Per Regulation D, Rule 506(c) from the Securities and Exchange Commission, issuers may conduct general solicitation without registering their securities if the following criteria are met:
- All investors must be accredited, per Regulation D requirements.
- The issuer must perform reasonable steps verification to verify the accredited status of investors, provided the issuer has no previous knowledge that the investor is not accredited.
- Certain securities resale restrictions, integration, and bad actor disqualification requirements are followed.
The issuer may broadly advertise and solicit if it meets the above requirements.
Reasonable Steps Verification
Regarding the requirement to take the proactive step to verify the accredited status of an investor, there is an extensive list of recommended methods in the statute. One common method when verifying based on the investor’s income is to review tax forms such as W-2s for the past two years and obtain a representation in written form that the investor’s income for the current year is reasonably expected to remain the same or increase. Another method commonly used is utilizing a third party such as a licensed attorney or registered CPA to verify the investor has accredited investor status.
Rule 506(b) to 506(c) Conversion and Reasonable Steps
Many investors and their managers seek to change their securities offering from a Rule 506(b) offering to a Rule 506(c) offering. There are some requirements to be fulfilled to make this conversion to a 506(c) offering. In order to do this, the private fund must:
- Modify the fund’s offering documents.
- File a new Form D with the SEC that confirms its dependence upon Rule 506(c).
- Use prescribed methods of verification for future investors in the fund.
Also, if the private fund of the sponsor depended previously on Rule 506(b) and complied with all of the necessary requirements laid out by Rule 506(b), the fund is only required to perform reasonable steps verification to verify if future investors are accredited, not current investors.
However, additional verification is necessary if current investors make new investments in the fund. For this reason, a best practice recommendation is to conduct reasonable steps to verify the accredited status of all current fund investors.
