Changes to Private Placements Under the JOBS Act

When the JOBS Act was enacted on April 5, 2012, it marked a significant change to private placement, resale exemptions and ‘safe harbors’ that could be used by both investors and issuers. The aim of the JOBS Act was to ease some securities regulations in order to make it easier for small business to raise capital. In fact, the legislative roots of this bill are in the fertile soil of crowdfunding activities.

Crowdfunding vs. Private Placements
Crowdfunding and private placements are on opposite ends of the investment spectrum – at least they were. Crowdfunding is the act of raising capital by making the opportunity known publicly to as many potential investors as possible. Private placements have traditionally been non-public offerings where securities are sold to a small(er) number of select investors.

Rule 506(c) and General Solicitation
The specific section of the JOBS Act that has changed the landscape for private placements is Title II, which became effective September 23, 2013 as Rule 506(c) of Regulation D. It has provided exemptions that create scenarios under which private placements might be offered through general solicitation, or advertising, to the general public. This is permissible, without registering with the SEC, if:

* Everyone who purchases the securities is an accredited investor; and
* ‘Reasonable steps’ have been taken by the issuer to verify that purchasers are accredited investors.

Reasonable Steps
Reasonable steps, according to the SEC, include the following verification methods:

* Look at IRS forms to verify income. Accredited investors should have $200K in annual income for two previous years, $300K when combined with a spouse, and a reasonable expectation of the same in the current year.
* Verify net worth by reviewing consumer credit reports, bank or brokerage statements, securities holding statements, tax assessments, or appraisal reports.
* Obtain writing confirmation from a registered broker, investment advisor, CPA or attorney that the investor is an accredited investor.

What if a generally solicited private placement were to be offered only to those that the issuer believed to be accredited investors? Would the issuer avoid having to take these reasonable steps to verify accreditation? No. The exemption available under Rule 506(c) wouldn’t be met unless the issuer took these reasonable steps in every case. If an issuer generally solicits anyone, they must verify everyone.

Contact today to learn more about a fast, secure and confidential way to verify accredited investor status.

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