"General solicitation" and Reg D Rule 506(c)
In the July 10th meeting, the SEC amended Rule 506 and adopted paragraph (c) to permit general solicitation, as required under Section 201(a) of the JOBS Act, where all purchasers of the securities are accredited investors and the issuer takes “reasonable steps” to verify that the purchasers are accredited investors.
While other categories exist within the definition, an “accredited investor” includes a natural person who:
Under the principles-based method, the SEC advised:
“[W]hether the steps taken are ‘‘reasonable’’ will be an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that issuers should consider under this facts and circumstances analysis are:
The SEC advised that this analysis is intended to assist the issuer in assessing “the reasonable likelihood that a purchaser is an accredited investor” and thus aid him or her in identifying which “steps” would be reasonable in the circumstances to then verify the purchaser’s accreditation status.
Further, the SEC offered a non-exclusive list of four verification methods that issuers may elect to use to satisfy the verification requirement of natural persons.
See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, 78 Fed. Reg. 44781-82 (July 24, 2013) (amending 17 CFR Parts 230, 239 and 242).
While other categories exist within the definition, an “accredited investor” includes a natural person who:
- earned income that exceeded $200,000 (or $300,000 together with a spouse) in each of the prior two years, and reasonably expects the same for the current year, or
- has a net worth over $1 million, either alone or together with a spouse (excluding the value of the person’s primary residence).
Under the principles-based method, the SEC advised:
“[W]hether the steps taken are ‘‘reasonable’’ will be an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances of each purchaser and transaction. Among the factors that issuers should consider under this facts and circumstances analysis are:
- the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
- the amount and type of information that the issuer has about the purchaser; and
- the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.”
The SEC advised that this analysis is intended to assist the issuer in assessing “the reasonable likelihood that a purchaser is an accredited investor” and thus aid him or her in identifying which “steps” would be reasonable in the circumstances to then verify the purchaser’s accreditation status.
Further, the SEC offered a non-exclusive list of four verification methods that issuers may elect to use to satisfy the verification requirement of natural persons.
- verification based on income, by reviewing copies of any Internal Revenue Service form that reports income, such as Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040;
- verification on net worth, by reviewing specific types of documentation dated within the prior three months, such as bank statements, brokerage statements, certificates of deposit, tax assessments and a credit report from at least one of the nationwide consumer reporting agencies, and obtaining a written representation from the investor;
- a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor; and
- a method for verifying the accredited investor status of persons who had invested in the issuer’s Rule 506(b) offering as an accredited investor before September 23, 2013 and remain investors of the issuer.
See Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, 78 Fed. Reg. 44781-82 (July 24, 2013) (amending 17 CFR Parts 230, 239 and 242).