Step 4: Completing KYC/AML & Accreditation to Finalize the Investment

By Dennis Crowley & Kellen Sizemore

As the popularity of private and alternative investments has grown, so has the need to efficiently manage the process of verifying investors.  As we have discussed in our prior articles (When Raising Capital, Tell a Good Story, Raising Capital? Get Yourself Investment Ready, and Diligence is Back, Be Prepared if You Want Investors) getting yourself prepared for the “yes” is critical, but once the investor is ready, you still have  work to do.

According to Regulation D (Reg D) capital seekers must adhere to certain requirements before accepting investments from individual or institutional investors. Two of these requirements are KYC/AML and confirming accreditation.

What is KYC and AML and Why Do I Care?

1. KYC/AML refers to the "Know Your Customer" and "Anti-Money Laundering", these regulations are in place to prevent fraudulent activities, terrorist financing, and money laundering. To remain compliant, issuers (those raising capital) must take several steps before taking investment dollars including Identification and Verification of Investors: Completing this step is as easy as collecting a copy of an investor's government issued ID and verifying the information with independent sources.
2. Customer Due Diligence: In this step issuers will identify and assess any potential risks associated with the investor. This includes identifying the investor's source of funds and understanding their investment objectives.
3. Ongoing Monitoring and Reporting: This is an interesting requirement as often the check is completed at the time of investment, but not ongoing. By continuously monitoring investor activity, issuers will be able to identify and report any suspicious transactions. To learn how the Trellis Platform and Identity Agent solutions can support this requirement, click here.
4. Implementation of Policies and Procedures: Examples of complaint KYC/AML policies and procedures are regular training of staff and periodic review of said policies and procedures. 

By implementing these steps, complying with KYC/AML and regulatory requirements is possible.  One effortless way to meet requirements and provide investors with a wonderful experience is to use the KYC/AML services provided by the Trellis Platform or directly through the Trellis Identity Agent.

What Must I Do to Confirm My Investor is Accredited?

Accreditation refers to the requirement that investors meet certain financial and experience criteria before investing to ensure they can bear the risk associated with private and alternative investments.

There are two types of Reg D offerings: 506(b) and 506(c). The accreditation requirements differ between these two offerings, one requires the investor to attest to his or her status where the second requires documentation.

For a 506(b) offering, investors must meet the financial and experience criteria set out in Rule 501 of Regulation D. Specifically, the investor must meet one of the following requirements:

1. Have a net worth (individually or jointly with spouse) of at least $1 million at the time of the investment excluding the value of the primary residence.
2. Have an income of at least $200,000 in each of the two most recent years, or joint income with a spouse of at least $300,000 in each of those years and have a reasonable expectation of reaching the same income level in the current year.
3. Be a director, executive officer, or general partner of the issuer of the securities being offered or sold.
4. Have a written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA that the investor has the knowledge and experience in financial and business matters to evaluate the merits and risks of the investment.

For a 506(c) offering, investors must provide documentation that proves they meet the accreditation requirements. This may include tax returns, bank statements, or other financial records.

It is worth noting that these accreditation requirements are minimum standards set by the SEC. There are various levels including Qualified Purchasers (QP) and Qualified Institutional Buyers (QIB), but we will save that for another blog.

What Happens If I Don’t Complete KYC/AML or Accreditation?

There are issuer-investor related penalties and regulatory penalties for not meeting complying with regulations.   Issuers who fail to comply with KYC/AML requirements and accreditation status may face reputational damage, loss of investor confidence, and other business consequences. Regulatory penalties, such as fines and sanctions, can vary depending on the severity of the violation, the regulatory body involved, and other factors.  The SEC has the authority to take enforcement actions against issuers who fail to comply with the requirements of Regulation D. For example, failure to comply with KYC/AML requirements under the Bank Secrecy Act (BSA) can result in significant civil and criminal penalties, including fines of up to $1 million or more, imprisonment, and revocation of banking licenses.

Conclusion

Any issuer of a Reg D investment opportunity must take regulatory compliance seriously when accepting investments from individual or institutional investors. To remain compliant and protect investors anyone raising capital under a Reg D offering must verify investors via KYC/AML and ensure investors are accredited. By adhering to these requirements, issuers can build trust with their investors and attract more capital for their investments.

You can learn more about how Trellis can help you meet these requirements with our KYC/AML solution as a stand-alone service or with the full integration inside the Trellis Platform.