In letters to the SEC, securities officials in Ohio
and Massachusetts
urged the Commission to adopt regulations under the JOBS Act that enhance the
verification process for Regulation D accredited investors and avoid a
check-the-box approach. William Galvin, Massachusetts Secretary of the Commonwealth, asked the Commission to establish as a
safe harbor or best practice the use of an independent party that would verify
the accredited status of potential investors. Ohio Securities Commissioner
Andrea Seidt saidn that a check-the-box approach to investor self-verification
of accredited status will not suffice because the Title II issuer must have
more than a belief that a prospective purchaser is accredited.
Title II of the JOBS Act modifies
the exemption provided under Rule 506 of Regulation D to eliminate the
prohibition against general solicitation or general advertising provided that
all purchasers of the securities are accredited investors. SEC regulations implementing
this provision must require the issuer to take reasonable steps to verify that
purchasers of the securities are accredited investors, using such methods as
determined by the Commission.
The requirement that investors in
offerings under the new Rule 506 exemption must be accredited is the sole
substantive protection built into the exemption, noted Secretary Galvin. In a
Rule 506 offering that is limited to accredited investors, he noted, other
protective requirements are waived. For instance, there is no information
requirement (no mandated disclosures to investors); no financial statement
requirement; no requirement that investors must be sophisticated; and no SEC or
state review of either the offering materials or the terms of the offering. Going forward, the Regulation D definition of
accredited investor will serve as the sole determinant of whether an investor
can invest in unregistered publicly-offered securities transactions.
Because the language of the new Rule 506 exemption calls for
verification, reasoned Mr. Galvin, it is clear that Congress intends this
responsibility to be a step up from the current requirement that issuers have
reasonable belief that investors are accredited. Other language in the JOBS Act
also demonstrates that verification is a heightened requirement for issuers,
For example, the Section 201(a)(2)
language relating to sales to Qualified Institutional Buyers under Rule 144A
requires only "reasonable belief' that a purchaser is a QIB. This
contrasting language makes it clear that Congress's use of the term
"verify" is purposeful, and the Commission should make the
verification requirement robust and meaningful.
While there are some who advocate that the verification process should
be as quick and frictionless as possible and regulatory standards should be
relaxed, he urged that the verification requirement be construed to actually
protect non-accredited investors from risky unregistered offerings
The Secretary
said that verification should require issuers to determine whether investors
are accredited based on documentary evidence, rather than just
representations from potential investors. The statute does not call for
investors to simply certify or attest that they are accredited or have a given
level of income or net worth. He urged the Commission not to adopt rules that
would reduce the requirement to that level since, in his view, permitting
issuers to accept mere representations from investors would allow them to rely
on unverified assertions.
He also suggested that issuers
and other persons carrying out the verification process should be required to
designate a key person who will have the responsibility to assure that
verification of accredited status is done properly. The key person should be
trained to properly verify that potential investors are accredited. If the
verification is not done properly, there must be consequences, he emphasized,
thus the key person, the issuer, and the platform should be subject to strict
sanctions, including fines and potential disqualification from participating in
future exempt offerings.
Since many issuers and platforms
may not wish, or feel they are not competent, to verify the accredited status
of potential investors, he urged the Commission to establish as a safe harbor
or best practice the use of an independent party that would verify the
accredited status of potential investors. This work could be carried out by
qualified broker-dealer firms, banks, or other financial institutions, which
have the expertise to carry out this verification and which have procedures in
place to protect investors' personal financial information.
The Ohio
Securities Commissioner noted that Congress gave issuers greater
responsibilities, including a key and active role in taking reasonable steps to
verify that each investor is accredited. Title II expressly requires the issuer
take multiple, active steps to actually verify accredited status, whereas
completing a check-the-box questionnaire entails only a single, passive step
taken by the purchaser. As for what multiple, active steps the Commission
should require Title II issuers to take, the Ohio Commissioner recommended that
issuers review, confirm and maintain appropriate records of the accredited
investor’s level of sophistication in a similar fashion to the requirements for
sophisticated, non-accredited investors in Rule 506(b)(2)(ii).
The issuer should also
review financial statements and/or tax returns evidencing actual satisfaction
of accredited investor thresholds; and in the case of accredited investor entities,
the issuer should review the accredited investor status of equity owners,
and/or review regulatory letters or certificates approving or confirming the
entity’s status as a bank, insurance company, registered investment company,
business development company, or small business investment company. More
broadly, in order to enjoy the benefits of general advertising and general
solicitation in an exempt public offering, thereby exposing more of the public
to risk, said the Ohio Securities Commissioners, issuers must take a greater
and more active role in ensuring that risk is limited to accredited investors
who are better able to bear such risk.