The Obligations of Purchasers & Issuers in Rule 506(c) Private Offerings

by | Jun 26, 2014 | Financial Services

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Title II of the Jumpstart Our Business Startups (JOBS) Act lifted the ban on general solicitation, allowing for public advertising for private placement investment capital. Issuers and purchasers involved in private placements, however, are responsible for meeting specific requirements and carrying out securities transactions that are compliant with the regulations promulgated and enforced by the United States Securities and Exchange Commission (SEC). Investor accreditation and “reasonable steps” verification are two important areas of concern that investors and sellers should address before moving forward with securities sales and purchases.

Impact on Investors & Sellers

Provisions adopting Title II of the JOBS Act were formally enacted and made legally effective by the SEC on September 23, 2013 and have since opened doors for both business owners and investors. Paragraph (c) was added to Rule 506 of Regulation D to accommodate Title II and the new laws surrounding public advertising of private offerings. Under Rule 506(c) private offerings, companies are permitted to use general solicitation to acquire investment funding, assuming all investors are accredited. Title II and Rule 506(c) also has the effect of making investment opportunities and deal flow better for accredited investors seeking to make investments.

Required Accreditation

Perhaps the key requirement of Title II and Rule 506(c) is that only accredited investors can invest in private placements involving the use of general solicitation. An “accredited” status is generally achieved by investors, i.e., individuals, corporations, trusts, etc., who meet specific asset, income, and net worth requirements outlined under Regulation D. It’s important to note that for Title II and Rule 506(c) capital raises, investors can no longer complete surveys or certify themselves as accredited investors. Instead, reasonable steps must be taken to certify that they are truly accredited investors.

Reasonable Proof of Status

The SEC prescribes certain methods which they deem to be reasonable steps, but gives companies the ability to verify in any method that would be deemed reasonable. For example, individuals qualifying on the basis of high income should provide tax statements to prove their income. Individuals qualifying on the basis of net worth should provide a consumer credit report to document their liabilities and bank/brokerage, and other statements. Where the SEC has given guidance on what they deem to be reasonable steps, it would be best to follow them. The SEC did also authorize companies to use third-party accredited investor verification providers, but only if companies had a reasonable basis to rely upon them.

Not all third-party accredited investor verification providers are legally compliant. To learn more about verification of accredited investors, visit

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