Investor Verification

In the financial services industry, venture capitalists and investment firms are given privileges and exclusive rights based on their net value and shares in stocks and securities. While these individuals and entities are non-exempt from certain performance fees and restrictions, businesses and financial institutions need to carry out proper Know Your Customer (KYC) checks before establishing corporate partnerships.  

What is Investor Verification?

In the financial industry, enterprises and startups need to make sure who they are associating ties with, especially when it comes to corporate investments. Carrying out a series of KYC checks to verify the financial track record, market profile, and sources of income of investors can save a business from potentially fraudulent actors. Investor verification guarantees that potential stakeholders have the required market experience and securities for long-term business prospects.

Which Investors Need to be Verified?

Qualified Client 

The US federal investment law, Advisers Act, administered by the Securities and Exchange Commission (SEC), restricts investment advisers and private fund managers to charge performance costs from investors. But in case an investor meets the requirements of a “qualified client”, they are subjected to the additional fees. Following is the criteria of a qualified client under Final Rule:

• The investor owns total assets of $1 million or more managed by the adviser after signing the contract of investment
• The adviser confirms a $2 million net worth of the shareholder with their spouse’s assets combined before entering the advisory contract
• The individual is either a general partner, director, executive official, or a trustee according to section 2(a)(51)(A) defined in the Investment Company Act of 1940.

How to Verify a Qualified Client?

Private offerings not registered with regulatory authorities are often part of a trade agreement between business parties. Verifying the eligibility of such investors is obligatory as per the globally acclaimed investment market rules and regulations. To address these concerns, verifying qualified clients becomes necessary via. screening their financial documents such as tax returns, W-2 forms and banks statements, etc.  

Accredited Investor

The Securities and Exchange Commission (SEC) defines accredited investors as an individual or business entity having distinct market credibility without the need to register with financial bodies. Investors accredited by the SEC can invest in crowdfunding platforms, hedge funds, venture capitals, and private equity, etc. without any restrictions. The fact that accredited investors can invest in unregistered securities makes them increasingly attractive for businesses, allowing greater opportunities for profit for both parties. Following is the criteria for being an accredited investor, as per the SEC publications:

• An annual income of $200,000 or greater ($300,000 in case of joint partners with a spouse) and proof of maintaining the same yearly
• Net worth greater than $1 million either as a sole owner or with a joint partner, excluding residence 
• In the case of a trust, a total of $5 million in assets is required
• An organization with all shareholders being accredited investors

How to Verify an Accredited Investor?

Although accredited investors need not keep a certificate or proof of them being verified, this doesn’t mean their due diligence is not necessary. As of September 2013, the SEC issued guidelines for business to verify the status of every accredited investor and take appropriate measures to perform a secure onboarding. These checks can validate the credibility of inventors and make sure whether they are eligible for financial investments or not. Business entities usually adopt the following ways to verify accredited investors:

• Acquire personally identifiable information of the investor such as their full name, address information, and email address, etc. 
• Investors need to provide information through questionnaires or forms, balance sheets, financial returns, and other relevant documents in order to prove the legitimacy of their assets.
• W-2 forms, endorsement letters from certified advisors and accounts, and tax statements can also be accepted if the investor is accredited based on their annual income.  

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