Rule 506(c) of the Securities Act has long required issuers to take “reasonable steps” to verify that all purchasers of private securities qualify as accredited investors. While the rule includes non-exclusive methods for investor verification, concerns persisted about their perceived exclusivity and the associated burdens. In response, the Securities and Exchange Commission (SEC) has implemented changes to make the reasonable steps verification process easier to fulfill.
New Verification Method: A Written Representation
The SEC’s recent amendment introduces a new verification method (Rule 506(c)(2)(ii)(E)) to the non-exclusive list. This method allows issuers to obtain a written representation from a person previously verified as an accredited investor. This written representation, obtained at the time of sale, serves as a valid verification for five years, as long as the issuer is not aware of any information that contradicts this representation.
Principles-Based Approach: Flexibility and Reasonableness
The adoption reinforces the commitment of the SEC to a principles-based approach. Issuers are not compelled to use methods provided in the non-exclusive category. Instead, they may directly apply the reasonableness standard to the particular circumstances of the securities offering and the investors involved. This flexibility prevents uniformity in reasonable step verification methods that may not suit specific purchasers or offerings.
Consideration of Key Factors for Investor Verification
When verifying the accredited status of investors, the SEC reinforces the need to consider several factors, including the specifics of the offering, the nature of the purchaser, information available to the issuer about the purchaser, and the specifics of the offering. This nuanced approach acknowledges that a one-size-fits-all method needs to be better suited for a diverse landscape of investment opportunities.
Alignment with Rule 506(b): Reasonable Steps vs. Reasonable Belief
The SEC explains that the “reasonable steps” standard in Rule 506(c) aligns closely with the “reasonable belief” standard in Rule 506(b). For instance, a representation from an investor regarding their accredited status may suffice if the issuer considers a prior substantive relationship or other pertinent facts. However, a mere “check the box” approach asserting accredited investor status on a questionnaire or other document is not sufficient without additional supporting information.
A Streamlined Future for Accredited Investor Verification
The SEC’s modifications to Rule 506(c) indicate a helpful shift toward simplifying the process of reasonable steps verification. By allowing a principal-based approach with a new verification method, and taking into account other important factors, the SEC is attempting to facilitate a more adaptable and efficient system of accredited investor verification. This reduces the burden on issuers and rings the verification process into alignment with the diverse nature of investor profiles and opportunities.
