506(c) offerings
As you could probably guess from the last post, it is not actually that easy to qualify for a 506(b) exemption. However, all is not lost if you do not have pre-existing, substantive relationships with accredited angel investors eager to invest in early stage companies.
If you don’t, or if there is some other reason you do not think the 506(b) rules work for you, then since 2012 you have had another approach – a 506(c) offering.
The JOBS Act of 2012 required the SEC to create a path to allowing issuers to use general solicitation but also remain exempt from registration. The result was Rule 506(c) and the associated rules that were finalized in 2015.
Rule 506(c) says you can raise money via general solicitation (advertising to anyone) as long as you only take money from accredited investors, and that you take “reasonable steps” to verify that everyone who invests is, in fact, accredited.
This is a trade-off: you can advertise, including to people you do not know (or with whom you only have a new, recent, and/or tenuous relationship); in return, you need to be certain that whoever buys the securities are accredited.
What are those “reasonable steps”?
Unfortunately, a form where investors can check a box to declare they are accredited (called self-certification) is not enough. (For example, in the enforcement example we will discuss in the next post, “Despite collecting accredited investor questionnaires and representations from investors certifying to their accredited investor status, Respondent did not take reasonable steps to verify that investors in the Fund were accredited investors.”)
The SEC outlines are a few acceptable “reasonable steps” verification:
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Collect and review the investor’s tax documents to verify the income for the last two years – and get a written representation from them that they have a reasonable expectation of reaching the required income this year too
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Review both a credit report for liabilities and bank, brokerage, or other statements for assets – to verify the overall net worth requirement
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Get a letter written by a professional that knows the investor well – a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a registered CPA – that says the investor is accredited
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Use a third-party platform that does this work for you
We’ll cover 506(c) offerings further in the next post too.