Verifying investor status is a regulatory requirement and a critical safeguard for issuers in private securities offerings. Two common approaches—Reasonable Steps Verification (RSV) and self-certification under Rule 506(b)—reflect different levels of compliance scrutiny, risk, and operational responsibility. Understanding the distinctions is essential for issuers seeking to balance investor accessibility with regulatory confidence.
Self-Certification under Rule 506(b)
Rule 506(b) of Regulation D allows issuers to raise capital without registering securities, provided investors meet accredited investor qualifications. Under this model, issuers may rely on investors’ self-attestation through a signed questionnaire or certification form.
Benefits
- Faster onboarding with minimal administrative burden.
- Lower upfront costs since issuers do not need extensive documentation or third-party involvement.
- Broader appeal to investors who value privacy and streamlined participation.
Risks
- Heavy reliance on investor honesty which may expose issuers to unintentional non-compliance if an investor misrepresents their status.
- Limited defensibility in regulatory reviews, as no independent evidence supports the certification.
- Potential reputational and financial consequences if ineligible investors are admitted.
Reasonable Steps Verification (RSV) under Rule 506(c)
By contrast, Rule 506(c) offerings require issuers to take reasonable steps to verify accredited investor status. This goes beyond a signed form, obligating issuers to collect and evaluate documentation such as tax returns, bank statements, brokerage reports, or professional confirmations from legal or financial advisors.
Benefits
- Stronger compliance posture with regulators, reducing the risk of enforcement actions.
- Greater investor confidence due to a structured, transparent verification process.
- More defensible in disputes, since issuers can demonstrate proactive due diligence.
Risks and Challenges
- Higher administrative and operational costs, particularly for issuers managing verification internally.
- Longer onboarding timelines which may deter certain investors.
- Increased sensitivity around privacy, as investors must disclose financial documentation.
Compliance Implications for Issuers
The core difference lies in the burden of proof. With self-certification, issuers depend on investor declarations, which may satisfy initial compliance but create vulnerabilities in audits. RSV, on the other hand, establishes a defensible compliance trail that can withstand regulatory inquiry.
Issuers must weigh:
1. Regulatory Risk Tolerance – Firms with higher exposure or larger offerings often prefer RSV for stronger compliance protection.
2. Investor Experience – Balancing security with accessibility is crucial, as intrusive verification may discourage participation.
3. Operational Resources – RSV requires more robust processes, which can be managed in-house or delegated to specialized providers.
Striking the Right Balance
Neither method is inherently superior; the decision depends on the issuer’s fundraising strategy, risk profile, and investor base. Self-certification under Rule 506(b) may suffice for issuers prioritizing efficiency and trust. However, Reasonable Steps Verification offers a safer compliance framework, particularly when regulatory scrutiny or investor accountability is paramount.
Ultimately, issuers who understand these differences can make informed choices that protect both their capital-raising efforts and long-term compliance standing.
