On Wednesday the Securities and Exchange Commission finally approved a general solicitation rule for Rule 506 securities offerings first authorized in last year’s JOBS Act.
The new rule permits issuers (the company seeking investment) to make a general advertisement of their Rule 506 securities offering; however, if a general solicitation is made, then sales may only be made to accredited investors. As a quick reminder, a person with either: 1) a net worth or joint net worth with spouse exceeding $1 million minus the value of their primary residence, or, 2) an annual income of $200,000 or joint annual income with spouse of $300,000 for the past two years and a reasonable expectation of an exceeding income level in the current year.
Moreover, the new SEC rule requires issuers to take “reasonable steps” to verify that all purchasers are accredited investors. Fortunately, the SEC also provides a non-exhaustive list of methods that would, any one of which would satisfy the standard of “reasonable steps”. Approved methods of verification include:
– Qualifying an accredited investor by annual income by reviewing any IRS statement of income (e.g., Form 1040, Form 1099, Form W-2) for the past two years plus a written representation from the purchaser that he or she has a reasonable expectation of reaching the minimum income level in the current year necessary to qualify as an accredited investor
– Qualifying an accredited investor by net worth by reviewing: 1) to verify assets — bank statements, brokerage statements or other statements of securities holdings, certificates of deposit, tax assessments, and appraisal reports issued by third parties; 2) to verify liabilities — a consumer credit report from one of the nationwide reporting agencies
– Obtaining a written confirmation of the purchaser’s status as an accredited investor from: 1) a registered broker-dealer, 2) an investment advisor registered with the SEC, 3) a licensed attorney in good standing, 4) a registered certified public accountant in good standing; with confirmation that such professional took reasonable steps to verify the purchaser’s accredited investor status
– A written certification by a prior Rule 506 accredited investor purchaser of the company’s securities that he or she continues to qualify as an accredited investor