Every private fund in the United States rests on a basic premise: you are selling securities to investors who can absorb the risk. That is the whole point of the accredited investor framework. The SEC restricts who can invest in private offerings because private funds do not provide the same disclosures and protections as public securities. If you get this wrong and accept capital from someone who does not qualify, the consequences run from offering rescission (giving the money back) to SEC enforcement action to personal liability for the GP.
I work with first-time and second-time fund managers daily, and investor verification is one of the areas where I see the most confusion. The rules themselves are not that complicated. But the difference between Rule 506(b) and Rule 506(c), the gap between self-certification and actual verification, and the work of maintaining proper records trip people up regularly.
Who qualifies as an accredited investor
Under Regulation D, Rule 501, the SEC defines accredited investors using financial and professional criteria [5]. For individuals, the main paths are:
- Net worth test: Net worth exceeding $1 million, individually or jointly with a spouse, excluding the value of the primary residence.
- Income test: Annual income exceeding $200,000 individually (or $300,000 jointly with a spouse) for the prior two years, with a reasonable expectation of the same in the current year.
- Professional credentials: Holders of Series 7, Series 65, or Series 82 licenses, or individuals serving as "knowledgeable employees" of the fund.
Entities have their own qualification criteria. An entity qualifies as accredited if it has total assets exceeding $5 million, or if all of its equity owners are themselves individually accredited [5]. This entity-level test matters when you are raising from family offices, investment vehicles, or other funds: the entity itself needs to meet the threshold, or every individual behind it does.
Institutional investors (pension funds, banks, insurance companies, registered investment companies) qualify automatically based on their regulatory status and asset size. For emerging managers raising from a mix of high-net-worth individuals and institutions, you need a verification process that handles both categories.
Rule 506(b) vs. Rule 506(c): the fundamental choice
Your fund offering will rely on one of two Regulation D exemptions, and the choice directly affects how you market the fund and how you verify investors [28].
Rule 506(b) is the traditional private placement exemption. You cannot engage in general solicitation or general advertising. No posting about the fund on LinkedIn, no mentions on your website, no cold emails to people you do not have a pre-existing substantive relationship with. In exchange, you get a lighter verification burden: investors can self-certify their accredited status through questionnaires and representations in the subscription agreement. You can also accept up to 35 non-accredited but sophisticated investors, though in practice almost no venture fund does this because of the additional disclosure requirements it triggers.
Rule 506(c) allows general solicitation. You can advertise, post on social media, and reach out to people you have never met. But the tradeoff is significant: you must take "reasonable steps" to verify that every single purchaser is accredited, and you cannot accept any non-accredited investors at all [28]. Self-certification is not sufficient under 506(c). You need actual documentation or third-party verification.
Most emerging venture fund managers choose Rule 506(b). Fundraising for a first fund is almost always relationship-driven: warm introductions, existing networks, and direct conversations. General solicitation is rarely needed and the heavier verification requirements of 506(c) add cost and friction that is hard to justify when you are raising from people you already know.
What "reasonable verification" actually requires under 506(c)
If you do choose Rule 506(c), the SEC provides flexibility on what counts as reasonable verification, but in practice the standard methods are well established [28]:
- Income verification: Reviewing IRS forms (W-2s, 1099s, K-1s, tax returns) for the past two years, plus a written representation that the investor reasonably expects to meet the income threshold in the current year.
- Net worth verification: Reviewing bank statements, brokerage statements, tax assessments, and a credit report within the prior three months, combined with a written representation regarding liabilities.
- Third-party confirmation: Obtaining written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA that they have verified the investor's accredited status within the prior three months.
- Prior verification: If the investor was verified as accredited for a prior investment with you, you can rely on a certification that their status has not changed.
Third-party verification services have become common and can take much of this off your plate. Services like Verify Investor, Parallel Markets, or similar platforms handle the documentation collection and review for a per-investor fee. For managers doing 506(c) offerings, these services are worth the cost because they create a defensible verification record.
The self-certification trap under 506(b)
Under Rule 506(b), the standard practice is to include accredited investor representations in the subscription agreement. The investor checks a box, signs the document, and you rely on that representation. This is legally sufficient, but it is not foolproof.
The risk is that a subscription agreement representation alone, without any supporting inquiry, may not protect you if it later turns out the investor was not accredited. The SEC has taken the position that managers have an obligation to form a "reasonable belief" that each investor is accredited [5][28]. If an investor's financial situation obviously does not support accredited status (say, a recent college graduate with no employment history investing $100,000) and you did not ask any follow-up questions, a regulatory examiner might question whether you had a reasonable belief.
In practice, this means even under 506(b), you should be conducting at least a baseline screening. At minimum, use investor questionnaires that ask specific questions about income, net worth, or professional qualifications. If anything in the responses raises a flag, follow up before accepting the subscription.
ERISA and benefit plan investors
Benefit plan investors add a separate complication, specifically pension funds and other retirement vehicles subject to ERISA. When benefit plan investors hold 25% or more of any class of a fund's equity, the fund itself may become subject to ERISA's fiduciary requirements, which impose strict restrictions on GP-fund transactions and create personal liability exposure for the fund manager [41].
This is a separate issue from accredited investor verification, but it comes up during the same onboarding process. Your subscription documents need to ask whether the investor is a benefit plan investor, and you need to monitor the 25% threshold on an ongoing basis. Many fund LPAs include provisions allowing the GP to restrict benefit plan investments or to restructure if the threshold is at risk of being breached.
Keeping records
Whatever verification method you use, documentation is what saves you. Maintain a complete file for each investor that includes: the signed subscription agreement with accredited investor representations, any questionnaires or verification documentation, records of any third-party verification, and notes on any follow-up inquiries. These records need to be accessible for the life of the fund plus any applicable retention period. An SEC examiner reviewing your fund years after formation will want to see how you verified each investor at the time of their subscription.
Changes to watch
The SEC has periodically expanded the accredited investor definition, most recently in 2020 when it added the professional credentials path [5]. There is ongoing discussion about expanding the definition further or adjusting the income and net worth thresholds for inflation. Stay current with any amendments, because a change to the definition could affect both your existing investor base and your fundraising strategy for future closes.
How we handle investor verification at Infra One
Investor onboarding and KYC/AML verification are part of our core fund administration platform. We manage the subscription document workflow, collect and review accredited investor questionnaires, and maintain the complete investor verification file for each LP. For managers using Rule 506(c), we coordinate with third-party verification services and ensure the documentation meets SEC standards.
If you are fundraising for a US fund and want to make sure your investor verification process is airtight, reach out to us.
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