The Amended 506(c) Accredited Investor Verification Requirements

Rule 506(c) of Regulation D allows the use of general solicitation in a securities offering as long as the issuer performs reasonable steps to verify the accredited status of the investors. These types of investors qualify as accredited investors by fulfilling certain income, net worth, asset, or other requirements. This aspect of Rule 506(c) accredited investor verification has not been changed – it still applies only to accredited investors.

The Amended Rule 506(c)

The SEC has modified Rule 506(c) to permit issuers of exempt securities to determine that an investor continues to qualify for accredited investor status for the same offering if that investor conducted reasonable steps verification in a previous Rule 506(c) offering within the last five years unless the issuer has contradicting information.

At the time of the sale, the investor must produce a written representation that asserts the investor still qualifies as an accredited investor. For issuers that routinely conduct multiple or continuous securities offerings, the amendment to the 506(c) accredited investor verification process simplifies the process.

Factors to Consider for Principle-based Verification

The SEC reasserted previous guidance for issuers that use the rule’s principle-based method of accredited investor verification. The guidance identifies factors issuers should consider, such as:

• Characteristics of the purchaser and the type of accredited investor the individual or entity claim to be
• The type and amount of information the issuer has obtained about the prospective investor
• Information about the offering, including how the purchaser was asked to participate in the offering and the dollar value of a minimum investment

The SEC stated that issuers may apply the standard of reasonableness to the circumstances and facts related to the investors and the offering without using any method in the non-exclusive list.

The SEC also indicated that in certain cases “reasonable steps” determination and “reasonable belief” for Rule 506(b) may be quite similar.

The SEC has stated that in some cases using the representation from an investor about his or her accredited investor status could satisfy “the reasonable steps” required for 506(c) accredited investor verification, but this depends on the following:

The issuer must use reason, consider a prior substantive relationship with the investor, or other pertinent facts that reveal the investor’s accredited status. However, if the issuer does not possess any other information about the investor, the investor representation process would be insufficient.