Last year, the US Securities and Exchange Commission ("SEC") adopted rule changes permitting general solicitation and general advertising in private placements under Rule 506 of Regulation D under the US Securities Act of 1933, as amended (the "Securities Act"), and securities offerings under Rule 144A under the Securities Act.
The rule changes added a new Rule 506(c) that permits the use of general solicitation and general advertising under Rule 506 as long as the issuer takes "reasonable steps" to verify that all purchases are made by accredited investors or by purchasers reasonably believed to be accredited investors at the time of sale. Although Rule 506(c) does not define "reasonable steps," it adopts a principles-based approach as to what steps are "reasonable" and specifies methods an issuer may use as safe harbour alternatives.
One of the non-exclusive safe harbour methods of verifying that a purchaser is an accredited investor is by reviewing any Internal Revenue Service ("IRS") form that reports the purchaser's income for the two most recent years. The SEC guidance states that this verification safe harbour cannot be relied upon if the IRS form for the recently completed year is not yet available. However, in that case the issuer may rely on the principles-based verification method by reviewing the IRS forms that report income for the two years preceding the recently completed year and obtaining written representations from the purchaser regarding the purchaser's income. The guidance also states that foreign tax forms cannot be used to satisfy the safe harbour, but may be used as part of the principles-based approach if the foreign jurisdiction imposes penalties for falsely reporting information comparable to the United States.
Under another non-exclusive safe harbour, an issuer can verify that a purchaser is an accredited investor on the basis of net worth by reviewing certain documentation of the purchaser's assets and liabilities dated within the prior three months. The SEC guidance states that the safe harbour would not be available where an issuer reviews an annual tax assessment that is dated more than three months. However, such a tax assessment may be relevant to the principles-based analysis. The guidance also clarifies that, while an issuer can rely on this safe harbour by reviewing a consumer report from one of the US nationwide consumer reporting agencies, a consumer report from a non-US consumer reporting agency would not satisfy the safe harbour.
The SEC staff also issued guidance on the definition of "accredited investor." The guidance clarifies that, for purposes of the income test, where a purchaser's annual income is not reported in US dollars, the issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for that year. Under the net worth test, assets in an account or property held jointly with a person who is not the purchaser's spouse may be included in the calculation for the net worth test, but only to the extent of his or her percentage ownership of the account or property.
The compliance and disclosure interpretations are available
at:
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#260.35.
http://www.sec.gov/divisions/corpfin/guidance/securitiesactrules-interps.htm#255.48.
Our related client publication on the rule changes allowing
general solicitation in private placements under Rule 506 of
Regulation D is available at:
http://www.shearman.com/en/newsinsights/publications/2013/07/sec-adopts-rule-changes-allowing-generalsolicit__.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
