Federal Securities Law: Regulation D: The Jobs Act
Title II of the JOBS (Jumpstart Our Business Startups) Act of 2012 required the SEC to remove the prohibition on “general solicitation or general advertising,” which has been part of Regulation D since that regulation was adopted in 1982, so long as the purchasers in an offering were all accredited. Accordingly, the SEC adopted Rule 506(c) of Regulation D, which essentially is a second kind of offering under Rule 506 of Regulation D.
So there are now these two different types of offering under Regulation D's Rule 506:
- Rule 506(b) offerings, which cannot use general solicitation, in which up to 35 non-accredited investors can participate; and
- Rule 506(c) offerings, which can use general solicitation, but must be sold to accredited investors only.
The JOBS Act further directed the SEC to require issuers to take “reasonable steps to verify” that all of the purchasers are accredited. Accordingly the SEC adopted rules to provide a non-exclusive safe-harbor to comply with this requirement.
The SEC Staff recently issued guidance related to (1) the “reasonable steps” safe harbors for verifying accredited investor status under Rule 506(c) and (2) the accredited investor definition in Regulation D. The guidance from the Staff establishes narrow Rule 506(c) accredited investor verification safe harbors.
Where a safe harbor is not available, the guidance also makes clear that issuers can satisfy the verification requirement under the principles-based verification method, under which issuers must consider all relevant facts and circumstances and additional verification steps may be necessary where reasonable doubt remains about a purchaser's accredited investor status.