On July 10, 2013, Securities and Exchange Commission (the “SEC”) amended Rule 506 of Regulation D to implement Section 201(a) of the JOBS Act, allowing companies to openly advertise the sale of their securities in private offerings. Under the new Rule 506(c), an issuer can offer securities by way of general solicitation, or advertising provided that all purchasers of the securities are accredited investors under Rule 501 of Regulation D and the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors.
Effects of the New Rules
The final rules will be effective sixty (60) days after publication in the Federal Register, which we expect to occur in the next few days. The elimination of the prohibition against general solicitation for a subset of Rule 506 offerings will enable issuers to solicit potential investors directly, through both physical (such as mailings, newspaper advertisements and billboards) and electronic (such as the Internet, social media, email and television) means. As a result, the SEC anticipates that issuers will be able to reach a much greater number of potential investors than is currently the case, thereby increasing issuers’ access to sources of capital.
“Reasonable Steps to Verify” Accredited Investor Status
Principles-Based Approach
The Rule 506(c) “reasonable steps” due diligence requirement may require some potential investors to provide more information to issuers than they currently provide and issuers may have to apply a stricter and costlier process to verify accredited investor status than what they currently use. The term “reasonable” is an objective determination by the issuer based on the particular facts and circumstances of each purchaser and transaction. Issuers should consider factors including:
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.
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.
Natural Person Investors – Non-Exclusive List of Methods
To clarify what reasonable steps need to be taken, the SEC has included in Rule 506(c) a non-exclusive list of four methods for verifying if natural persons are accredited investors. These methods are:
Income Test. For accreditation on the basis of income, verification by reviewing copies of the two most recent years’ IRS tax forms that report income.
Net Worth Standard. For accreditation on the basis of assets, verification by reviewing (1) supporting asset documentation, such as bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties; and (2) a written representation by the person dated within the prior three months stating that all liabilities necessary to make a determination of net worth have been disclosed.
Third-party Attestation. Obtaining a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months and has determined that such purchaser is an accredited investor.
Existing Accredited Investors. Any natural person who invested in an issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and remains an investor of the issuer, for any Rule 506(c) offering conducted by the same issuer, the issuer is deemed to satisfy the verification requirement in Rule 506(c) with respect to any such person by obtaining a certification by such person at the time of sale that he or she qualifies as an accredited investor.
Rule 506(c) does not impose any formal record-keeping requirements but issuers are expected to document the steps taken to verify that purchasers are accredited. Such record-
keeping is necessary because the issuer has the burden of demonstrating that its offering is entitled to an exemption from the registration requirements of Section 5 of the Securities Act.
If the verification of purchasers presents difficulties and issuers do not wish to engage in general solicitation, such issuers will continue to have the ability under Rule 506(b) to conduct Rule 506 offerings subject to the prohibition against general solicitation.
For Further Information
If you have any questions regarding the information in this alert, please contact Richard I. Anslow at [email protected] or Gregg E. Jaclin at [email protected] or any attorney in the firm with whom you are regularly in contact with.
Disclaimer: This Alert has been prepared and published for informational purposes only and does not constitute advertising, a solicitation, or legal advice. Transmission of the materials and information contained herein is not intended to create, and receipt thereof does not constitute formation of, an attorney-client relationship.
About Anslow + Jaclin
Anslow + Jaclin servers diverse clients domestically and worldwide on unique and sophisticated securities and corporate matters including IPO’s, PIPEs, Registered Direct Offerings, reverse mergers, corporate finance, M+A and general corporate work. Anslow + Jaclin’s clients are publicly held corporations which include well-established and other business entities across a broad range of industries. Anslow + Jaclin has consistently been ranked as one of the top law firms in the United States by SEC New Registrations Report for the number of pre-effective IPO registrations advised. In addition, Deal Flow Media, Inc.’s The Deal Flow Report ranks Anslow + Jaclin as one of the top Issuers and Investors Legal Counsel for number of placements advised.