The SEC Eases Restrictions on Private Offerings
The SEC recently took a significant step forward in facilitating the marketing of private investment opportunities, such as start-up and early-stage company stock and debt instruments, among other things. In the past, privately offered securities could not be marketed in a “general solicitation,” meaning through any public means. The SEC had made changes to private placement regulations to permit general advertising and general solicitation so long as greater steps were taken to ensure that the ultimate investors were “accredited investors,” meeting sufficient net worth tests to qualify to invest in private offerings. The SEC issued further guidance recently that relaxed the additional steps required to ensure accredited investor status when general solicitation is used.
Previously, in order to market a private placement, or non-public offering, through general solicitation or advertising, a company would have to obtain a letter from an investor’s accountant or attorney attesting that the investor has at least $1 million in net worth (excluding the value of his or her home) or $200,000 in income ($300,000 if considered jointly with a spouse) and the expectation of the same income in the current year, or (2) the investor’s tax returns for the prior year (or the prior two years if the income prong of the test was relied upon). This option was almost never used because investors were fundamentally unwilling to provide a company with their full tax return, evidencing the income or net worth standards, and service providers such as accountants and attorneys were unwilling to take on the liability of making the required attestation; accredited investor verificationwas and remains a novel attestation for an attorney or CPA, and not one they are readily willing to make for many clients.
The new SEC guidance, in the form of its FAQs on private offerings, states that when an issuer is conducting a private offering, then, depending on the facts and circumstances, the issuer may be able to reasonably conclude that reasonable steps to verify “accredited investor” status have been taken if the offering requires a high minimum investment amount. A related no-action letter provides additional detail regarding relevant conditions that would increase the likelihood that a purchaser is accredited. Under the no-action letter, SEC Staff agreed that an issuer could reasonably conclude that it has taken reasonably steps to verify “accredited investor” status if:
- the purchaser agrees to make a minimum investment of $200,000 (in the case of a natural person) or $1,000,000 (in the case of a legal entity),
- the purchaser provides written representations as to their “accredited investor” status and the fact that their minimum investment amount is not financed in whole or in part by any third party, and
- the issuer has no actual knowledge of any facts that indicate that any purchaser is not an accredited investor or that the minimum investment amount of any purchaser is financed in whole or in part by any third-party.
Thus, the certification by an attorney or CPA and/or an investor providing tax returns is no longer necessary in order to more broadly market a private placement. An issuer can rely on a “self-certification,” which immensely reduces the burden of determining whether an investor is reasonably likely to be accredited and able to invest in the opportunity. This is another means by which the SEC and the Administration are easing the raising of capital through the removal of administrative and regulatory barriers.
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