Committee: SEC Should Amend “Accredited Investor” Definition for Rule 506(c)

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A recommendation to amend the definition of “Accredited Investor” was one of several recommendations made on October 15, 2012 by the SEC’s Investment Advisory Committee (“Committee”) regarding the proposed Rule 506(c) to lift the ban on general advertising and general solicitation in private securities offerings.  The Committee made it clear that if the new JOBS Act provisions were introducing a regulatory climate in which investors must fend for themselves, that there be some further requirements that investors have the financial sophistication to do so.

Some of the other recommendations made by the Committee for the proposed Rule 506(c) offerings included that the SEC:

  • 1) require issuers to file all offering materials with the SEC;
  • 2) take steps to ensure that any performance claims used in the general solicitation materials are based on appropriate performance reporting standards;
  • 3) require the filing of a new Form GS or revised Form D that will enable the SEC and state regulators to monitor Rule 506(c) offerings, and
  • 4) adopt a safe harbor that provides “clear and enforceable standards” for verification, as opposed to reasonable belief, of accredited investor standards.  In an August 2012 release, the SEC had endorsed that issuers in Rule 506(c) offerings take “reasonable steps” to verify accredited investor status.

The Committee noted that there has “long been a debate regarding the adequacy of the definition of ‘accredited investor’ which currently relies on asset and income tests.”  The Committee noted that the JOBS Act places greater reliance on investors to fend for themselves under the Federal securities laws, and recommended that “it seems prudent to explore alternative formulations of the accredited investor standard.” The Committee recommended that the SEC amend the definition to require some consideration of the investor’s actual investment sophistication (with the exception of situations in which a purchaser representative is used).

The Committee concluded by stating that it believes the SEC has clear authority to amend the accredited investor definition at this time, except with regard to the net worth component of the definition which the SEC is precluded from acting until 2014.

The link to the Committee’s full seven recommendations are set forth under our link: Rule 506(c) news feed.



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