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January 2015 Archives

New Accredited Investor Verification Under 506(c) of Regulation D

Reasonable Steps to Verify Accredited Investor Status. Rule 506(c) of Regulation D as adopted contains both a general requirement that issuers take "reasonable steps" to verify that purchasers are accredited investors, as well as a non-exclusive list of methods that can be used to satisfy this requirement. As originally proposed, Rule 506(c) of Regulation D did not mandate a particular verification process or even identify a set of "safe harbor" procedures that would be deemed to be "reasonable." Instead, the proposing release identified certain factors that issuers would need to consider in determining whether their verification process is "reasonable." In the release adopting the final rules, the SEC retained the "principles-based" method of determining whether the verification steps taken by an issuer were reasonable, but supplemented it with four specific verification methods that will be deemed to constitute "reasonable steps" to verify a purchaser's status unless the issuer or its agent has knowledge that the particular purchaser is not an accredited investor. Under the "principles-based" method, the extent to which an issuer needs to verify the accredited investor status of a proposed purchaser is to be determined based on the facts and circumstances of the particular purchaser and transaction. The adopting release identifies the following as among the factors that an issuer should consider in determining whether the verification steps taken in any particular case were "reasonable." 

Why Some "Finders" May Not Be Keepers

Firms may regret their decision to hire finders that are not registered broker-dealers, or individuals that are not associated with registered broker-dealers, to connect them with potential investors. Section 15(a)(1) of the Securities and Exchange Act of 1934 states that non-registered persons who use any "instrumentality" to "induce" the purchase or sale of a security are unlawful.

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