RIA Compliance Blog
The Securities and Exchange Commission (“SEC”) recently adopted long-awaited rule changes required by the 2012 Dodd-Frank Act that will allow some offerings under Rule 506 to be offered using general solicitation. At the same time, the SEC proposed a set of additional changes that would further regulate this new type of offering.
Offerings under Rule 506, which provides one of the three operative safe harbor offering alternatives under Regulation D, have been prohibited from using any form of public solicitation since the rule’s inception in 1982. However, Congress responded to calls from industry seeking easier and less expensive ways to raise investment capital by creating the “crowdfunding” exemption and by loosening the public solicitation prohibition for Rule 506 offerings.
The rule amendment creates a new subsection 506(c), which provides that public solicitation is allowed if the offering is limited to accredited investors and the issuer takes reasonable steps to verify each investor’s accredited status. Although the rule does not enumerate specific verification procedures or even create a defined safe harbor, the issuing release describes a “principles-based” approach to verification and discusses a number of verification alternatives that may be considered adequate.
The release acknowledges that different types of accredited investors would require different methods of status verification. For example, individual investors claiming accredited status based upon income might be required to produce tax returns or other tax materials reflecting the required income level. Alternatively, institutional investors might be able to produce audited financial statements. Issuers may rely upon certain third parties, such as banks and broker-dealers that have relationships with investors, to certify their status. In addition, the new rule does not require separate verification if the issuer has actual knowledge that the investor is accredited.
At the same time as it released the new final accredited status verification rule, the SEC proposed additional amendments focusing on the manner of solicitation. The proposed rules would require a pre-solicitation filing of form D as well as a pre-filing (for what is described as a two-year pilot program) of all solicitation material. We discuss them in detail in another blog posted later this week.
Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules.