In my earlier post on the liberalization of general solicitation and advertising in Rule 506 offerings (to be effective September 23, 2013), I briefly mentioned the more stringent requirement, when general solicitation or advertising is used, for verifying each investor’s status as an “accredited investor.”  I’d like to get into more detail about what that entails.

Current practice is for companies conducting Rule 506 offerings to have prospective investors check a box on a simple accredited investor questionnaire, and that is generally sufficient to establish the investor’s accredited investor status without further investigation by the company.  Going forward, Rule 506 offerings that are not accompanied by general solicitation or advertising will continue to operate in the same manner.  However, when general solicitation or advertising is used, the company must take “reasonable steps” to verify each investor’s accredited investor status.  This is a “principles-based” standard that is dependent on the facts and circumstances of the investors and the offering, but clearly a checked box on a questionnaire will not suffice.

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Generally, the terms “public offering” and “private offering” have the meanings that the words imply: a public offering of securities is made to hundreds or thousands of investors who may have no connection to the company, and a private offering is made to a select group of investors known to the company or its broker. Historically, private offerings made under widely-used SEC Rule 506 (part of Regulation D) were required to be completed without the use of any “general solicitation or general advertising.” However, a provision of the federal JOBS Act, enacted in 2012, blurred the lines between private and public offerings by permitting general solicitation or advertising in Rule 506 offerings, subject to conditions imposed by the SEC. The SEC has now done its imposing, establishing rules to become effective in September 2013.

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