Effective September 23, 2013, issuers will be able to use print, display and electronic media to promote non-registered securities offerings for the first time since SEC Reg. D was adopted in 1982. Pursuant to newly adopted Rule 506(c), issuers will be able to engage in general solicitation and general advertising for Rule 506 offerings under Reg. D if (1) all purchasers are “accredited investors” or the issuer reasonably believes that all purchasers are “accredited investors” at the time of the sale, and (2) the issuer takes reasonable steps to verify that all purchasers are “accredited investors.”

Rule 506(c) provides three non-exclusive and non-mandatory methods for satisfying the accredited investor verification process. Although these methods are not exclusive, the rule provides that an issuer will be deemed to have taken reasonable steps to verify a person’s accredited investor status if it follows one of the three methods, provided the issuer does not have knowledge that the person is not an accredited investor. In adopting the verification procedure, the SEC did not provide guidance on what constitutes knowledge that someone is not an accredited investor. The three methods of verification are:

  1. Income Verification. An issuer will satisfy this method by reviewing any filed IRS forms that report the subscriber’s income for the two most recent years and obtaining a written representation from the person that he or she reasonably expects to earn the same amount or more during the current year. For joint subscribers where the income of each subscriber is used to satisfy the accredited investor standard, the requirements would apply to both persons. Redacted versions of IRS forms that disclose only information about annual income are acceptable.
  2. Net Worth Verification. An issuer will satisfy this method by reviewing at least the following documents dated within the past three months and obtaining a written representation from the subscriber that all liabilities necessary to make a net worth determination have been disclosed:
    1. For assets: An issuer must obtain documents sufficient to substantiate the assets, including, but not limited to: 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. For liabilities: An issuer must obtain a consumer report by one of the nationwide consumer reporting agencies.
For joint subscribers, the above requirements apply to both persons. Redacted versions of these documents that disclose only information about assets and liabilities are acceptable.
  1. Third-Party Certification. An issuer will satisfy this method by obtaining written confirmation from one of the following persons or entities that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor:
    1. registered broker-dealer;
    2. registered investment adviser;
    3. licensed attorney; or
    4. licensed certified public accountant.
  2. Existing Investors. Existing Rule 506(b) accredited-investor purchasers who became investors prior to September 23, 2013, can purchase additional interests in Rule 506(c) offerings from the same issuer by re-certifying in writing that he/she qualifies as an accredited investor at the time of subsequent purchase. Additionally, issuers may utilize Rule 506(c) for general solicitations even if they have non-accredited investors that were admitted prior to September 23, 2013.
Issuers planning to take advantage of the new exemption should consider revising their subscription documents to incorporate the three methods described above or other satisfactory means of verification. In its release, the SEC stated that the widely used, “check the box” verification method will no longer be suitable for purposes of Rule 506(c). The final rules also amended Form D by making technical amendments and requiring issuers to indicate any reliance on the Rule 506(c) exemption. Because some private funds rely on certain Investment Company Act exclusions that are not available for funds engaging in public offerings, the SEC has stated that a general solicitation conducted pursuant to Rule 506(c) will not be a public offering. The final rules are available here.