The staff of the U.S. Securities and Exchange Commission (SEC) recently released a no action letter addressing when accredited investor status for purposes of Rule 506(c) of Regulation D can be established by a representation from the investor without further verification by the issuer. This new guidance will streamline processes for issuers raising funds through a private placement, meeting the conditions of the no-action letter.

Rule 506(c) was added to Regulation D with the passage of the Jumpstart Our Business Startups (JOBS) Act of 2012 to provide an exemption from registration for securities offerings that involve general solicitation of potential investors. Traditionally, Regulation D exemptions had been conditioned upon there being no general (i.e., public) solicitation of potential investors. Under Rule 506(c), an issuer may broadly solicit and advertise an offering that otherwise meets the relevant conditions of Regulation D so long as (1) all purchasers are accredited investors and (2) the issuer takes “reasonable steps” to verify that all purchasers are accredited investors. By contrast, other Regulation D exemptions from registration, such as Rule 506(b), permit an issuer to rely upon a representation by the potential investor as to accredited investor status without taking further steps to verify so long as the issuer has no information to the contrary. As an example, prior to the issuance of this SEC guidance, issuers would have to obtain from purchasers a variation of the following information in order to verify that a person was an accredited investor: tax forms, certification from an attorney or CPA or a third-party verification.

The SEC had previously stated in Securities Act Release No. 9415 (July 10, 2013) that “if the terms of the [Rule 506(c)] offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accreditor purchaser may be sufficiently high that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” In response to the no-action letter, the SEC staff confirmed that when the minimum investment amount in a Rule 506(c) offering is sufficiently high and cannot be financed in whole or in part by a third party, then additional steps to verify accredit investor status may not be required.

The key points that the SEC staff pointed out in the no-action letter for verifying that a purchaser is an accredited investor were as follows:

1. High Minimum Investment Amounts: In the no action request, the purchaser’s minimum investment was $200,000 for natural persons and $1 million for legal entities (for entities relying on Rule 501(a)(8) because all of the entity’s equity owners are accredited investors, this would equate to $200,000 in annual income or a net worth of $1,000,000 million or more for each of the equity owners), including pursuant to a binding commitment to invest in one or more installments when requested by the issuer. The SEC staff agreed that requiring a high minimum investment amount is a relevant factor in verifying accredited investor status, and if a purchaser meets these terms, it may be reasonable for the issuer to take fewer steps to verify the status, provided the investment is not financed by a third party.
2. Written Representations: The issuer should obtain written representations from the purchaser regarding their accreditation status under Rule 501(a) and that the investment will not be financed by a third party.
3. No Actual Knowledge of Contrary Facts: The issuer must have no actual knowledge of any facts indicating that a purchaser is not an accredited investor or that an investment is financed by a third party.

Impact on Issuers

Issuers conducting an offering under Rule 506(c) have the option to avoid investor verification requirements through minimum investment conditions consistent with the no-action letter. This may streamline the offering process and appeal to large investors.