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Blog

Requirements of Private Offerings Under Rule 506(c)

Mihir Gandhi

The Jumpstart Our Business Startups Act (JOBS Act) was signed into law in 2012.  Section 201(a) of the JOBS Act required the Securities and Exchange Commission (SEC) to remove the ban on the use of general solicitation by companies seeking to conduct a private placement so long as certain requirements are observed.  In September 2013, the ban on general solicitation in private placements was finally lifted and formally memorialized as Rule 506(c) of Regulation D.  Rule 506(c) plays a critical role in private startups and companies' ability to conduct a private placement of their securities while still being able to generally solicit and publicly advertise.  However, there are certain requirements that must be met for a securities offering and purchase to be properly carried out under Rule 506(c).

ACCREDITED INVESTORS
Under the terms of Rule 506(c) of Regulation D, companies are permitted to utilize general solicitation to obtain funding. Private startups and business can publicly advertise for investment capital via a number of methods and still be considered as conducting private offerings which do not require registration with the SEC. The main requirement for companies taking advantage of Rule 506(c) is that they must take “reasonable steps” to verify that their investors are actually accredited investors.  They can no longer rely on investors’ self-verifications through investor questionnaires and subscription agreements which the industry had regularly utilized in the past.

VERIFICATION & REASONABLE STEPS
What constitutes a valid verification?  The fact that a company takes “reasonable steps.”  The SEC provided some guidance as to what methods they would consider as sufficient reasonable steps.  These methods include reviewing certain defined documentation to ensure that an investor meets income or net worth requirements or seeking third-party confirmation from a certified attorney or accountant. In the event that an investor is found to be unaccredited after purchasing securities, an issuer that took reasonable steps to confirm the purchaser's status will not lose their exemption from SEC registration.  The gold standard for compliance in the industry is to obtain third party verification from a licensed attorney.

ADDITIONAL REGULATIONS
As well as meeting the requirements involving investor accreditation and accredited status verification, it's important that other rules and regulations under Regulation D are adhered to.  Consulting with your attorney on how to properly abide by all the requirements of Regulation D and the securities law is strongly recommended.  As Rule 506(c) is relatively new, the SEC has proposed additional regulations that might take effect in the future.  We’ll update you with the latest developments.

VerifyInvestor.com provides legally compliant third-party verifications of purchasers as accredited investors from licensed attorneys. To verify your accredited investor status or the status of another investor, visit https://VerifyInvestor.com