As I discussed in my first edition of Cronin’s Corner, the SEC has made major changes to private placements by eliminating the ban on general solicitation and advertising for Rule 506 offerings to “accredited investors”. This really is a significant event for growing and emerging businesses. The new rules will take effect in September 2013. I expect to see Internet driven solicitation and extensive use of social media (i.e. LinkedIn, Facebook) as solicitation tools.
Historically, companies established accredited investor status by having investors check a box indicating compliance with the accredited investor criteria in a subscription agreement. For example, a net worth of over $1 million, exclusive of primary residence, or joint annual income of over $300,000 in the most recent taxable year. Under the new rules, issuers and placement agents will have a heightened level of responsibility for determining accredited investor status. Copies of brokerage statements, tax returns or personal financial statements prepared by the investor’s CPA may be required to establish accredited investor status.
There will be a new Form D, which will require a filing with the SEC before the first offering is made, instead of after as is now the case, and the information required by the new Form D will be more detailed with updating more frequent. This may be problematic and is akin to the issues we sometimes face in New York blue-sky filings, which is a presale notice state.
The evolution of Regulation D is impressive, and the SEC should be congratulated for this advancement. In 1986, under the supervision of Mickey Beach and Richard Wolfe, I had the privilege of working on early interpretations of Regulation D, as a staff attorney at the SEC in Washington, D.C. My personal view is that the definition of an “accredited investor” will become more restrictive in the future, i.e. higher income/net worth standards and eliminating retirement plan assets for net worth calculations.
If you care to, attached is a link which will take you to the 116 page Adopting Release of the SEC as published in the Federal Register (SEC Release No. 33-9415) relating to these amendments.