How do Broker-Dealers verify accreditation of investors?
Websites like SharesPost.com & SecondMarket.com verify accreditation by simply filling out a form and if what the investor fills out SEC laws (ie. net worth, income) then they're approved and can view the private securities.
Offline, what is the process? Does the investor sign a document stating they're accredited? Do the investors have to show income returns to the broker-dealer? Bank statements? What if the documents are forged? What is the absolute way broker dealers verify accreditation?
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Same verification standards apply both online and offline. BDs also have to determine the suitability of a particular investment opportunity for a client. Verification best practices differ among BDs, but most require some form of written documentation of AI status.
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I agree with Charles, particular practices differ, but the goal is the same - to establish a due diligence defense. The BD must reasonably believe that the investor is an "accredited investor". There are different ways of showing that belief is reasonable. It's always a good idea to require strong written representations by the investor. But additional due diligence steps -- such as requiring high minimum denominations for investment - can also be useful to mitigate potential liability.
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Thanks guys. Can you elaborate what reasonable steps are? Would having an investor fill out 1 form and sign be considered reasonable? My assumption was reasonable steps to verify accreditation is a form agreeing, tax return, background check etc.
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Brokers are obligated to know their customers' financial situations (KYC) in order to open their accounts. If a broker is selling private as well as publicly-traded securities, the customers to whom private securities are offered usually fill out pre-qualification forms in which they represent that they are 'accredited investors' and then sign subscription agreements to the same effect at the point of sale. I do not believe that brokers independently verify the income or asset requirements of accredited investors through bank statements or tax returns.
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Brokers are obligated to know their customers' financial situations (KYC) in order to open their accounts. If a broker is selling private as well as publicly-traded securities, the customers to whom private securities are offered usually fill out pre-qualification forms in which they represent that they are 'accredited investors' and then sign subscription agreements to the same effect at the point of sale. I do not believe that brokers independently verify the income or asset requirements of accredited investors through bank statements or tax returns.