General Solicitation Under Rule 506(c)

In 2013 and in accordance with the Jumpstart Our Business Startups Act (the JOBS Act), the SEC amended Rule 506 of Regulation D under the Securities Act of 1933 to permit the use of general solicitation in securities offerings conducted under new Rule 506(c).  Rule 506(c) offerings are technically private placement offerings, but issuers if such offerings can do something no other of private offerings have done before – advertise the offering widely: on television, in newspapers, through publicly advertised seminars and over the internet.

The JOBS Act directed the SEC to lift the prohibition on general solicitation provided that all purchasers of the securities offered via general solicitation were accredited investors and the issuer took “reasonable steps to verify” that the purchasers were accredited “using such methods as determined by the Commission.”

It is important to note, this “reasonable verification” requirement applies only to Rule 506(c) offerings, is separate from the requirement that sales be limited to accredited investors and must be satisfied even if all purchasers happen, by chance, to be accredited investors.

So, how do you “reasonably verify” the accredited investor status of a potential investor?

Rule 506(c) includes a non-exclusive list of four verification methods that issuers may use, but are not required to use, when seeking greater certainty that they satisfy the “reasonable verification” requirement with respect to natural person purchasers.  This non-exclusive list of verification methodologies includes the following:

  • Income Verification Method: When verifying whether an individual meets the accredited investor income test by reviewing copies of any Internal Revenue Service (IRS) form that reports income, such as Form W-2, Form 1099, Schedule K-1 of Form 1065, and a filed Form 1040; and, obtaining a written representation from the individual with respect to the expectation of income for the current year.
  • Net Worth Verification Method: When verifying whether an individual meets the accredited investor net worth test by reviewing specific types of documentation dated within the prior three (3) 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 with reference to all liabilities.
  • Written Confirmation Verification Method: Obtaining 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 (3) months and has determined that such purchaser is an accredited investor.
  • Prior Investment Certification Method: Obtaining a certification of accredited investor status at the time of sale from an individual who invested in the issuer’s Rule 506(b) offering as an accredited investor prior to the effective date of Rule 506(c) and remain an active investor of the same issuer.

Prior to allowing an individual to invest in a Rule 506(c) offering, the issuer of the offering or a broker-dealer involved with the offering must verify that the individual is an accredited investor using one of the above described methodologies.