general solicitation are required to obtain verification of accredited investor status for all investors who are U.S. residents or are present in the U.S. when the offering documents are presented to the investors or signed by the investors. Verification does not have to be obtained before the prospective investor is solicitated, but does have to be obtained at the time the investor signs investment documents and before the NCE accepts the investor.
EB-5 offerings conducted under SEC Rule 506(b), which as noted above may not employ general solicitation, are not required to obtain verification of accredited investor status, but are required to obtain the investor’s own representations that he or she does meet the accredited investor requirements. These representations are typically provided in an investor questionnaire or in the subscription agreement. The investor questionnaire may even require the investor to state their income or net worth or provide other financial representations, but no verification is required.
4. How can an NCE obtain verification of accredited investor status?
SEC Rule 506(c) states that an issuer making an offering under Rule 506(c) must take reasonable steps to verify every investor’s accredited status, and describes several non-exclusive methods of verification that will be deemed to satisfy this requirement, including the following:
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- Income – for investors accredited on the basis of income, the NCE may obtain and review: (i) any Internal Revenue Service form that reports the investor’s income for the two most recent years (including, but not limited to, Form W-2, Form 1099, Schedule K-1 to Form 1065, and Form 1040) and (ii) a written representation from the investor that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year;
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- Net Worth – for investors accredited on the basis of net worth, the NCE may obtain and review (i) one or more of the following types of documentation dated within the prior three months and (ii) a written representation from the investor that all liabilities necessary to make a determination of net worth have been disclosed:
(1) With respect to assets: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties; and
(2) With respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies;
c. Third Party Verification – The NCE may obtain a written confirmation from one of the following persons or entities that such person or entity has taken reasonable steps to verify that the investor is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor:
(1) A registered broker-dealer;
(2) An investment adviser registered with the SEC;
(3) A licensed attorney who is in good standing under the laws of the jurisdictions in which he or she is admitted to practice law; or
(4) A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office.
5. Are there service providers who can perform third party verification for EB-5 Offerings?
Most NCEs that conduct offerings under SEC Rule 506(c) engage third party service providers to obtain the required information from EB-5 investors, review it, and provide a letter to the NCE that the EB-5 investor is an accredited investor. The third party service provider will typically provide the NCE with a letter from a licensed attorney who has reviewed the information submitted by the EB-5 investor certifying that the attorney has determined that the EB-5 investor is accredited on the basis of that information. Several of these service providers are available on internet platforms, such as verifyinvestor.com and investready.com.
6. Are there circumstances in which verification of accredited investor status is required for non-U.S. resident investors or investors with assets outside the U.S.?
Although it is only necessary to verify accredited investor status for investments sold under SEC Regulation D, there are circumstances when it is necessary to use Regulation D even for sales to investors who do not reside in the U.S. and are not in the U.S. at the time they receive or sign offering documents. For example, if a state does not have an exemption from registration that is available for an EB-5 offering made outside the U.S., it may be that the exemption under Regulation D is the only exemption that will pre-empt state securities exemption requirements. In that case, if the NCE relies on SEC Rule 506(c), it will be required to obtain verification of accredited investor status for all investors, even non-U.S. investors. In addition, an investor may be located in the U.S. at the time of an offering, but the investor’s primary assets may be located outside the U.S., in which case the verification will be based on non-U.S. information.
7. Can third party verification service providers certify accredited investor status for non-U.S. investors or non-U.S. assets?
There are third party verification service providers who do certify accredited investor status of investors who do not have assets or accounts in the U.S. They generally ask for the same types of documents as would be required from a U.S. investor, including bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports and credit reports issued by independent third parties. If there is no credit reporting agency in a non-U.S. investor’s country of residence, they may obtain a certification from the non-U.S. investor that no such report is available and use any other reasonable information that may be provided by the non-U.S. investor. Some of these verification service providers have had many years of experience with non-U.S. investors and have knowledge of the types of information that can be provided by non-U.S. investors.
8. What are the penalties for failure to obtain verification of accredited investor status?
NCEs that conduct EB-5 offerings using general solicitation but do not obtain verification of accredited investor status are at risk of losing the exemption from registration of their EB-5 offerings, which could result in potential civil sanctions by the SEC and could result in disqualification from conducting future EB-5 offerings. The SEC has in the past brought enforcement actions against persons involved in offerings who have not provided evidence of verification that the SEC deemed sufficient to comply with SEC Rule 506(c). In addition, EB-5 investors may have a right to rescind their purchase of securities if an EB-5 offering was not exempt from registration because it did not meet the requirements of SEC Regulation D. NCEs must therefore exercise diligence in documenting that they complied with the verification requirements when conducting an EB-5 Offering under Rule 506(c) to avoid a potential violation of federal (and in some cases state) securities laws.
[1] There are other categories of accredited investors for corporations, limited partnerships, limited liability companies, trusts and other organizations, but since an EB-5 investor can only be a natural person, these categories are not discussed in this article.
[2] These licensing categories are for persons who are registered representatives of a U.S. securities broker-dealer or advisory representatives of a U.S. investment adviser.
[3] EB-5 offerings can also be made without registering with the SEC under Regulation S to non-U.S. investors who are not residents of the U.S. and are not present in the U.S. at the time they receive or sign offering documents. There are no accredited investor requirements under federal securities laws for non-U.S. investors when the EB-5 offering complies with SEC Regulation S. This article does not discuss the requirements for compliance with SEC Regulation S.
