Relying on Rule 506(c) for securities offerings allows companies to solicit investments from accredited investors through public channels. However, this comes with the obligation to take reasonable steps to verify investors’ accredited status. Here, we’ll explore the features and methods of reasonable steps verification under Rule 506(c), explaining some of the intricacies of this process.
Rule 506(c) Overview
Rule 506(c) enables companies to advertise and solicit investments publicly, provided all investors are accredited. This exemption streamlines the fundraising process but requires thorough verification of investors’ accredited status. To comply, issuers must perform reasonable steps to ensure investors meet the accredited criteria, as defined by SEC regulations.
Verification Methods
Rule 506(c) offers flexibility in verification methods, allowing issuers to choose approaches tailored to their specific circumstances. Some common methods include:
Document Review: Reviewing financial documents such as bank statements, tax returns, or brokerage statements to verify income or net worth.
Third-Party Confirmation: Obtaining written confirmation from registered professionals such as SEC-registered investment advisers, broker-dealers, attorneys, or CPAs, validating the accredited status of investors.
Investor Certification: Requesting investors to provide a signed statement or certification confirming their accredited status, supplemented by prior verification methods conducted within the last five years.
Principles-Based Verification
Rule 506(c) adopts a principles-based approach to verification, emphasizing an issuer’s objective assessment of the reasonableness of the verification methods used. Issuers have flexibility in selecting verification methods, guided by the specific context of each offering and investor.
Diligence in Verification
Thorough record-keeping of verification methods used for each investor is crucial for transparency and compliance. Issuers should line up verification efforts with SEC standards and exercise prudence in adapting verification methods to the unique circumstances of the offering.
Navigating the verification requirements of Rule 506(c) demands careful consideration of available methods and compliance obligations. By understanding the features of reasonable steps verification and utilizing appropriate methods, issuers can conduct offerings effectively while ensuring regulatory compliance.
