A 506(c) Verification Package That Does Not Verify
Your firm is placing a $30 million Rule 506(c) offering with a $250,000 minimum. A prospective investor, Dr. Alvarez, signs the investor questionnaire certifying accredited status based on individual income over $1.1 million in each of the last two years. She says her CPA will 'confirm later.' She also forwards a screenshot of a $2.4 million brokerage account; the statement is 14 months old and titled in a family trust, not her name. The issuer's closing is Friday at noon and the syndicate desk is pressing you to accept the documents so the allocation is not lost. You have not met Dr. Alvarez in person.
1. Is the questionnaire plus the account screenshot 'reasonable steps to verify' under Rule 506(c)?
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No. Each piece has a defect that goes to the heart of verification:
- The questionnaire is a self-certification. In a 506(c) deal the issuer must take reasonable steps to verify; a signed check-the-box form, standing alone, is exactly what the rule is designed to prevent.
- The screenshot is not a statement from a financial institution, is 14 months old rather than recent, and is titled in a trust rather than in the investor's name. It does not show her assets and it does not show a current balance.
- The promised CPA letter does not exist yet. A future assurance is not verification at closing.
Verification methods that would ordinarily work include IRS tax forms or transcripts for the prior two years plus a written representation of continuing income, recent bank or brokerage statements, or a written confirmation from a CPA, attorney, or registered broker-dealer. A trust account would need documentation showing she is a beneficial owner and can look through to the assets.
2. What can you do to try to close on Friday without cutting corners?
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Work the permitted methods in parallel and let the clock run out if none lands:
- Ask Dr. Alvarez to authorize release of IRS transcripts or provide signed returns for the last two years, plus a written representation that she reasonably expects the same income this year.
- Ask the CPA to send a verification letter directly to the firm - not to the investor - confirming the income figures.
- Obtain a current statement (typically within the last three months) in her name, or trust documentation plus a statement showing she is a beneficiary with authority.
If none is in hand by the deadline, the answer is that she does not close in this offering. Accepting the file creates rescission exposure for the issuer and supervisory and antifraud exposure for the firm and for you. Escalate to compliance rather than letting the syndicate desk pressure convert a documentation gap into a closing.
3. Would your analysis be different if this were a 506(b) offering?
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Yes, materially.
- In a 506(b) offering the issuer may not generally solicit, but it may sell to accredited investors on a reasonable-belief standard. A signed investor questionnaire, together with your knowledge of the customer and the account records, can be sufficient to form a reasonable belief.
- In a 506(c) offering the standard is reasonable steps to verify, which is deliberately higher than reasonable belief. The same questionnaire that supports a 506(b) sale does not support a 506(c) sale.
- The common mistake is carrying a 506(b) file into a 506(c) deal because the paperwork looks familiar.
Confirm with the issuer which exemption is actually being relied on before you decide what documentation is enough.