On July 10, 2013, the Securities and Exchange Commission (SEC) adopted amendments to its private offering safe harbors to implement Section 201(a) of the Jumpstart Our Business Startups (JOBS) Act. In a 4-1 vote, the SEC adopted amendments to the Securities Act to permit issuers to use general solicitation and general advertising in securities offerings to accredited investors under Rule 506 of Regulation D and qualified institutional buyers (QIBs) under Rule144A. The amendments will go into effect sometime in September, 60 days after their publication in the federal register.

The amendment to Rule 506, which creates new Rule 506(c), reverses the SEC’s long-standing prohibition against using general solicitation and advertising in offerings of securities exempt from registration. The amendment was adopted by the SEC as proposed on August 29, 2012, with one modification. An issuer relying on 506(c) may use general solicitation and advertising to offer securities as long as:

  • The issuer takes reasonable steps to verify that all purchasers are accredited investors.
  • Only accredited investors purchase the issuer’s securities or the issuer has a reasonable belief that all investors were accredited investors at the time of the sale.

There are various ways an individual can be an accredited investor under the Securities Act, including, among others:

  • having an individual net worth exceeding $1 million, not taking into account a primary residence
  • having an individual income in excess of $200,000 in each of the two most recent fiscal years (or a joint income with a spouse exceeding $300,000), with a reasonable expectation of the same level of income in the current year

New Rule 506(c) will give issuers two ways of satisfying the requirement that the issuer take reasonable steps to verify that all purchasers are accredited investors. The first is a “principles-based method of verification,” which requires the issuer to consider all the facts and circumstances surrounding the offering to verify whether the purchaser is an accredited investor. In its adopting release, the SEC suggests that such considerations include:

  • the nature of the purchaser and type of accredited investor the purchaser claims to be
  • the amount of information about the purchaser available to the issuer
  • the nature of the offering, such as how the purchaser was solicited and the minimum investment involved

In addition to the “principles-based method,” the SEC modified the amendment to Rule 506 as originally proposed to provide issuers with a list of nonexclusive methods to verify accredited investor status of individuals. This list was added to allay concerns of commentators who cautioned that the “principles-based method” would not give issuers sufficient certainty of compliance with Rule 506(c). The nonexclusive list of methods includes:

  • Tax Documents. To determine a purchaser’s income, an issuer will satisfy the verification requirement by reviewing copies of forms filed with the IRS (including Forms W-2, 1099 and 1040).
  • Bank Statements. To determine a purchaser’s net worth, an issuer will satisfy the verification requirement by reviewing documents such as bank statements, brokerage statements and certificates of deposit to determine assets; reviewing a consumer report to determine liabilities; and obtaining a written representation from the purchaser that all of the purchaser’s liabilities have been disclosed.
  • Confirmation by Third Party. An issuer may obtain written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or certified public accountant that such person has taken reasonable steps to determine if a purchaser is an accredited investor.
  • Current Accredited Investor. Finally, an issuer may obtain certification from an individual purchaser certifying his or her accredited investor status if the purchaser has invested in the issuer prior to the adoption of Rule 506(c) as an accredited investor and remains an investor in the issuer at the time of the offering.

The amendment does not alter Rule 506(b) and issuers can continue to rely on 506(b) for private offerings of securities to both accredited and nonaccredited investors without complying with the new verification requirement of 506(c), as long as no general solicitation or advertisement is used.

The SEC also adopted an amendment to Rule 144A to permit securities sold under Rule 144A to be offered to investors other than qualified institutional buyers (QIBs), including by general solicitation, so long as the securities are only sold to investors that the issuer reasonably believed to be QIBs at the time of the sale. QIBs include companies with more than $100 million in investment securities and certain banks, financial institutions and registered broker-dealers. The amendment was adopted as proposed.

Finally, the SEC amended Form D to add a check box for issuers to indicate whether they are relying on the new Rule 506(c) exemption.

SEC Adopted Amendments: