Friday, August 31, 2012

SEC: "Verify Means Verify"

As I have blogged about previously, the JOBS Act required the SEC to adopt rules which would permit general solicitation in connection with a Rule 506 private offering made strictly to accredited investors if the issuers "take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the [SEC]."

So, of course, securities law practitioners have been anxiously waiting for the SEC to adopt those new rules and clarify what actions an issuer must take to "verify" the accredited investor status of purchasers of its securities in Rule 506 offerings.  

On August 29, the SEC proposed amendments to Rule 506 to implement the changes required by the JOBS Act.  Those proposed amendments are available here.  Under the proposed amendments, the SEC addressed the question of what is required to "verify" accredited investor status by stating that the issuer must "take reasonable steps to verify that purchasers of securities sold in any offering under this § 230.506(c) are accredited investors."  The SEC's proposing Release explains that "reasonableness" "would be an objective determination, based on the particular facts and circumstances of each transaction."  The determination would include the following factors:
  • the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
  • the amount and type of information that the issuer has about the purchaser; and
  • the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
In short, the SEC is saying "verify means verify."

Fortunately, the Release goes on to provide quite a bit of helpful commentary describing different types of accredited investors and how an issuer might verify their status.  For example, an issuer could verify the status of an investor who claims to be an accredited by virtue of the fact that he is a registered broker-dealer by going to FINRA's BrokerCheck website.  The Release acknowledges that verifying the status of a natural person who claims to meet the net worth or annual income test for accredited investor might be more challenging.  Among other possible verification methods, the Release suggests that one or more private companies might get into the business of providing accredited investor certifications upon which an issuer might be able to reasonably rely for more difficult determinations.

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