The JOBS Act required the SEC to issue regulations allowing the use of “general solicitation” in Rule 506 offerings, as long as all the purchasers are accredited investors. The SEC has now proposed such regulations, which is welcome, but anyone expecting step-by-step guidance will be disappointed.
The proposed regulations establish three criteria:
- The issuer must take reasonable steps to verify that the purchasers are accredited investors.
- All purchasers must be accredited investors, either because they meet the objective definitions of “accredited” or because the issuer reasonably believes that they do at the time of the purchase.
- All of the other terms and conditions of an offering under Regulation D must be satisfied.
Note the key phrases: the issuer must take reasonable steps to verify that the purchasers are accredited and must reasonably believe that they are accredited.
The definition of “reasonable” is critical here, as it is in many other areas of law – but no real definition exists. Reasonable is whatever a reasonable person thinks is reasonable, yet reasonable people sometimes disagree. For the issuer trying to complying with the law, the important points are (1) you cannot merely pretend to believe your purchasers are accredited, but are required to really look into the question and be able to prove that you did so; and (2) as long as you tried to ensure that your purchasers were accredited, not in a perfunctory way but in a meaningful, reasonable way, you will not be penalized just because you turn out to have been wrong.
Some hoped that the SEC would offer more objective criteria, e.g., if you take steps one through six then you will satisfy the legal requirement. However, the SEC decided that the question could come up in so many different ways, no single approach would be sufficient.
The SEC did note that the steps an issuer might take to determine whether a purchaser is accredited, and the information it might require, would vary depending on such factors as the nature of the purchaser (e.g., individual or established business), the amount and type of information the issuer has about the purchaser, and the nature of the offering. For example, an individual purchaser claiming to be accredited based on his or her income might need only to produce W-2 statements, while the situation would be more complicated for an individual purchaser claiming to be accredited based on net worth.
If adopted in their current form, the SEC regulations would, in effect, require issuers, their lawyers, the SEC, and the courts to work all of these questions out over time. For now, proceed with caution.