Last week, Corp Fin issued guidance about how to verify accredited investors in two different forms. It issued two CDIs on the topic, as well as a no-action letter that goes into more detail. [As noted in this blog by Cooley’s Cydney Posner, these CDIs were among two dozen that the staff issued, modified or withdrew.]
CDI 256.35 clarifies that the list of verification methods in Rule 506(c)(2)(ii) is “non-exclusive and non-mandatory” that is based on the facts and circumstances and that an issuer should consider these three factors:
- Nature of the purchaser and the type of accredited investor that the purchaser claims to be.
- Amount and type of information that the issuer has about the purchaser.
- Nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.
CDI 256.36 provides a bright-line test that addresses whether minimum investment amounts can factor into the “reasonable steps to verify” requirement. The related no-action letter provides more gloss about the relevant conditions that increase the likelihood that a purchaser is accredited and provide evidence that reasonable steps were used to verify, so long as a minimum investment amount was triggered.
This guidance modernizes Rule 506(c) by acknowledging investment size as a credible indicator of accredited status. Here’s a summary of some of the key points and implications:
1. Issuer Benefits and Obligations:
– Efficiency for Issuers: Reduces administrative burden by simplifying verification, avoiding intrusive financial document requests.
– Investor Pool Expansion: May attract accredited investors wary of sharing personal data, potentially broadening participation.
– Risk Mitigation: High thresholds act as a filter, assuming only those with substantial resources would commit such amounts. The anti-loan representation addresses concerns about leveraged investments.
– No Actual Knowledge or Red Flags: Issuers must not have actual knowledge contradicting the investor’s accredited status. No red flags (e.g., indications of third-party financing) can be present.
2. High Minimum Investment Thresholds
– Natural Persons: Minimum investment of $200,000.
– Legal Entities: Minimum investment of $1 million.
– These thresholds serve as a proxy for accredited status, assuming such investments imply sufficient wealth or income.
3. Written Representations:
– Investors must provide written confirmation of their accredited status under Rule 501(a).
– They must attest that the investment is not financed by third-party loans specifically for this purpose.
Authored by
Broc Romanek