Updated SEC Rules Help Simplify Complex Investor Verification Methods

Changes set to smooth out friction points for potential investors

Part 3

By Julie Herzog

The SEC recently amended its exempt offering framework rules in an effort to promote capital formation and expand investment opportunities while preserving or improving important investor protections. The new rules take effect 60 days after publication in the Federal Register.

In my first two posts on this topic, I covered the history of the SEC Exempt Offering Framework rules and focused specifically on changes regarding Integration Framework, Offering and Investment Limits, and “Test-the-Waters” and “Demo Day” Communications. In this post, I will cover Accredited Investor Verification Methods and Financial Statement Requirements in Rule 506(b) Offerings.

Accredited Investor Verification Method

Rule 506(c) permits issuers to generally solicit and advertise an offering, provided that all purchasers in the offering are accredited investors, the issuer takes reasonable steps to verify that purchasers are accredited investors, and certain other conditions in Regulation D are satisfied.

The new amendment is intended to update and improve the definition to identify more effectively investors that have sufficient knowledge and expertise to participate in investment opportunities that do not have the rigorous disclosure and procedural requirements, and related investor protections, provided by registration under the Securities Act of 1933.

This rule basically provides a principles-based method for verification of accredited investor status, as well as a nonexclusive list of verification methods. The amended rule will now allow an issuer to rely on a prior verification of accredited investor status for an investor to establish that the investor remains an accredited investor at the time of a subsequent sale—as long as the investor provides a written representation stating that the investor continues to qualify as an accredited investor, and the issuer is not aware of information to the contrary. There is a five-year time limit on the issuer’s ability to rely on the prior verification.

The new rule also reaffirms and updates the SEC’s prior guidance with respect to the principles-based method for verification of accredited investor status, and what may be considered “reasonable steps” to verify an investor’s accredited investor status. It is important to note however that the SEC staff has stated that it continues to believe that an issuer will not be considered to have taken reasonable steps to verify accredited investor status if it requires only that a person check a box in a questionnaire or sign a form, absent other information about the purchaser indicating accredited investor status.

Financial Statement Requirements in Rule 506(b) Offerings

The amended rules change the financial information that must be provided to non-accredited investors in Rule 506(b) private placements to align with the financial information that issuers must provide to investors in Regulation A offerings.

Specifically, for Rule 506(b) offerings up to $20 million, the requirement for audited financial statements will be the same as the financial statement requirements applicable to Tier 1 Regulation A offerings. For Rule 506(b) offerings greater than $20 million, issuers will be required to provide audited financial statements and comply with Regulation S-X requirements similar to those applicable to Tier 2 Regulation A offerings.

For a more detailed account and explanation of the SEC rule amendments, please see the final rules and/or review the SEC table that provides an overview of the principal private offering exemptions.

If you have questions about the potential implications of the amended rules on your business, the experienced corporate attorneys at Fortis Law Partners are here to help.


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