Launch of More Streamlined and Robust Accreditation Procedures
Patch of Land’s Legal Department has been working on a number of projects with an eye towards making investments easier and more protective of investors in 2015. We are happy to announce the launch of one of those projects today, which is a more robust and streamlined “accredited investor” verification process.
Generally, an accredited investor includes (1) any organization with total assets in excess of $5M; (2) an individual with a net worth greater than $1M, excluding their primary residence; (3) an individual with more than $200,000 in income ($300,000 for joint filers) over the past 2 tax years; (4) any trust with assets in excess of $5M; or (5) any entity whose owners are all accredited investors. Click here for more information on the definition of “accredited investor.”
Patch of Land is a Rule 506(c) platform, meaning that we are obligated by the U.S. Securities and Exchange Commission (“SEC”) to take “reasonable steps to verify” the accredited status of investors. While we realize that this additional step continues to be an inconvenience towards our investors, we and our third party vendors make every attempt to ensure that the process is as quick, easy, and painless as possible. We take regulatory compliance very seriously, and thank our investors for their patience and cooperation. In the long run, strong and streamlined accreditation procedures will protect not only the company, but also our investors.
Safe Harbor Methodology
While the SEC allows for two approaches towards accredited investor verification, Patch of Land’s third party verification vendor utilizes the more stringent but precise “safe harbor” approach outlined in 17 CFR 230.506(c)(2)(ii), and not the “principles-based approach” of verification. The safe harbor method ensures that verification against that standard will not be deemed to be in violation of U.S. securities law.
The Safe Harbor approach allows for three methods of verification: a letter from a third party service provider, income verification, and net worth verification. We often receive investor inquiries regarding the easier and least frequent method, which we will outline below.
Letter from Third Party Service Provider (good for 3 months) [recommended]
Patch of Land accepts letters from a registered broker-dealer, registered investment adviser, licensed attorney or certified public accountant (CPA) indicating that such person or entity has taken reasonable steps to verify the accredited status of the individual within the last 3 months and has determined the individual to be accredited. Our third party vendor will then check the registration and standing of the service provider to ensure the reliability of the attestation.
We’ve streamlined this process by allowing investors to upload their letters here. Service providers can provide their own form, or can use a standardized form available here, (password is “verify”). If you choose to use your own form, please ensure that the third party service provider: 1) attests to taking reasonable steps to verify that you qualify as an accredited investor under Rule 501 of the Securities Act of 1933; 2) identifies the basis for accredited status (net worth or income); 3) is dated; and 4) has the CPA or attorney’s license number. Please note that if you are a third party service provider, you cannot attest to your own accredited status.
Income Verification (good for the current tax year) [recommended]
If you don’t have a CPA or attorney letter, we can verify your income via a confirmation that you reasonably expect to reach the income level necessary to qualify as an accredited investor during the current year and an upload of your W-2, K-1, and/or tax return forms for the previous two years.
Net Worth Verification (good for 3 months) [not recommended]
Patch of Land accepts net worth verifications, though our investors tend to avoid this method because its slower, more burdensome, and may require that you pay a small fee for a credit report. This method requires certain documentation of the investor’s assets--that is, bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by independent third parties--and liabilities via a credit report from at least one of the nationwide consumer reporting agencies. Neither Patch of Land nor its third party verification vendors will take your social security number for the purposes of obtaining a credit report on your behalf. Investors may use Experian Connect to share a credit report via a soft credit inquiry that will not affect your credit score for a fee of $14.95. However, you are free to obtain a credit report from Equifax, TransUnion or Experian through services such as AnnualCreditReport.com and provide that if you wish. Note that this free method can only be used once every twelve months, so continual investors may need to pay for additional credit reports after the first free one. We apologize that Experian Connect does not currently allow Patch of Land to cover this cost for you, but one of our third party verification vendors has indicated that it is currently integrating with the Experian API, which will allow for direct billing to Patch of Land in the future. All documentation relied upon must be dated within the prior three months. Unfortunately, this method of verification continues to be a manual process, so we would recommend investors utilize other methods of verification, if possible.
What Happens If Investors Don’t Get Verified
We know our investors are busy people, so will gently remind you via email to upload your verification documents. If you have any questions or issues, please don’t hesitate to contact Investor Relations at 424-320-3101. However, if we are unable to reach an investor after two weeks (14 full days), our system may cancel any pending order(s) and refund your investment, at our discretion.
Recent SEC case law indicates that the SEC is closely monitoring the reasonable steps 506(c) platforms take to verify an investors’ accredited status. On November 10, 2014, the SEC issued a Cease and Desist Order against Eureeca, a Dubai-based investment crowdfunding portal incorporated in the Cayman Islands for alleged failures to implement procedures sufficient to prevent U.S. investors from accessing and investing in securities on the site and failures to take reasonable steps to verify those investors’ accredited status. The site was fined $25,000--the SEC’s version of a slap on the wrist--but this does not preclude more drastic consequences against other platforms in the future.
By streamlining this accreditation procedures and implementing more robust procedures, Patch of Land protects not only itself, but its investors, in the form of regulatory compliance.
Be Heard
Wish the process were easier? We do too. To the extent that we can, we have built and continue to build technology to make this process as easy and painless as possible. Simplifying certain requirements, however, is not possible due to SEC requirements. For example, we wish all verification methods would accredit an investor for at least one year, and that credit reports would not be necessary for net worth verifications. If you think so to, we encourage you to write or tweet to the SEC and get involved in asking the SEC to make changes to the accredited investor definition and verification process. You can read more about the SEC’s consideration of these changes from its recent open Government-Business Forum on Small Business Capital Formation on November 20, 2014 here.
