Category: Rule 506

The Crowdfunding Bad Actor Rules Don’t Apply To Investors

On By crowdfundattnyIn 100 Investor Rule, Accredited Investor, Investor, Investor Disclosures, Reg CF, Regulation A, Rule 506, Title III, Title III CrowdfundingLeave a comment

I often see Subscription Agreements asking the investor to promise she’s not a “bad actor.” This is unnecessary. The term “bad actor” comes from three sets of nearly indistinguishable rules:

  • 17 CFR §230.506(d), which applies to Rule 506 offerings;
  • 17 CFR §230.262, which applies to Regulation A offerings; and
  • 17 CFR §227.503, which applies to Reg CF offerings.

In each case, the regulation provides that the issuer can’t use the exemption in question (Rule 506, Regulation A, or Reg CF) if the issuer or certain people affiliated with the issuer have violated certain laws.

Before going further, I note that these aren’t just any laws – they are laws about financial wrongdoing, mostly in the area of securities. Kidnappers are welcome to use Rule 506, for example, while ax murderers may find Regulation A especially useful even while still in prison.

Anyway.

Reg CF’s Rule 503 lists everyone whose bad acts we care about:

  • The issuer;
  • Any predecessor of the issuer;
  • Any affiliated issuer;
  • Any director, officer, general partner or managing member of the issuer;
  • Any beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities, calculated on the basis of voting power;
  • Any promoter connected with the issuer in any capacity at the time of filing, any offer after filing, or such sale;
  • Any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; and
  • Any general partner, director, officer or managing member of any such solicitor.

Nowhere on that list do you see “investor.” The closest we come is “Any beneficial owner of 20 percent or more of the issuer’s outstanding voting equity securities,” but even there the calculation is based on voting power. In a Crowdfunding offering you wouldn’t give an investor 20% of the voting power, for reasons having nothing to do with the bad actor rules. 

So it just doesn’t matter. This is one more thing we can pull out of Subscription Agreements. 

I know some people will say “But we want to know anyway.” To me this is unconvincing. If you don’t ask about kidnapping you don’t need to ask about securities violations.

Questions? Let me know.

Use A Third Party To Verify Investors Under Rule 506(c)

On By crowdfundattnyIn Rule 506, Rule 506(c)Leave a comment

An issuer raising capital under Rule 506(c) must take “reasonable steps” to verify that investors are accredited. Rule 506(c)(2)(ii) specifies several steps that will be deemed reasonable, like getting a letter from the investor’s accountant.

Looking to save money, some issuers are tempted to verify investors themselves rather than using a third-party service like VerifyInvestor. For most issuers I think that’s a bad idea.

Suppose a non-accredited investor gets into your deal by forging a letter from an accountant, whiting out the numbers on her tax return, or because someone in your office makes a mistake. The deal goes south, investors lose money, and a clever plaintiff’s lawyer learns about the non-accredited investor. “The offering was illegal!” he claims. “Investors get their money back!”

You say, “But the letter from the accountant!” The plaintiff’s lawyer says, “You should have called the accountant’s office!”

You say, “The numbers on the tax return were whited out!” The plaintiff’s lawyer says, “The new numbers are in a different font!”

You say, “Everyone makes mistakes!” The plaintiff’s lawyer says, “But this mistake wasn’t reasonable!”

What you have are (1) a big headache, and (2) a lawsuit that’s not getting thrown out on summary judgement. Sorry for all the exclamation points but that’s the tenor of litigation.

Now suppose you used a reputable third party to verify investors. The plaintiff’s lawyer, who is working on a contingency, writes his demand letter and you respond “Sorry, I used XYZ Corp., an industry leader in investor verification.” I suspect the plaintiff’s lawyer doesn’t take the case. I think there’s a very strong argument that by hiring XYZ Corp. you have automatically taken “reasonable steps.”

For $50 per investor or whatever it is, that seems to me about as close to a no-brainer as they come.

Three points.

One, I said this is true for most issuers. A large issuer with lots of investors and an established, professionally-managed investor relationship department might be able to absorb the new responsibilities with proper training.

Two, Rule 506(c) is the only offering exemption that requires verification. In offerings conducted under Rule 506(b), Regulation A, and Reg CF, issuers are allowed to take investors at their word.

Three, suppose an issuer using Rule 506(c) does nothing to ensure that investors are accredited but they’re all accredited anyway. The issuer can still be sued successfully by that clever plaintiff’s lawyer. The obligation to take “reasonable steps” is independent of the requirement that all investors must be accredited.

Questions? Let me know.

SEC Proposes Major Upgrades To Crowdfunding Rules

On By crowdfundattnyIn Accredited Investor, Angel Fairs, Crowdfunding, Crowdfunding Articles, Crowdfunding Laws, Crowdfunding Portals, Crowdfunding Real Estate, Demo Days, Equity Crowdfunding, General Solicitation, Integration, JOBS Act, Raising Money, Regulation A, Regulation A Plus, Regulation A Plus Primer, Regulation D offerings, Rule 506, Rule 506(b), Rule 506(c), SAFE, SEC, SEC Proposals, SPV, Title II, Title II Crowdfunding, Title III, Title III Crowdfunding, Title IV of the JOBS Act, UncategorizedLeave a comment

The SEC just proposed major changes to every kind of online offering:  Rule 504, Rule 506(b), Rule 506(c), Regulation A, and Regulation CF.

The proposals and the reasoning behind them take up 351 pages. An SEC summary is here, while the full text is here. The proposals are likely to become effective in more or less their existing form after a 60-day comment period.

I’ll touch on only a few highlights:

  • No Limits in Title III for Accredited Investors:  In what I believe is the most significant change, there will no longer be any limits on how much an accredited investor can invest in a Regulation CF offering. This change eliminates the need for side-by-side offerings and allows the funding portal to earn commissions on the accredited investor piece. The proposals also change the investment limits for non-accredited investor from a “lesser of net worth or income” standard to a “greater of net worth or income” standard, but that’s much less significant, in my opinion.
  • Title III Limit Raised to $5M:  Today the limit is $1.07M per year; it will soon be $5M per year, opening the door to larger small companies.

NOTE:  Those two changes, taken together, mean that funding portals can make more money. The impact on the Crowdfunding industry could be profound, leading to greater compliance, sounder business practices, and fewer gimmicks (e.g., $10,000 minimums).

  • No Verification for Subsequent Rule 506(c) Offerings:  In what could have been a very important change but apparently isn’t, if an issuer has verified that Investor Smith is accredited in a Rule 506(c) offering and conducts a second (and third, and so on) Rule 506(c) offering, the issuer does not have to re-verify that Investor Smith is accredited, as long as Investor Smith self-certifies. But apparently the proposal applies only to the same issuer, not to an affiliate of the issuer. Thus, if Investor Smith invested in real estate offering #1, she must still be verified for real estate offering #2, even if the two offerings are by the same sponsor.
  • Regulation A Limit Raised to $75M:  Today the limit is $50M per year; it will soon be $75M per year. The effect of this change will be to make Regulation A more useful for smaller large companies.
  • Allow Testing the Waters for Regulation CF:  Today, a company thinking about Title III can’t advertise the offering until it’s live on a funding portal. Under the new rules, the company will be able to “test the waters” like a Regulation A issuer.

NOTE:  Taken as a whole, the proposals narrow the gap between Rule 506(c) and Title III. Look for (i) Title III funding portals to broaden their marketing efforts to include issuers who were otherwise considering only Rule 506(c), and (ii) websites that were previously focused only on Rule 506(c) to consider becoming funding portals, allowing them to legally receive commissions on transactions up to $5M.

  • Allow SPVs for Regulation CF:  Today, you can’t form a special-purpose-vehicle to invest using Title III. Under the SEC proposals, you can.

NOTE:  Oddly, this means you can use SPVs in a Title III offering, but not in a Title II offering (Rule 506(c)) or Title IV offering (Regulation A) where there are more than 100 investors.

  • Financial Information in Rule 506(b):  The proposal relaxes the information that must be provided to non-accredited investors in a Rule 506(b) offering. Thus, if the offering is for no more than $20M one set of information will be required, while if it is for more than $20 another (more extensive) set of information will be required.
  • No More SAFEs in Regulation CF:  Nope.

NOTE:  The rules says the securities must be “. . . . equity securities, debt securities, or securities convertible or exchangeable to equity interests. . . .” A perceptive readers asks “What about revenue-sharing notes?” Right now I don’t know, but I’m sure this will be asked and addressed during the comment period.

  • Demo Days:  Provided they are conducted by certain groups and in certain ways, so-called “demo days” would not be considered “general solicitation.”
  • Integration Rules:  Securities lawyers worry whether two offerings will be “integrated” and treated as one, thereby spoiling both. The SEC’s proposals relax those rules.

These proposals are great for the Crowdfunding industry and for American capitalism. They’re not about Wall Street. They’re about small companies and ordinary American investors, where jobs and ideas come from.

No, the proposals don’t fix every problem. Compliance for Title III issuers is still way too hard, for example. But the SEC deserves (another) round of applause.

Please reach out if you’d like to discuss.

SEC Rules 506(B) And 506(C): Clearing Up The Confusion

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Rule 506, Rule 506(b), Rule 506(c), SEC, Securities Exchange Commission, Securities LawsLeave a comment

Some Crowdfunding portals offer Rules 506(b) transactions in addition to, and sometimes even in lieu crowd funding word cloudof, Rule 506(c) transactions. Let’s clear up the confusion.

In the beginning. . . .

Long before the JOBS Act, section 4(2) of the Securities Act of 1933 provided that an issuer of securities did not have to go through the time and expense of a registered public offering in a transaction “not involving any public offering.” Recognizing the putting-the-rabbit-in-the-hat nature of that language and wishing to provide more clarity to the public, the SEC issued Regulation D in 1982, which provides a series of Rules guiding issuers through the shoals of private – as opposed to public – offerings.

One of the Rules in Regulation D, Rule 506(b), describes a kind of private offering that has been the favorite of issuers and their lawyers for many years:

  • An unlimited amount of money raised
  • An unlimited number of accredited investors plus 35 non-accredited investors
  • Exemption from state Blue Sky registration

Rule 506(b) provides great flexibility to issuers. However, consistent with the distinction inherent in Regulation D between private and public offerings, Rule 506(b) prohibited the use of “general solicitation and advertising” to find investors. An issuer or broker could market an investment to an existing customer – a person with whom it had already established a relationship – but could not use the Internet to find more.

2013 No-Action Letters

In the beginning of 2013, the SEC issued no-action letters to FundersClub and AngelList under Rule 506(b). These no-action letter provided that if an online portal merely “registered” a user with a name and email address, the portal could immediately show investments to the user. To many familiar with the history of Rule 506(b) that sounded a lot like general solicitation and advertising, but the SEC concluded that it was not.

With the two no-action letters, the SEC effectively launched the Crowdfunding industry even before the JOBS Act officially came into effect.

The JOBS Act

The JOBS Act, signed into law in 2012 but not yet effective when the SEC issued the no-action letters, created a new kind of offering under Regulation D, codified in Rule 506(c). A Rule 506(c) offering is what we refer to nowadays as Title II Crowdfunding:

  • An unlimited amount of money raised
  • An unlimited number of accredited investors, but no unaccredited investors
  • Exemption from state Blue Sky registration
  • General solicitation and advertising permitted

If Rule 506(c) sounds a lot like Rule 506(b), that’s because it is. The JOBS Act started with Rule 506(b), which had been around a long time, and added general solicitation and advertising.

Why Both?

Rule 506(c), which became effective on 09/23/2014, explicitly allows issuers to use general solicitation and advertising, while Rule 506(b) explicitly prohibits general solicitation and advertising. Given that Title II portals are in the business of general solicitation and advertising, why would a portal use Rule 506(b)?

There are a few reasons.

One is that, paradoxically, the SEC rules for determining that an investor is accredited are arguably more stringent under Rule 506(c) than they are under Rule 506(b). Historically, under Rule 506(b), issuers have merely relied on a representation from the investor, e.g., “I promise I am accredited.” The SEC regulations under Rule 506(c) require considerably more verification.

Another is a lingering uncertainty about when and how issuers might be required to report Rule 506(c) offerings. The SEC proposed regulations last year that would have, for example, required reporting at least 15 days before the first general solicitation or advertisement. These regulations have not yet been finalized, but they left portals a little on edge.

More broadly, with the two no-action letters in hand, portals may feel they have a clear road map to legal Rule 506(b) offerings, while they remain hesitant about Rule 506(c) pending more advice from the SEC. My own view is that portals are probably more comfortable with the no-action letters than they should be, but that is a story for another day.

The Future

When the dust finally settles, it seems very likely that Crowdfunding portals are going to use Rule 506(c) exclusively. Until then we will have a mix and maybe just a little confusion.

Questions? Let me know.

Crowdfunding Cheat Sheet

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Form D, Investing, Investor, JOBS Act, Regulation A, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Title II Crowdfunding, Title III Crowdfunding, Title IV of the JOBS Act, UncategorizedLeave a comment

Crowdfunding now comes in multiple flavors:

  • Title II Crowdfunding – Rule 506(c)
  • Title III Crowdfunding
  • Title IV Crowdfunding – Regulation A+
  • Existing Regulation A
  • Rule 504 of Regulation

All have one thing in common:  the entrepreneur can use “general solicitation and advertising” to raise money.

But that’s all they have in common. They differ on such critical features as: 

  • Who is allowed to invest
  • How much money can be raised
  • Whether Internet portals can be used
  • How much each investor can investCFCS
  • The degree of SEC oversight
  • Whether foreign companies can participate

I’ve created a chart to keep it all straight – a Crowdfunding Cheat Sheet. The chart won’t
format properly here in the blog, so you’ll need to click here to view it. You might want to print it for future reference.

CLICK HERE TO VIEW THE CROWDFUNDING CHEAT SHEET 

This is my takeaway from the chart:

Of the five flavors of Crowdfunding that will soon be available, only Title II Crowdfunding and Regulation A+ Crowdfunding are likely to play a major role. Title III Crowdfunding – ironically, the only thing the media talked about when the JOBS Act was passed in 2012 – seems doomed to a non-speaking part, at least as long as the $1 million limit remains in place. Those satisfied with raising money from only accredited investors will probably look to the simplicity of Title II while those needing to cast a wider net will likely take the plunge into Regulation A+. As for Rule 504 and the old version of Regulation A – they’re history.

But it’s a brand new world in the capital markets, and impossible to predict.

 Questions? Contact Mark Roderick.

SEC Answers Questions On Title II Crowdfunding

On By crowdfundattnyIn Crowdfunding, Entrepreneurs, Investing, Investor, JOBS Act, Rule 506, Securities Exchange Commission, Title II CrowdfundingLeave a comment

On January 23, 2014, the SEC issued two Securities Act Rules “compliance and disclosure interpretations” regarding Title II Crowdfunding. Both of the new C&DIs provide transition guidance for Rule 506 offerings that started before September 23, 2013, the effective date of the new Rule 506(c) exemption.

Question 260.33: An issuer commenced an offering in reliance on Rule 506 before September 23, 2013, the effective date of the new Rule 506(c) exemption.  The issuer decides, at some point after September 23, 2013, to continue that offering as a Rule 506(c) offering under the transition guidance in Securities Act Release No. 9415 (July 10, 2013).  In such circumstances, is the issuer required to take “reasonable steps to verify” the accredited investor status of investors who purchased securities in the offering before the issuer conducted the offering in reliance on Rule 506(c)?

Answer: No.  For an offering that commenced before September 23, 2013 and that, pursuant to the Commission’s transition guidance, the issuer continues in accordance with Rule 506(c) after that date, the issuer must take reasonable steps to verify the accredited investor status of only investors who purchase securities in the offering after the issuer begins to make offers and sales in reliance on Rule 506(c).  The issuer must amend any previously-filed Form D to indicate its reliance on the Rule 506(c) exemption for its offering.  See Securities Act Rules C&DI 260.05.

Question 260.34: An issuer commenced a Rule 506 offering before September 23, 2013 and made sales either before or after that date in reliance on the exemption that, as a result of Securities Act Release No. 9415 (July 10, 2013), became Rule 506(b).  The issuer now wishes to continue the offering in reliance on Rule 506(c).  Can the issuer rely on the transition guidance in Securities Act Release No. 9415 that permits switching from Rule 506(b) to Rule 506(c) if it already sold securities to non-accredited investors before relying on the Rule 506(c) exemption?

Answer: Yes, as long as all sales of securities in the offering after the issuer begins to offer and sell in reliance on Rule 506(c) are limited to accredited investors and the issuer takes reasonable steps to verify the accredited investor status of those purchasers.

While these C&DIs are important for issuers caught mid-stream when Title II Crowdfunding came into effect, the more general message is that the SEC continues to be quite lenient toward Crowdfunding. On both of these questions the decision could have gone the other way, but the SEC chose to make life easier.

Questions? Let me know.

Free Seminar – Smart Talk: Crowdfunding 101

On By crowdfundattnyIn Crowdfunding, Crowdfunding Speaking Engagements, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the University City Science Center in Philadelphia, PA to be the featured speaker on Crowdfunding at the “Smart Talk – Crowdfunding 101” seminar on October 24, 2013.

I will discuss the basic changes to the JOBS Act and what this means for you and your company’s future, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

The seminar will take place on Thursday, October 24, 2013 at the Quorum at the University City Science Center in Philadelphia, PA from 8:30 – 10:00 a.m. This event is free, but space is limited, so you must register to attend. To register, email the University City Science Center to secure a seat. For additional information on the event, click here.

I hope to see you there!

MARK RODERICK

Will The SEC’s 15 Day Notification Rule End Angel Fairs?

On By crowdfundattnyIn Angel Fairs, AngelList, Crowdfunding, FundersClub, General Solicitation, Regulation D offerings, Rule 506, SEC, Securities Exchange CommissionLeave a comment

No, it won’t.

On July 10, 2013 the SEC proposed rules that would, among other things, require a company to notify the SEC at least 15 days before using any “general solicitation” to raise money under the newly-adopted Rule 506(c) of Regulation D, also known as Title II Crowdfunding.

This proposal triggered more anxiety in the investment community than any other. Angel groups in particular were concerned about the possible effect on “angel fairs” and similar networking events, where companies look for investors and publicity by making presentations and handing out literature. If these activities constituted general solicitation, so the thinking went, and a company had not notified the SEC at least 15 days in advance, the company would be violating the law with potentially serious consequences.

Should companies stop presenting at angel fairs? Should attendance at angel fairs be limited? Would the SEC rule bring a wrenching halt to the way startups have raised money for 30 years?

There are two reasons why the concerns in the investment community are probably overblown.

First, “general solicitation” is not a new concept. Regulation D has always prohibited general solicitation. Rule 506 of Regulation D is itself a regulatory implementation of section 4(a)(2) of the Securities Act of 1933, which provides simply that the registration requirements do not apply to “transactions by an issuer not involving any public offering.” It has always been the position of the SEC, reflected in Rule 502(c), that using general solicitation to attract investors crossed the indistinct line from “private offering” to “public offering.”

Thus, every angel fair that has ever been held for the last several decades has been subject to the SEC prohibition on general solicitation. Yet given all that time and all those opportunities, the SEC has never taken the position that what happens at angel fairs constitutes prohibited general solicitation.

Having stood aside and permitted angel fairs for three decades, it seems unlikely that the SEC would take the opposite position today, after Congress announces its support for Crowdfunding by enacting the JOBS Act!

So far, it is safe to say that the SEC has taken the opposite approach, i.e., by making Crowdfunding easier, not more difficult. Consider, for example, the two no-action letters issued by the SEC on March 26, 2013 to FundersClub and AngelList. It seems very possible, even likely, that these letters would not have been issued before enactment of the JOBS Act. The SEC seems to have taken the wishes of Congress to heart and there is no reason to believe it intended to do otherwise with the 15 day proposal.

The other reason the concerns are overblown is that the rule in question is not yet in effect. The public comment period ended on September 23, 2013 and the SEC is considering the many comments made by the investment community. The chances are very high that when the SEC issues the final rule, these comments will be taken into account.

Maybe I’ll be proven wrong. Maybe the SEC will suddenly reverse course after 30 years and issue final rules that blow angel fairs out of the water, throw up unnecessary impediments to Crowdfunding despite the JOBS Act, and make everyone angry. Don’t bet on it.

Questions? Let me know.

Crowdfunding – A Monumental Change in Securities Law

On By crowdfundattnyIn Crowdfunding, Form D, General Solicitation, JOBS Act, Regulation D offerings, Rule 506, SEC, Securities Exchange Commission, Securities LawsLeave a comment

I have been asked by the New Jersey Institute of Continuing Legal Education to present a webinar on the recent change of Crowdfunding rules. The program will take place on Wednesday, October 9, 2013 and has been approved for CLE credits.  For additional information on the webinar, or to register, click here.

More info: Crowdfunding – A Monumental Change in Securities Law

Now, for the first time, small companies and entrepreneurs will be able to raise money directly from the public using newspaper advertisements, Facebook pages, and other means of “general solicitation,” without going through brokers or other middlemen.

My presentation, entitled “A Monumental Change in Securities Law: Crowdfunding is Now Open for Business,” will discuss the basic changes to the law, including: Rule 506 of Regulation D issued by the Securities & Exchange Commission (SEC); new requirements for establishing that investors are accredited; SEC regulations; mechanics of a Crowdfunded offering; proposed changes to Form D; and the exclusion of “bad actors.”

I concentrate my practice on the representation of entrepreneurs and their businesses. I represent companies across a wide range of industries, including technology, real estate, and healthcare. I am also spearheading my firm’s Crowdfunding Practice.

Check back frequently for information on Crowdfunding, including news, updates and links to important information pertaining to the JOBS Act and how Crowdfunding may affect your business.

Questions? Let me know.

SEC Finalizes “General Solicitation” Regulations: Full Steam Ahead

On By crowdfundattnyIn Crowdfunding, Crowdfunding Portals, Entrepreneurs, FundersClub, General Solicitation, Investing, Investor, JOBS Act, Kickstarter, Rule 506, SEC, Securities Exchange CommissionLeave a comment

Since President Obama signed the JOBS Act into law on April 5, 2012, we have been waiting for the SEC to finalize the rules on Crowdfunding.

At long last the SEC has done just that, at least with respect to one of the two components of Crowdfunding. Sometime in mid-September, company will be allowed to use “general solicitation” in certain “Rule 506 offerings.” The rules governing the other component of Crowdfunding, where small issuers will be allowed to raise money through Internet portals from small, unsophisticated investors, will have to wait for later in the year.

Even so, these new regulations mark the largest change to the securities laws in almost 80 years. Companies will now be allowed to raise money from accredited investors (in the case of individuals, those with over $1 million of net worth or incomes over $200,000 per year) through social media, print materials, email, and other means. Not only will companies have greater access to the capital they need, but the new rules are likely to significantly disrupt the money-raising industry, displacing brokers, lawyers, and other middlemen just as the Internet has displaced so many middlemen before them.

Now the technical rules.

The rules allow general solicitation and general advertising where:

  • All purchasers are accredited investors; and
  • The company takes reasonable steps to verify that the purchasers are accredited investors; and
  • All of the requirements in Rule 501, Rule 502(a), and 502(d) are satisfied.

Whether the company has taken “reasonable steps” will be determined on a case-by-case basis. Among the relevant factors:

  • The type of accredited investor that the purchaser claims to be (e.g., the CEO of a Fortune 100 company or a store clerk).
  • The amount and type of information that the issuer has about the purchaser.
  • The nature of the offering, including the manner of the solicitation.

When the regulations were proposed last August, many people complained about the absence of hard-and-fast rules and the resulting ambiguity. The final rules take a large step in the direction of certainty by providing that a company will be considered to have taken reasonable steps to verify that a natural person is an accredited investor if it does any of the following:

  • If basing the decision on the purchaser’s net income:
    • Reviews W-2s, 1099s, or other IRS documents that report the person’s income for the past two years; and
    • Obtains a written representation that the person reasonably expects to reach the income level required to qualify as an accredited investor in the current year.
    • If basing the decision on the purchaser’s net worth:
      • Reviews one or more types of documents dated within the past three months, including bank statements, brokerage statements, tax assessments, and a report from one of the national consumer reporting agencies concerning liabilities; and obtains a written representation that the person has disclosed all liabilities necessary to make a net worth determination; or
      • Obtains a written representation from certain third parties, including registered broker-dealers or investment advisors, that they have taken reasonable steps to verify the person’s accredited investor status within the past three months and have determined that the person is an accredited investor; or
      • Permits existing security-holders who had acquired issuer securities in a previous Rule 506 offering and had qualified as accredited investors at that time to certify his or her accredited investor status at the time of the sale.

These steps are neither exclusive nor mandatory. The final rules also discuss other factors and procedures.

In addition to taking reasonable steps to verify that purchasers are accredited, the company must also have a reasonable belief that they are accredited. This has always been part of Rule 506 and was not changed by the JOBS Act.

NOTE:  These new rules offer enormous opportunities for entrepreneurs seeking to raise money for their existing businesses or start new businesses. Please contact us if you would like to discuss your idea.

Questions? Let me know.