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Articles : Raising Capital Under the New SEC Rule 506 (c)

Raising Capital Under the New SEC Rule 506 (c)



By Gisella Rivera

Effective September 23, 2013, issuers can use general solicitation and advertising in an offering of its securities provided that each and every purchaser is an accredited investor (“Rule 506(c)”). To satisfy its obligation to verify an investor’s accredited investor status, an issuer can:

  • if accreditation is based on income, request copies of IRS forms such as Form W2, Form 1099 and/or Schedule K-1 showing annual compensation for the two most recent years, and a written representation that the investor reasonably expects to earn the same level of compensation for the current year; or
  • if accreditation is based on net-worth, request copies of bank statements, brokerage statements and other statements of securities holdings, certificates of deposits, tax assessments and appraisal reports issued by independent third parties to verify an investor’s assets, a copy of a consumer report from either Expedia, Equifax or Transunion to verify an investor’s liabilities, and a written representation that the investor has disclosed all liabilities (all documents should be dated no later than three months before the date of purchase of the offered securities);
  • request written confirmation of the investor’s accredited investor status from a registered broker-dealer, registered investment adviser, an attorney or a certified public accountant, each of whom has verified such investor’s status no later than three months before the date of purchase of the offered securities; or
  • for investors who had previously purchased the issuer’s privately placed securities, a certification that such investors remain eligible as accredited investors.

If a purchaser of the offered securities subsequently turns out not to be an accredited investor, the offering will not lose its exemption from registration if the issuer can prove that it has taken reasonable steps to verify accreditation (such as the safe harbor steps described above) and did not know, at the time of the purchase, that the investor is not an accredited investor. To determine whether the steps taken to verify an investor’s accredited investor status are reasonable, issuers should analyze the facts and circumstances of the purchaser and the transaction on a case-by-case basis…