For issuers raising capital under Rule 506(c) of Regulation D, verifying the eligibility of their investors is a critical compliance obligation. Unlike other exemptions that allow for self-certification, Rule 506(c) requires issuers to take “reasonable steps” to verify that every purchaser is an accredited investor. A common question for both compliance officers and investors is how long this verification remains valid before the process must be repeated.
The 90-Day “Safe Harbor” Standard
The industry standard of 90 days stems directly from the verification methods outlined by the Securities and Exchange Commission (SEC). To provide certainty to issuers, the SEC established non-exclusive “safe harbor” methods. If an issuer utilizes one of these methods, they are deemed to have satisfied the verification requirement.
Two of the most common safe harbor methods rely on a strict 90-day timeframe:
-
Review of Financial Documents: If an issuer verifies status by reviewing asset and liability documentation (such as bank statements or credit reports) to calculate net worth, these documents must be dated within the prior three months.
-
Third-Party Confirmation: Issuers often rely on a written confirmation from a qualified third party—such as a CPA, attorney, registered investment adviser, or broker-dealer. This letter must state that the professional has taken reasonable steps to verify the purchaser within the prior three months.
Therefore, for a new investment with a new issuer, the validity of the verification documentation—and effectively the accredited investor status proof—is typically limited to this 90-day window. If an investor attempts to enter a deal on day 95 using a letter dated three months prior, the issuer cannot rely on the safe harbor provision and must request updated documentation.
The 5-Year Exception for Repeat Investors
There is a significant exception to the 90-day rule designed to reduce friction for ongoing relationships. If an investor has previously been verified by an issuer and wishes to purchase additional securities from the same issuer, the verification can remain valid for up to 5 years.
In this scenario, the investor does not need to undergo another full financial review. Instead, they must provide a written representation that their financial status has not changed materially. This allows for a streamlined process for follow-on investments, provided the issuer has no reason to believe the investor’s status has changed.
When is Re-Verification Required?
Outside of the specific five-year allowance for repeat issuers, re-verification is generally required in the following scenarios:
-
New Issuers: Proof of status is not automatically transferable between different companies.
-
Material Changes: If an issuer becomes aware of a material change in an investor’s circumstances—such as a bankruptcy, significant loss of income, or change in employment—they cannot rely on previous verifications, regardless of the timeframe.
-
Expired Documentation: Any financial document or third-party letter older than 3 months is considered “stale” for purposes of a new verification safe harbor.
By adhering to these timeframes, issuers protect their exemption status while ensuring that the verification process remains robust and compliant.
