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On July 10, the SEC voted 4-1 to lift the ban on general solicitation for private securities deals. Earlier today, the final rules were published in the Federal Register, and will go into effect in 60 days – on September 23.
The rules create a new kind of offering, called 506(c), which allows companies, hedge funds, and various other asset managers to advertise private securities offerings to the public. While the broadcasting call can go out to the general population, the SEC specified that issuers will need to take “reasonable steps to verify” that only accredited investors are involved in the actual purchase.
Accredited investors, generally, are individuals who have a net worth, or joint net worth with their spouse, of $1 million (excluding primary residence); or have an income of $200,000 per year ($300,000 with their spouse) in each of the past two years. There are nearly nine million households in the U.S. that fit this definition, though, as David Drake points out, there are only about 270,000 active accredited investors.
The SEC has included four safe harbors in the rules that would satisfy the “reasonable steps” requirement. If verifying net income, an issuer would review an individual’s IRS documents (like a W2 or 1099 form) for the past two years, as well as a written statement from the person saying he or she expects to meet the income requirement in the current year.
In verifying net worth, an issuer would review statements of securities holdings, certificates of deposit, tax assessments, and third party reports, as long as the records are no more than three months old. The issuer would also need a credit report to review liabilities, and a written statement that all liabilities have been disclosed.
Issuers can also use third party verification of accredited status from a registered broker-dealer, investment adviser, or a licensed attorney or certified public accountant; the third party verification needs to have taken place within the last three months. Finally, the SEC states that existing investors who have invested in a company’s previous 506(b) offerings as verified accredited investors can also invest in the 506(c) offerings.
On July 10, the SEC also passed the so-called bad actor rule that disqualifies securities offerings involving felons and other “bad actors.” These rules were also published today and will also go into effect on September 23. You can find those rules here.
The proposed rules around the new, more demanding Form D for 506(c) offerings were also published today; these have a comment period of 60 days, and it’s unclear when they will be finalized. This means there is likely to be a period of time between when issuers can begin advertising to the public, and when they need to file the new Form D. You can find the proposed rules here.