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More Clarification on How To Raise Money Without Registration: SEC Issues Compliance and Disclosure Interpretations on Exempt Offerings (Part 1)

On Behalf of | Oct 27, 2015 | JOBS Act, Private Placements, Raising Capital, Securities Laws, Uncategorized

On August 6, 2015, the Securities and Exchange Commission (“SEC”) issued Compliance and Disclosure Interpretations (“C&DIs”). For the full text of the C&DIs, click here. C&DIs are not rules, regulations, or statements of the SEC, but reflect the current views of the staff of the agency, which should be of interest to many businesses that want to raise capital through exempt offerings. The recent C&DIs deal with a multitude of issues, through questions and answers, but in this blog series, we will focus on three topics that are particularly relevant: accredited investor status, general solicitation, and intrastate exemption.

Accredited Investor

As we discussed in our previous blog series on exempt offerings (available here), “accredited investor” is an important concept in many exempt offerings. For instance, in Rule Regulation D, 506(b) offerings, the issuer can offer or sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors, and in offerings conducted under Rule 506(c), general solicitation is permitted, as long as the issuer takes steps to verify that all purchasers are accredited investors. As you know by now, “accredited investor” means certain institutional buyers (e.g., banks), certain insiders (e.g., director, executive officer, or general partner of the issuer), or any person whose individual net worth is over $1,000,000 (excluding their primary residence) or who had an individual income over $200,000 (or joint income in excess of $300,000 with his or her spouse) in the two most recent years, among others.[1] In other words, these are investors who, by virtue of their wealth and sophistication, are presumed to have the ability to fend for themselves. In the C&DIs, the SEC answers many questions relating to accredited investor status.

  • Question 255.01. This question describes a situation where a director (accredited investor) of a corporate issuer purchases securities offered under Rule 505 and resigns due to a sudden illness after the purchase and prior to completion of the offering. The SEC says that the former director is an accredited investor if he met the criteria “at the time of the sale of securities to that person.”[2]
  • Question 255.06. This question relates to the requirement that all of the equity owners of an entity be accredited investors for the entity to be considered an accredited investor. Specifically, if an equity owner is itself an entity rather than a natural person but does not qualify on its own merits as an accredited investor, can the issuer look through the owner-entity to its natural person owners to determine whether they are all accredited investors? The SEC confirms that an issuer can look through various forms of equity ownership to natural persons in judging accreditation.[3]
  • Question 255.11. This question asks whether property must be held jointly between spouses to be included in the joint net worth calculation and whether the securities must be purchased jointly by spouses for the investor to be considered accredited. The SEC says no; joint net worth can be the aggregate net worth of an investor and the investor’s spouse and need not be held jointly and the purchase need not be made jointly.[4]

This post was a part of a multi-part series on the SEC’s guidance to clarify details about when registration with the SEC is not needed in the SEC’s latest C&DIs regarding exempt offerings. In our next post, we will look at some of the questions and answers relating to verification of accredited investor status.

This posting is intended to be a planning tool to familiarize readers with some of the high-level issues discussed herein.  This is not meant to be a comprehensive discussion and additional details should be discussed with your transaction planners including attorneys, accountants, consultants, bankers and other business planners who can provide advice for your circumstances.  This article should not be treated as legal advice to any person or entity.

Steps have been taken to verify the contents of this article prior to publication.  However, readers should not, and may not, rely on this article.  Please consult with counsel to verify all contents and do not rely solely on this article in planning your legal transactions.

About the Author

Shawn McBride – R. Shawn McBride is the Managing Member of The R. Shawn McBride Law Office, P.L.L.C., which helps clients in legal issues related to starting companies, joint ventures, raising capital from and negotiating with investors and outside General Counsel functions. Shawn can be contacted at: 407-517-0064; [email protected], or <a ” ” target=”_blank” href=””>

[1] 17 C.F.R. § 230.501(a).

[2] SEC, Securities Act Rules: Questions and Answers of General Applicability (Aug. 6, 2015) (citing 17 C.F.R. § 230.501(a)(4)).

[3] SEC, Securities Act Rules: Questions and Answers of General Applicability (Aug. 6, 2015) (citing 17 C.F.R. § 230.501(a)(8)).

[4] SEC, Securities Act Rules: Questions and Answers of General Applicability (Aug. 6, 2015).