Finding A Way.

New Rule 506(c) — Are You Sure You Are Reasonable?

adviser compliance attorneyIt went in effect yesterday. “It” being the SEC’s historic amendment to Rule 506, the new Rule 506(c), which permits general solicitation and advertising in securities offerings made under the rule.  506(c) means that companies will be able to tweet, pitch, call, do press, blog, and for that matter, put up a billboard on Times Square, about their fundraising efforts.   There are a few caveats, though.  One of them is that in order to rely on Rule 506(c), all investors must be accredited investors.  So far it’s pretty straightforward. The trickier part starts when the SEC asks issuers to take “reasonable steps” to verify that such purchasers are indeed accredited.

Amended Rule 506 does include a non-exclusive list of methods that issuers may rely on for investors who are natural persons. The SEC specifically lists four ways for satisfying the verification requirement:

  • Verification of income based on tax reporting forms, such as a W-2, Form 1099, K-1, and Form 1040.
  • Verification of net worth based on bank statements, brokerage statements, certificates of deposit, tax assessments, or a recent credit report from at least one of the three nationwide credit rating agencies, dated as of the prior three months.
  • Written confirmation from a registered broker-dealer, an SEC registered investment advisor, a licensed attorney, or a certified public accountant that that person has taken reasonable steps to verify that a purchaser is accredited within the prior three months.
  • For existing accredited investors, if the investor has maintained the prior investment.

For methods not listed above, the Adopting Release indicates that the method is principles-based and requires an “objective determination by the issuer in the context of the particular facts and circumstances of each purchaser and transaction.”  Let’s just call it the “common sense” test.  In evaluating the status, issuers should consider under this principles-based method:

  • The nature of the investor and the type of accredited investor that he/she claims to be;
  • The amount and type of information that the issuer has about the investor; and
  • The nature of the offering, such as the manner in which the investor was solicited to participate, and its terms, such as whether it requires a minimum investment amount.

In the Adopting Release, the SEC confirms that Rule 506(c) does not require any particular method. For example, issuers may collect publicly available information in filings with a federal, state, or local regulatory body or obtain third-party information that provides reasonably reliable evidence, so long as the issuer has a reasonable basis to rely on such third-party verification.

A worthy side-note: the steps must be taken. An issuer will not avoid an enforcement action simply because the purchasers ultimately turn out to all be accredited.

As always, if you have questions or comments, please call, e-mail or tweet me @Bettina Eckerle.

Eckerle Law offers legal advice in a variety of transactional and regulatory matters and serves companies’ plenary business law needs. Its founder, Bettina Eckerle, is a veteran of Debevoise & Plimpton and Wachtell, Lipton, Rosen & Katz.  She also served as the General Counsel of two companies en route to IPO. Please visit the Eckerle Law website for more details.