Main Menu
Print PDF

General Solicitation and (Public) Private Placements: Navigating the Minefield Planted by New and Proposed SEC Rules

Securities Alert | September 11, 2013
By: Neil P. Casey, Lori S. Smith and Merritt A. Cole

On July 10, 2013, the SEC adopted two new sets of rules that made significant changes to the securities offering process under Rule 506 of Regulation D and Rule 144A under the Securities Act of 1933 (the Securities Act).  These new rules lift the ban on general solicitation and advertising (hereinafter “general solicitation”) in connection with such offerings and impose new prohibitions on the participation by certain “bad actors” in Rule 506 offerings.  At the same time, the SEC also issued (of its own accord) proposed rules that would impose significant new requirements on Rule 506 offerings.[1]  This Client Alert will address the practical impact of certain provisions of the new rules, as well as potential implications of certain aspects of the proposed rules on various types of issuers, including early stage ventures as well as private funds.

The new rules implement specific mandates of Title II of the Jumpstart Our Business Startups Act (the JOBS Act), which was enacted in 2012 to improve access to the capital markets, with the ultimate goal of creating jobs and economic growth.  The final rules take effect on September 23, 2013, while the proposed rules are subject to a public comment period ending on that date.  The SEC’s Advisory Committee on Small and Emerging Companies has announced that it will hold a public meeting on September 17, 2013 relating to, among other things, the rules and proposed rules.

Already, the proposed rules have elicited loud objections from the early stage community, including angel investors, entrepreneurs, small businesses and other market participants, many of whom have argued that the requirements of the rules (and proposed rules), together with the severe consequences of noncompliance, would effectively cause Regulation D to become unusable by those issuers whom it was ostensibly designed to benefit (i.e. early stage ventures and entrepreneurs).  In fact, many of those commenting, including Senator McHenry of North Carolina, one of the original sponsors of the JOBS Act, have argued that the proposed rules violate Title II of the JOBS Act by imposing a 15 day advance notice requirement on general solicitation and would impose significant compliance costs, thereby placing at risk smaller issuers who could not afford such costs or bear the consequences of noncompliance (even if inadvertent).

The following is a brief summary of only some of the issues raised by the rules and proposed rules.  Our previous Client Alert summarizing key provisions of the final and proposed rules can be found here.

New Rules

Lifting of Ban on General Solicitation.

The final rules adopted by the SEC include new Rule 506(c), which permits an issuer to engage in general solicitation in offering and selling securities pursuant to Rule 506 provided that all purchasers of the securities are accredited investors and the issuer takes reasonable steps to verify that such purchasers are accredited investors.[2]  In addition, Form D has been amended to require issuers to indicate whether they are relying on Rule 506(c) by checking a box on the form.  Issuers relying on Section 4(a)(2) (formerly Section 4(2)) of the Securities Act outside of Rule 506, or on the pre-existing Rule 506 safe harbor (renumbered as Rule 506(b)), will continue to be subject to the prohibition on general solicitation.

1.      What Is General Solicitation?

Now that issuers are permitted to engage in general solicitation in reliance on Rule 506(c), a central question remains -- what is general solicitation?  Neither the rules nor the adopting release provides any new guidance on what types of activity constitute general solicitation.  On this issue, the adopting release simply refers to Rule 502(c), which provides general examples of activity that have historically been considered to be general solicitation (advertisements in newspapers and magazines, television and radio broadcasts, and seminars where attendees have been invited by general solicitation), as well as prior interpretive guidance from the SEC confirming that other uses of publicly available media, such as unrestricted websites, may also constitute general solicitation.

The adopting release, however, did set off some alarm bells in the early stage community because, in discussing the nature and terms of the offering as one of the factors to consider in the process of verification of a person’s status as an accredited investor, the SEC stated that “an issuer that solicits new investors through a website accessible to the general public, through a widely disseminated email or social media solicitation . . . will likely be obligated to take greater measures to verify accredited investor status than an issuer that solicits new investors from a database of pre-screened accredited investors created and maintained by a reasonably reliable third party.”  In that one sentence, the SEC made clear that they believe that use of websites like AngelList, FundersClub, and the many others that have developed over the last few years, will be considered general solicitation, and if so, within the purview of Rule 506(c).  For many years, these websites have operated in a gray area, subject to the limited guidance available in various no action letters.[3] These websites were hopeful that the lifting of the ban on general solicitation would clearly sanction their activities, but the potential limitations imposed by the proposed rules, if adopted, will require a revamping of many of these websites to make sure that issuers do not inadvertently lose the benefit of Regulation D by virtue of posting on these sites.

With the advent of new technologies and media, market practices continue to evolve in ways that may or may not be viewed as general solicitation.  Presenting at business plan competitions, demo days, meetups and pitch events, attending angel group screening sessions, and sharing information via social media and other internet platforms are now common practices for startups operating within the current Regulation D framework.  Where will the lines be drawn and what activities will be considered fund-raising vs. merely communications regarding the issuer’s business and its products?  If these activities are deemed to constitute general solicitation, then Rule 506(c) is essentially the only way to continue to raise capital in the modern fundraising environment.  But without further guidance on this point, issuers are left to wonder what is or is not permissible under Rule 506(b).

2.      How Can Issuers Be Satisfied They’ve Taken Reasonable Verification Steps?

Issuers will need to develop, implement and record the steps taken to verify that all investors in their Rule 506(c) offerings are accredited investors.  The principles-based approach described by the SEC in the adopting release requires the issuer to make an objective determination that such steps are reasonable in light of the particular facts and circumstances of the investor and transaction, taking into account several factors enumerated in the release.

For investors other than individuals, there are no presumed sufficient verification steps.  For individual investors, even though the SEC has described certain presumed sufficient verification steps, privacy concerns may make it difficult to verify investors’ qualifications because of the sensitive personal financial information the investor may have to provide to the issuer in order to satisfy certain of these methods.[4]  Investors may be hesitant to share this financial information with issuers and issuers may be ill-equipped to adequately safeguard such information.  For this reason, both issuers and investors may find third-party verification services helpful.

In the adopting release, the SEC notes that an issuer may rely on a third-party to verify an investor’s accredited investor status so long as the issuer has a reasonable basis for such reliance.  This presumably means that the issuer understands the process by which such third-party verifies the investor’s status and reasonably believes such process would satisfy the principles-based approach to verification outlined in the adopting release or, in the case of a natural person investor, utilized one or more of the rule’s enumerated verification methods.  It has also been suggested that an issuer could potentially satisfy the reasonable steps requirement by reference to, among other things, an investor’s membership in industry groups with certain minimum eligibility requirements.  For example, the Angel Capital Association (ACA), an organization of angel investors in early stage ventures, has recently issued a paper that suggests how an issuer might conclude that confirming an investor’s membership in an “established angel group” could constitute reasonable steps (either on a stand-alone basis or together with other information available to the issuer) to verify accredited investor status in accordance with the principles based approach set forth in the adopting release.

3.      What Other Legal Obstacles May Prevent or Inhibit Issuers From Engaging in General Solicitation?

Even if an issuer is prepared to comply with the specific requirements of Rule 506(c) in order to engage in general solicitation, other regulatory requirements may effectively preclude or significantly constrain general solicitation by that issuer.

a.      For example, sponsors of private funds that rely on CFTC Rule 4.13(a)(3) to remain exempt from registration under the Commodity Exchange Act can only offer or sell interests in such funds “without marketing to the public in the United States”.  Additionally, private fund sponsors that are registered with the CFTC may rely on CFTC Rule 4.7 to remain exempt from various disclosure, reporting and recordkeeping requirements otherwise applicable to CFTC registrants, but only if the private fund’s securities are offered or sold solely to specified persons “in an offering which qualifies for exemption from the registration requirements of the Securities Act pursuant to Section 4[(a)](2) of that Act or pursuant to Regulation S.” The CFTC has not given any definitive guidance on whether it will harmonize these provisions with the new Rule 506(c) so as to extend the exemptions to offerings that utilize general solicitation.

b.      Also, any such marketing of private fund interests would be subject to existing anti-fraud rules and specific advertising rules and regulations applicable to fund marketing materials.  For example, there are specific prohibitions on the use of testimonials or past specific recommendations.  States and non-U.S. jurisdictions may also have rules that apply to marketing materials.

c.       If a Rule 506(c) offering is conducted in proximity to a Rule 506(b) offering, the issuer will need to consider integration issues.  Rule 502(a) provides a six-month safe harbor from integration for successive Regulation D offerings, as well as a framework of five factors to consider in cases where the six-month safe harbor is not available.   If the two offerings were integrated, general solicitation conducted in the Rule 506(c) offering could taint and destroy the exemption for the Rule 506(b) offering.
i.    A Rule 506(b) offering could be converted to a Rule 506(c) offering upon compliance with the requirements of the new rule, but it is unlikely that an issuer could convert a Rule 506(c) offering into a Rule 506(b) offering without observing a six-month cooling off period to qualify for the Rule 502 safe harbor.
ii.    A completed Rule 506(c) offering could be followed by a Rule 506(b) offering, but the issuer should apply the five-factor test of Rule 502 if less than six-months have elapsed between the offerings.  While the SEC did not directly address the issue in the adopting release, we are aware that the SEC staff is considering the issue and are hopeful that the staff will conclude that a Rule 506(c) offering could be conducted after a completed Rule 506(b) offering without significant integration concerns.
iii.    The adopting release confirms that concurrent offshore offerings that are conducted in compliance with Regulation S will not be integrated with domestic unregistered offerings that are conducted in compliance with Rule 506(c).
4.      What Practical Considerations May Limit the Usefulness of General Solicitation under Rule 506(c)?

There may be practical reasons why an issuer would decline to engage in general solicitation in reliance on Rule 506(c), particularly when weighed against the anticipated benefits, if any, of freer communication during the offering process.  It seems likely that an issuer that engages in general solicitation could face greater likelihood of regulatory scrutiny.  Further, a “blown” Rule 506(c) offering may have consequences even if the proposed rules (described below) are not adopted.  If, for example, an issuer engages in general solicitation, and has not taken adequate steps to verify accredited status of the purchasers (as determined in hindsight because it is not within any of the safe harbor methods), it is likely that no exemption from registration exists for the offering.  In such an event, it is possible that the issuer could be required to offer rescission to all investors and if even one investor asked for its money back, this could be a death knell for the issuer.  For this reason, many commenters, including many in the early stage investment community, have questioned whether they should limit their investments solely to companies that can comply with Rule 506(b) and provide adequate assurances to investors that no general solicitation has been used.

Disqualification of Felons and Bad Actors from Rule 506 Offerings.

In a separate release, the SEC adopted final rules amending Rule 506 to implement Section 926 of the Dodd-Frank Act and disqualify issuers from relying on Rule 506 if certain felons and other “bad actors” are participating in the offering.  Those covered by the rule include the issuer, its predecessors and affiliated issuers, as well as directors and certain officers, general partners, and managing members of the issuer, 20 percent beneficial owners of the issuer, promoters, investment managers and principals of pooled investment funds, and persons compensated for soliciting investors, as well as the general partners, directors, certain officers, and managing members of the investment manager or compensated solicitor.

The final rules include an exception from disqualification if the issuer establishes that it did not know, and in the exercise of reasonable care could not have known, that a disqualifying condition existed.  In order to rely on this exception, an issuer will be required to establish that it has made a factual inquiry into whether a disqualifying condition exists, the nature and scope of which may vary based on the facts and circumstances concerning the issuer and other offering participants.  Additionally, the rules contemplate that the SEC could waive a disqualification upon showing of good cause.

1.      Who Are “Covered Persons”?

Promoters.  For startups, the issuer will need to be particularly concerned with who could be deemed to be a “promoter” and therefore a covered person who could potentially disqualify the issuer from relying on Rule 506.  The promoter category is very broad.  As noted in the adopting release, a promoter is anyone who, “either alone or with others, directly or indirectly takes initiative in founding the business or enterprise of the issuer”, who in connection therewith becomes a 10% shareholder of the issuer or receives 10% of any class of the issuer’s securities (other than as underwriting commissions or in exchange for property).

Certain Beneficial Owners of Voting Securities.  Issuers will need to make a determination as to whether any beneficial owners of their voting securities would be covered persons.  The question of whether a person or entity constitutes a 20% beneficial owner of the issuer’s outstanding securities is calculated on the basis of voting power.  This analysis will start with the terms of the issuer’s underlying organizational documents to determine whether the securityholders “have or share the ability, either currently or on a contingent basis, to control or significantly influence the management and policies of the issuer through the exercise of a voting right”, as noted in the adopting release.  Securities entitled to elect or remove directors or other controlling persons of the issuer, or to approve significant transactions, are viewed by the SEC as voting securities.

The next step is to determine who are the “beneficial owners” of the securities under traditional SEC beneficial ownership tests, analyzing, for example, whether persons other than the record owner of the securities have or share voting power or investment power with respect to the securities, or have certain other beneficial interests in, or rights to acquire, the securities [5].  In some cases, angel groups who invest through funds or collective vehicles could be covered by these rules if they meet the 20% threshold. This will require additional diligence by the Issuer, including having participants in an offering complete questionnaires or provide additional representations, which may be met with resistance by investors.

Non-U.S. Private Funds.  The offering of shares in non-U.S. private funds (such as offshore feeders) to U.S. investors (such as U.S. tax-exempt investors) may present issues.  These funds will need to analyze whether to undertake diligence with respect to their covered persons, including, for example, directors and large non-U.S. shareholders, if they plan to rely on Regulation D.

Affiliated Issuers.  Portfolio companies of private funds could be deemed to be affiliated issuers and vice versa.  An affiliate is a person or entity that directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, another person or entity.

2.      What If A Disqualifying Event Is Discovered?

An issuer will not be disqualified from relying on Rule 506 even if one of its covered persons is subject to a disqualifying event so long as the issuer did not know, and in the exercise of reasonable care could not have known, of the disqualifying event.  The adopting release notes that a factual inquiry is necessary and that questionnaires and certifications, perhaps together with contractual representations and undertakings, may be sufficient in some circumstances (particularly where there are no indicators or other information suggesting bad actor involvement).  However, issues will undoubtedly arise as to what level of diligence is necessary to qualify for this exception, particularly in circumstances where additional diligence may be advisable and an issuer’s covered persons are located in jurisdictions where background information is not made available to the public.

For continuous and long-lived offerings (such as offerings by hedge funds), the adopting release states that the frequency and degree of the issuer’s factual inquiry should depend on the circumstances and that, in the absence of knowledge or notice of facts that may indicate further or more frequent inquiry is warranted (i.e. knowledge of a regulatory proceeding), periodic updating via bring-downs, negative consent letters or checking of public databases, for example, may be sufficient to establish reasonable care.  No further guidance is given as to how frequently this “periodic” updating should occur in the context of continuous offerings.

Issuers that discover disqualifying events may seek a waiver of disqualification from the SEC, although questions remain as to what types of circumstances will justify a waiver and how quickly an issuer might be able to obtain such a waiver.  In the case of disqualifying events arising out of orders issued by state regulators, the regulator issuing the order may itself determine whether Rule 506 disqualification is necessary under the circumstances.

Proposed Rules

The SEC also proposed rules which would impose significant new notice and disclosure requirements on certain securities offerings under Rule 506 and impose or enhance penalties for failing to make required filings.  These proposed rules were approved for proposal by a split 3-2 vote of the SEC commissioners.  In the Proposing Release, the SEC indicated its proposals were motivated by investor protection concerns that fraud might be more prevalent in general solicitations and were intended to assist the SEC in monitoring how offerings under new Rule 506(c) are being made in the marketplace and the types of investor verification procedures being used by issuers.

Changes to Form D and Filing Procedures

The proposed rules would require issuers relying on Rule 506 to file up to a total of three Form Ds with the SEC.  First, if the issuer is relying on Rule 506(c), it would be required to file an advance Form D notice of sale (an “Advance Form D”) with the SEC at least 15 calendar days prior to the first use of general solicitation in such offering.  Second, the issuer would be required to file an expanded Form D within 15 days after the date of first sale of securities in the offering.  And finally, the issuer would be required to file a closing amendment to Form D within 30 days of termination of the offering (i.e. completion or abandonment) indicating that the offering had ended.  (Issuers are currently required to make only one Form D filing in connection with a Rule 506 offering, within 15 days after the date of first sale of securities in the offering.)

Form D would also be revised to require additional information concerning the issuer, any website utilized by the issuer, the offered securities, the types of investors in the offering, the use of proceeds of the offering, the types of general solicitation used and the methods used to verify the accredited investor status of the investors.

1.      Will New Form D Requirements Discourage Issuer Reliance on Rule 506(c)?

Issuers may be reluctant to make Advance Form D filings and therefore, without a compelling countervailing reason to use Rule 506(c), likely eschew Rule 506(c) in favor of a traditional 506(b) offering without general solicitation.  The proposed Advance Form D requirement, when coupled with the proposed requirement that the issuer file a “closing amendment” to Form D upon termination of the offering (whether completed or abandoned) will publicly highlight failed offerings.  For an early stage company this could significantly affect, if not potentially end, the company’s business prospects.  The adopting release contemplates that an issuer could file an Advance Form D without contemplating a specific offering, but if that practice becomes widespread, the information provided would be of limited use to the SEC, if not practically worthless.  Moreover, if the net result of the new Form D requirements is to actually reduce the likelihood that early stage companies would utilize Rule 506(c), many commenters have argued that these requirements actually undermine the express purpose of the JOBS Act (i.e. to improve capital markets access for early stage companies).

2.      Will the Final Rules Contain a “Cure” Provision for Inadvertent General Solicitation?

Under the proposed rules, there is only a very limited opportunity to cure an inadvertent general solicitation through a late filing of Advance Form D (essentially, the issuer would have to make the filing not later than 30 days after the date it was originally due, and would be available only for the issuer’s first failure to file timely a Form D in connection with the particular offering).  Also, as noted above, since there is limited guidance as to what constitutes general solicitation, it is likely that issuers that utilize social media and other cutting edge marketing techniques will be advised that they must comply with the requirements necessary to rely on Rule 506(c). This could result in costly and burdensome practices developing whereby every start-up is advised to file an Advance Form D almost immediately upon formation.  In fact, some entrepreneurs may even have engaged in general solicitation before their actual companies are formed, as start-ups often delay formation of an entity to avoid cost.  Given the often informal nature of fundraising and communications by startups, a broader curative provision would be extremely useful, and the adopting release requests comment on whether there should be a different filing deadline in this circumstance.

Disqualification for Failure to Comply with Filing Requirements.

One of the most controversial provisions of the proposed rules is that the rules would disqualify issuers from using the Rule 506 exemption in any new offering (not just those offerings that use general solicitation) if the issuer or its affiliates have failed to comply with the Form D filing requirement in a Rule 506 offering.  The disqualification period would continue for one year following the date on which the required Form D filings are made.  Issuers would be able to rely on a limited cure period for a late Form D filing (as described above), and in certain circumstances, could request a waiver from the staff.  The SEC noted that an issuer that was disqualified from using the Rule 506 exemption by virtue of this rule would not be prohibited from relying on any other available exemption.  However, unlike Rule 506 offerings, securities offerings that rely on other exemptions such as Section 4(a)(2) of the Securities Act would not be exempt from substantive regulation under state securities laws, and would therefore be more costly and time-consuming as a result of state “blue sky” compliance.

1.      Is the Penalty for Noncompliance Overly Harsh?

Many commenters have already objected to the one-year penalty as being disproportionate with violations of the mechanical provisions of the rules.  A one-year ban on raising capital under Rule 506 could effectively put a company out of business, particularly emerging companies which may rely on multiple rounds of capital raising to finance themselves over the course of a single year.

2.      Will Compliance Costs Be Prohibitive?

Some commenters have argued that the SEC did not properly consider compliance costs for small entities in particular, and that contrary to the policy reasons for the JOBS Act, the proposed rules effectively require all Regulation D issuers to incur additional significant up-front compliance (legal and accounting) costs before raising even a single dollar of capital.  Due to the draconian consequences of noncompliance, issuers will not be able to afford “foot faulting” on the Form D filing requirements, inadvertent general solicitation or other missteps.

Submission of General Solicitation Materials to the SEC.

In order to assist the SEC in monitoring market practices in the Rule 506 market following the effectiveness of Rule 506(c), the proposed rules would require issuers to submit all written general solicitation materials to the SEC through an intake page on the SEC website no later than the date of the first use of these materials in general solicitation.  As proposed by the SEC, materials submitted in this manner would not be publicly available and would not be treated as being filed or furnished for purposes of the Securities Act or the Securities Exchange Act of 1934.  (However, the SEC has requested comment as to whether the solicitation materials should be public.)  This submission process is proposed to be temporary and expire in two years.

1.      Is this Process Feasible?

Commenters have observed that this temporary process presupposes a fundraising process more akin to a traditional, institutional private placement, or even a registered offering, than startup or small business fundraising, which may utilize an extremely broad range of communication methods and forums.  Fundraising pitches can involve slide decks, graphics, videos, podcasts, interactive online “chats” and pitch competitions, as well as more conventional written materials such as private placement memoranda.  Companies will have facebook pages, twitter accounts, and use various social media venues and websites to interact with third parties.  In many cases, whether specific content constitutes solicitation materials will be subject to interpretation.   The interactive, iterative and continuous nature of the “modern” fundraising process for emerging companies and small businesses presents a number of challenges for issuers seeking to comply with the SEC’s requirement to submit written general solicitation materials no later than the date of first use.

2.      What Will Issuers Have to Consider?

Issuers will have to make determinations as to (i) whether their solicitation materials are “written”, (ii) whether the materials were used in general solicitation, and (iii) if earlier versions of the materials had been filed, whether a new filing would be triggered by updated information.  Issuers will also have to ensure that the materials are filed by the “date of first use”, which could require daily attention.  Non-traditional forms of solicitation may raise questions as to how to comply with the filing requirement, and managing this process will likely take considerable resources and dramatically increase the risk of inadvertent noncompliance.  Many entrepreneurs and early stage companies will not have the resources to hire sophisticated advisors and therefore may be putting their potential venture at risk as a result of these burdensome requirements.

In the context of Rule 506(c) offerings, the importance of issuers implementing and enforcing strict communications and media policies would be heightened by the new filing requirements.  For issuers who cannot effectively control communications, the risk of noncompliance will be high.  Even for those issuers who can reasonably exercise such control, the communication process will become much more time consuming and require significant, continuous monitoring.

3.      Are There Better Alternatives for Obtaining Market Information?

An enormous quantity of materials may be required to be submitted to the SEC.  Commenters have observed that there may be more efficient means for the SEC to gather information about the development of market practices, utilizing existing advisory bodies and working groups, as well as industry associations, rather than imposing broad filing requirements that will significantly burden issuers, incentivize noncompliance, increase the risk of inadvertent noncompliance, and produce an array and quantity of information far beyond what is necessary or useful.


While the lifting of the general solicitation ban was long encouraged and anticipated, and is generally a very positive event, many significant issues remain that need to be addressed.  Issuers should proceed cautiously and fully understand the implications of the new and proposed rules.  As noted above, the JOBS Act was intended to make it easier for small businesses to raise financing, spur investment and ultimately create jobs.  However, the lack of clarity in the rulemaking and the limitations and requirements of the proposed rulemaking may inadvertently lead to a much tougher fundraising environment ahead as both investors and issuers will need to be very cautious.

For more information regarding this Client Alert, please contact Neil Casey (212.631.4414; or Lori Smith (212.714.3075; in our New York office or Merritt Cole (215.864.7018; in our Philadelphia office.

[1] The SEC’s final and proposed rules, and accompanying SEC releases, can be found at (repeal of general solicitation ban); (disqualification of felons and bad actors from Rule 506 offerings); and (proposed amendments to Form D and certain notice and disclosure requirements).

[2] The final rules also amend Rule 144A to effectively provide that securities may be offered pursuant to Rule 144A via general solicitation so long as the securities are actually sold only to persons that the seller and any person acting on behalf of the seller reasonably believe are “qualified institutional buyers” under Rule 144A.

[3] In its IPOnet No-Action Letter (July 26, 1996), the SEC approved a website which provided password-protected access to private offering material only after the investor was pre-qualified by the website operator as an “accredited investor” and a suitable cooling off period was observed following such qualification.  The SEC’s rationale was that sufficient steps had been taken to establish a “preexisting substantive relationship” between the investor and the issuer and/or broker.  A general solicitation is typically not found in such circumstances.  In its subsequent  Lamp Technologies, Inc. No-Action Letter (May 29, 1997), the SEC concluded that the operation of a website containing information for continuously offered hedge funds did not constitute a general solicitation where investors were required to be pre-qualified as accredited investors, access was password-protected and a 30-day waiting period was imposed before investments could be made.   However, in the wake of these No-Action Letters, the SEC issued a clarifying release in April 2000, expressing concern that some entities (generally not broker-dealers or their affiliates) had construed these No-Action Letters too liberally in offering private placements via websites.  The lack of meaningful verification of accredited investor status appeared to be of significant concern in the context of these websites.

[4] For individuals, the non-exclusive, presumed sufficient verification steps approved by the SEC include: (i) if the investor purports to qualify as an accredited investor on the basis of income, by reviewing copies of any IRS form that reports income, such as a Form W-2 or a Filed Form 1040, for the most recent two years and obtaining a written representation from the investor as to his or her reasonable expectation of reaching the required income level in the current year, or (ii) if the investor purports to qualify on the basis of assets, by reviewing one or more of the following types of documentation current within the most recent three months: for assets, bank statements, brokerage statements, and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties, and for liabilities, a credit report from at least one of the nationally recognized credit rating services.  Alternatively, an issuer may rely on a written confirmation from a registered broker-dealer, an SEC registered investment adviser, a licensed attorney or a certified public accountant that such person or entity has taken reasonable steps to verify that the investor is an accredited investor within the prior three months and has determined the same.  Lastly, the issuer may rely on self-certification of accredited investor status by any natural person who has invested in a Rule 506(b) offering of the same issuer made prior to the effective date of Rule 506(c), and who remains an investor of the issuer.

[5] A “beneficial owner” of a security includes:

(i) any person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise has or shares:

(a) voting power, which includes the power to vote, or to direct the voting of, such security; and/or

(b) investment power, which includes the power to dispose, or to direct the disposition of, such security.

(ii) any person who, directly or indirectly, creates or uses a trust, proxy, power of attorney, pooling arrangement or any other contract, arrangement or device with the purpose or effect of divesting such person of beneficial ownership; and

(iii) a person who has the right to acquire beneficial ownership of such security, as defined in clause (i) above, within sixty (60) days, including but not limited to any right to acquire: (a) through the exercise of any option, warrant or right, (b) through the conversion of a security, (c) pursuant to the power to revoke a trust, discretionary account, or similar arrangement, or (d) pursuant to the automatic termination of a trust, discretionary account or similar arrangement.

This correspondence should not be construed as legal advice or legal opinion on any specific facts or circumstances. The contents are intended for general informational purposes only, and you are urged to consult a lawyer concerning your own situation and legal questions.
Back to Page