SEC Division of Corporation Finance Issues C&DIs Relating to Accredited Investor Verification Methods

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On July 3, the Securities and Exchange Commission’s Division of Corporation Finance issued six new Compliance and Disclosure Interpretations (C&DIs) with respect to determination of accredited investor status and, in particular, verification of accredited investor status under Rule 506(c) of the Securities Act of 1933 (the rule adopted by the SEC in 2013 that allows general solicitation in connection with offerings under Rule 506 of Regulation D). The new C&DIs include the following interpretative guidance: 

C&DI 255.48 provides that when determining the annual income of a purchaser whose income is not reported in US dollars under the income test for qualifying as an accredited investor, an issuer may use either (a) the exchange rate that is in effect on the last day of the year for which income is being determined or (b) the average exchange rate for that year. 

C&DI 255.49 clarifies that when determining the net worth of a purchaser under the net worth test for qualifying as an accredited investor, a person may include assets or property in an account held jointly with a non-spouse to the extent of his or her percentage ownership in the account or property. 

C&DI 260.35 provides that, when verifying an accredited investor’s annual income under Rule 506(c), an issuer may not rely on the safe harbor provisions with respect to a purchaser’s Internal Revenue Service forms for the “two most recent years” where an IRS form for the most recently completed year is not yet available for that purchaser. However, the SEC suggests that an issuer could reasonably conclude that a purchaser is an accredited investor under the principles-based verification method (Principles-Based Method) by (a) reviewing the IRS forms from the two years prior to the most recently completed year and (b) obtaining other written representations from the purchaser that the purchaser has met, and will meet for the current year, the requisite income level. 

C&DI 260.36 provides that, when verifying an accredited investor’s annual income under Rule 506(c), an issuer may not rely on the safe harbor provisions with respect to IRS tax forms where a purchaser is not a US taxpayer and can only provide comparable tax forms from a foreign jurisdiction. However, the SEC suggests that an issuer could reasonably conclude that a purchaser is an accredited investor under the Principles-Based Method by reviewing filed tax forms that report income from a foreign jurisdiction that impose comparable penalties for falsely reported information. 

C&DI 260.37 clarifies that, when verifying an accredited investor’s net worth under Rule 506(c), an issuer may not rely on the safe harbor provisions with respect to tax assessments dated within the prior three months where the most recent such tax assessment is dated more than three months from the time of verification. However, the SEC suggests that an issuer could reasonably conclude that a purchaser is an accredited investor under the Principles-Based Method by relying on the most-recent tax assessment dated more than three months from the time of verification if it reflects a value that, after deducting the purchaser’s liabilities, shows the purchaser’s net worth is substantially higher than $1,000,000. 

C&DI 260.38 clarifies that, when evaluating a purchaser’s liabilities for purposes of verifying an accredited investor’s net worth under Rule 506(c), an issuer may not rely on the safe harbor provisions with respect to reports generated by “nationwide consumer reporting agencies” where the issuer reviews a consumer report from a non-US consumer reporting agency. However, the SEC suggests that an issuer could reasonably conclude that a purchaser is an accredited investor under the Principles-Based Method by obtaining a representation from the purchaser that all liabilities are disclosed on the foreign consumer report. 

If an issuer employing any of the Principles-Based Methods has a reason to question the applicable measure of determining a purchaser’s accredited investor status, it must conduct additional verification measures to establish that it has taken reasonable steps to verify that purchaser’s accredited investor status.

Topics:  Accredited Investors, Investors, JOBS Act, Regulation D, Rule 506 Offerings, SEC, Securities Act of 1933

Published In: General Business Updates, Finance & Banking Updates, Securities Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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