Regulation D (Reg. D), under the 1933 Securities Act, provides issuers with exemptions from security registration. Most offerings utilize Rule 506(b) to sell securities to a limitless number of accredited investors and a maximum of 35 non-accredited investors, provided no general solicitation occurs. Rule 506(c) accredited investor exemption provisions created under the JOBS Act allows general solicitation, provided the proper steps are followed.
Private fund managers in the digital asset arena have been increasingly utilizing this exemption. Within this arena, managers can solicit funds for their offerings in a more general and broad manner than private fund managers can in a traditional securities arena.
Rule 506(c) Exemption
Per Rule 506(c), issuers may engage in general solicitation without registering their securities under the Securities Act under the following conditions:
- All purchasers are accredited investors.
- The verification of all investors’ accredited status has occurred through “reasonable steps” as long as the securities issuers have no previous knowledge that the investors are non-accredited.
- Certain rules involving bad actor disqualification, resale of securities restrictions, and integration are followed.
Issuers may generally solicit and advertise their securities offerings if these requirements are met and remain compliant with Reg. D.
The second requirement mentioned above under Rule 506(c) accredited investor exemption obligates an issuer of securities to take proactive steps to confirm the accredited investor status of an investor. When verifying based on income, common verification methods include:
- Reviewing W-2s or other related tax forms that apply to the previous two years
- Having certain parties, such as a licensed attorney or registered CPA, confirm that the investor is an accredited investor.
- Receiving a written representation from the investor that the investor reasonably expects to have accredited investor status in the current year
Powerful Benefits of the Exemption
Rule 506(c) allows no limit on the dollar value raised from individual investors and no limit on the total dollar value that may be raised. This Rule allows issuers to expand their investor base significantly.
Under Rule 506(c), even though general solicitation is allowed, issuers must follow all required securities regulations, such as the anti-fraud obligations under the 1940 Investment Advisers Act, as amended. Suppose you are in the market to issue a securities offering under Rule 506(c) accredited investor exemption, it is important to understand the applicable requirements, which may be explained by an investment adviser or attorney.
If you need to verify the accredited status of potential investors of your securities offering, or if you need to verify your status as an accredited investor, contact an experienced accredited investor verification service today.
