D with respect to offers and sales of securities made pursuant to Rule 506, provided that all purchasers are accredited investors. The amendments to Rule 506 would require that for offerings involving the use of general solicitation, issuers take reasonable steps to verify that the purchasers of the securities are accredited investors. The proposed amendments would also provide that securities may be offered pursuant to Rule 144A to persons other than qualified institutional buyers, provided that the securities are sold only to purchasers that the seller (or someone acting on the seller’s behalf) reasonably believes is a qualified institutional buyer. The SEC’s proposed rules implement a bifurcated
approach to Rule 506 offerings. As proposed, an issuer may still choose to conduct a private offering in reliance on Rule 506 without using general solicitation. In order to implement this approach, the SEC proposed new paragraph (c) in Rule 506, which would permit the use of general solicitation, provided: • the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors;
• all purchasers of securities are accredited investors, either because they come within one of the enumerated categories of persons that qualify as accredited investors or the issuer reasonably believes that they qualify as accredited investors, at the time of the sale of the securities; and
• the conditions of Rule 501 and Rules 502(a) and 502(d) are satisfied. The SEC noted that the exemption applies only to offerings made pursuant to the safe harbour provided by Rule 506(c), and it does not apply to offerings relying on the Securities Act section 4(a)(2) exemption in general. The SEC’s proposal would provide a flexible approach
for verifying the accredited investor status of purchasers in a Rule 506(c) offering. The approach reflected in the proposed rules acknowledges that reasonable efforts to verify investor status may differ depending on the facts and circumstances. The SEC provides the following non- exhaustive list of factors that may be appropriate to consider: • The nature of the purchaser. The SEC describes the different types of accredited investors, including broker- dealers, investment companies or business development companies, employee benefit plans, and wealthy individuals and charities.
• The nature and amount of information about the purchaser. Simply put, the SEC states that “the more information an issuer has indicating that a prospective purchaser is an accredited investor, the fewer steps it would have to take, and vice versa.”
• The nature of the offering. The nature of the offering may be relevant in determining the reasonableness of steps taken to verify status: issuers may be required to take additional verification steps to the extent that solicitations are made broadly, such as through a website accessible to the general public, or through the use of social media or email. By contrast, less intrusive verification steps may be required to the extent that solicitations are directed at investors that are pre- screened by a reliable third party. The SEC stated that these factors are interconnected,
and the more indicia that are in evidence that an investor qualifies as an accredited investor, the fewer steps that the issuer must take to verify status. The SEC notes that issuers should retain adequate records to document the verification process. The proposing release did not require that individuals submit financial statements, and instead suggests that reasonable steps may include relying on publicly available information such as purchaser’s compensation described in a proxy statement, or independent verification of a person’s status as an accredited investor by a third party, such as a broker-dealer, attorney or accountant, so long as there is a reasonable basis to rely on the third-party verification. The SEC confirmed the view that Congress did not
intend to eliminate the existing “reasonable belief ” standard in Rule 501(a) of the Securities Act or for Rule 506 offerings. It confirmed that if a person were to supply false information to an issuer claiming status as an accredited investor, the issuer would not lose the ability to rely on the proposed Rule 506(c) exemption for that offering, provided the issuer “took reasonable steps to verify that the purchaser was an accredited investor and had a reasonable belief that such purchaser was an accredited investor.” The SEC also proposed to add a separate check box for
issuers to indicate whether they are claiming an exemption under Rule 506(c). Meredith Cross, former director of the Division of Corporation Finance, noted at the open meeting for the proposal that it was the staff’s intention to form a multi-divisional task force to monitor these offerings as a means of gaining insight into market practices. The SEC confirmed that the effect of section 201(b) of
the JOBS Act is to permit privately offered funds (including private equity funds and hedge funds, among others) to make a general solicitation under amended Rule 506 without losing the ability to rely on the exclusions from the definition of an investment company available under section 3(c)(1) and 3(c)(7) of the Investment Company Act.
JOBS Act Quick Start 41
Page 1 |
Page 2 |
Page 3 |
Page 4 |
Page 5 |
Page 6 |
Page 7 |
Page 8 |
Page 9 |
Page 10 |
Page 11 |
Page 12 |
Page 13 |
Page 14 |
Page 15 |
Page 16 |
Page 17 |
Page 18 |
Page 19 |
Page 20 |
Page 21 |
Page 22 |
Page 23 |
Page 24 |
Page 25 |
Page 26 |
Page 27 |
Page 28 |
Page 29 |
Page 30 |
Page 31 |
Page 32 |
Page 33 |
Page 34 |
Page 35 |
Page 36 |
Page 37 |
Page 38 |
Page 39 |
Page 40 |
Page 41 |
Page 42 |
Page 43 |
Page 44 |
Page 45 |
Page 46 |
Page 47 |
Page 48 |
Page 49 |
Page 50 |
Page 51 |
Page 52 |
Page 53 |
Page 54 |
Page 55 |
Page 56 |
Page 57 |
Page 58 |
Page 59 |
Page 60 |
Page 61 |
Page 62 |
Page 63 |
Page 64 |
Page 65 |
Page 66 |
Page 67 |
Page 68 |
Page 69 |
Page 70 |
Page 71 |
Page 72 |
Page 73 |
Page 74 |
Page 75 |
Page 76 |
Page 77 |
Page 78 |
Page 79 |
Page 80 |
Page 81 |
Page 82 |
Page 83 |
Page 84 |
Page 85 |
Page 86 |
Page 87 |
Page 88 |
Page 89 |
Page 90 |
Page 91 |
Page 92