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More Clarification on How To Raise Money Without Registration: SEC Issues Compliance and Disclosure Interpretations on Exempt Offerings (Part 2)

On Behalf of | Oct 31, 2015 | JOBS Act, Private Placements, Raising Capital, Securities Laws, Uncategorized

Verification of Accredited Investor Status.

The next set of questions are related to the requirement under Rule 506(c) that an issuer take reasonable steps to verify, and form a reasonable belief regarding, the accredited investor status of a purchaser at the time of the sale of securities.[1]  This is important because, to qualify for an exemption from registration, an issuer must meet all the terms and conditions of the exemption, and verification of accredited investor status is a requirement under Rule 506(c).

  • Question 260.06. This question asks whether the exemption is available to an issuer that takes reasonable steps to verify and forms a reasonable belief about the accredited investor status of a purchaser but subsequently discovers that the purchaser did not meet the criteria. The answer is that an issuer does not lose the ability to rely on the exemption in such situation, as long as the issuer took reasonable steps to verify and had a reasonable belief that such purchaser was an accredited investor at the time of the sale of securities.[2]
  • Question 260.07. This question asks whether an issuer can rely on the exemption if all purchasers met the accredited investor standard but the issuer itself did not take reasonable steps to verify. The SEC says the verification requirement is separate from and independent of the requirement that sales be limited to accredited investors and, thus, must be satisfied even if all purchasers happen to be accredited investors.[3]
  • Question 260.08. This question describes a situation where an issuer verifies the accredited status of a purchaser based on the net worth verification method by reviewing relevant documentation, properly dated within the prior three months at the time, but the previously submitted documentation becomes outdated by the time the purchaser decides to purchase the securities. If an issuer chooses to use one of the methods provided in the applicable rule’s non-exclusive list, the SEC says, the documentation must be dated within the prior three months of the sale of securities and, thus, the issuer will lose the ability to rely on the exemption in this situation. At the same time, the SEC adds, the issuer may determine whether it has taken reasonable steps to verify the purchaser’s accredited investor status under the principles-based method of verification based on the particular facts and circumstances of each purchaser and transaction.[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 general solicitation.

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

[1] 17 C.F.R. § 230.506(c)(ii).

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

[3] Id.

[4] Id.