In July 2013, the Securities and Exchange Commission (SEC) issued a rule that lifted the ban on general solicitation and advertising that was present in the old rule 506. New Rule 506(c) authorizes general solicitation advertising with regards to securities offerings as long as the issuer takes “reasonable steps” to verify the SEC accredited investor verification status of the individuals purchasing the offerings.
The SEC characterizes any reasonable steps that are taken to verify accreditation falling under the objective determination of the issuer or the issuer’s representative. In addition, however, the new Rule 506 (c) includes a list of non-mandatory, non-exclusive and quite specific methods for verifying accredited investor status for purchasers who happen to be natural persons. These methods are the SEC “Safe Harbor” provisions, which mean that if an issuer follows these methods, they will have, by definition, taken reasonable steps to verify an investor’s accredited status. Some of these are reviewed below.
Income Requirement
In order to satisfy the income requirement (i.e. having income over $200,000, or $300,000 with a spouse, in the last two years), an issuer can review various forms provided by the purchaser, including W-2s, 1040s, tax forms, 1099s, or K-1’s for the previous two years. The SEC also requests the purchaser (and the spouse of the purchaser) to provide a written representation that the purchaser has a reasonable expectation of earning the income level in the current year required to qualify as an accredited investor.
Net Worth Requirement
In order to satisfy the net worth requirement for SEC accredited investor verification (i.e. having over $1 million in net worth not including their primary residence), the issuer may review various items including statements of securities holdings, brokerage statements, bank statements, tax assessments, certificates of deposit, and appraisal reports. Liabilities may be ascertained by examining reports from credit agencies dated within the previous three months. As well the purchaser would need to provide the issuer with a written representation that all liabilities have been disclosed in order to make a proper determination of net worth.
Grandfathering of Existing Investors
Investors who purchased securities in an offering under Rule 506 prior to implementation of the new rule may certify they are still qualified as accredited investors.
Third Party Confirmation
Instead of obtaining written confirmation from the purchaser, an issuer can instead obtain written confirmation from certain third parties who have already taken reasonable steps within the previous three months to obtain SEC accredited investor verification status of a purchaser based on either or both the net worth and income requirement. These third-party entities may include attorneys, broker-dealers, CPAs, or SEC registered investment advisors.
