Two weeks ago, we celebrated the SEC’s adoption of Title II of the JOBS Act, which lifted the ban on general solicitation and paved the path towards greater capital accessibility for entrepreneurs. Today we report the SEC’s final rule amendments expected to become effective on September 23, 60 days after the Federal Register publication date.
1. Verifying accreditation status of investors
Among the final amendments are non-exclusive guidelines that issuers can follow to verify investor accreditation status:
- Income: Review copies of IRS forms that report the investor’s income for the two most recent years. In addition, obtain the investor’s written confirmation that he or she has the reasonable expectation of reaching the income level necessary to qualify as an accredited investor.
- Net Worth: Review documentation dated within the prior three months that show the investor’s assets and liabilities and obtain a written confirmation from the investor that all liabilities necessary to make a determination of net worth has been disclosed.
- Third-Party Verification: Obtain written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that such person has taken reasonable steps to verify that the purchaser is an accredited investor within the prior three months
- Grandfathering: For an investor who has invested in an issuer’s Rule 506 offering as an accredited investor prior to the Rule 506(c) effective date and remains an investor of the issuer, the issuer only needs to obtain a confirmation from the investor that he or she remains qualified as an accredited investor.
2. Bad actor disqualification
Additionally, the SEC is adopting amendments to disqualify issuers from relying on Rule 506 if “felons and other bad actors” are participating in the offering. Causes for disqualification include these “bad actor events”:
- Securities-related criminal convictions, injunctions and restraining orders, disciplinary and other orders issued by the SEC and other regulatory and government agencies
- The issuer must also provide to each purchaser, a reasonable time prior to sale, a description in writing of any matters that would have triggered disqualification.
In addition to the final rule amendments, the SEC has proposed additional rules that serve to monitor general solicitation practices and further protect investors:
- Form D: Issuers are required to file a Form D with the SEC at least 15 days before they engage in general solicitation. The proposed rule also requires issuers to file an amended Form D within 30 days of the successful conclusion or termination of any Rule 506 offering to update the information in the initial Form D and to announce that the offering has ended. Form D would also include additional disclosure requirements regarding the issuer, investors, and offering.
- Legend requirements: All general solicitation materials would be required to include cautionary legends and disclosures.
- Submission of general submission materials: All general solicitations materials would have to be submitted to the SEC on a temporary (2-year) basis. The materials would be required to be submitted no later than the date of first use and would not be made publicly available.
The SEC’s adoption of the final rules marks a turning point in the way entrepreneurs will be able to reach investors. With proper caution and prudence, these new advertising techniques are poised to change and improve the way startup finance is conducted for burgeoning companies.
Mark your calendars and prepare for September! Big changes are on the way.
By Sang Lee