The SEC took a big step yesterday. Using the mandate set forth in the JOBS Act, for the first time since the promulgation of Rule 506, the SEC has taken a step towards allowing Rule 506 offerings that are conducted through a general solicitation. The SEC proposed an amendment to Rule 506 that would add a section 506(c) as follows:
“(c) Conditions to be met in offerings using general solicitation or general advertising.
(1) General conditions. To qualify for exemption under this section, sales must satisfy all the terms and conditions of §§ 230.501 and 230.502(a) and (d).
(2) Specific conditions.
(i) Nature of purchasers. All purchasers of securities sold in any offering under this § 230.506(c) are accredited investors.
(ii) Verification of accredited investor status. The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under this § 230.506(c) are accredited investors.”
This means that so long as all investors are accredited investors and the issuer has taken “reasonable steps” to verify that status, the issuer may raise money through a general solicitation and still fall under the Rule 506 exemption.
There is still a lot to chew on here. First of all, and this always bears repeating, this amendment is not yet in effect. It is just a proposed amendment, so don’t go out there buying adds in the Wall Street Journal just yet!
Second, section 506(c)(2)(ii) is obviously fairly vague. The issuer must take “reasonable steps to verify that the purchasers… are accredited investors.” The old “accredited investor” standard was that the issuer needed to have a reasonable belief that the investor was accredited. The venture community got comfortable with the notion that an “Accredited Investor Questionnaire” was sufficient for this purpose. But now issuers will have to take “reasonable steps to verify.” It’s a subtle difference, but a difference nonetheless.
In its rule proposal the SEC expressed that the question of whether an issuer has taken “reasonable steps to verify” and accredited investor’s status would be an “objective determination, based on the particular facts and circumstances of each transaction.” These facts and circumstances include:
- 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.
The SEC specifically told us that a mere accredited investor questionnaire would not be sufficient if you are attracting potential investors into a mass-audience online portal.
All in all this is probably less restrictive than most people thought, but also provides a little less guidance, so we are going to have to feel it out a bit and do our best to stay within the SEC’s boundaries until we have a little more clarity.