SEC Issues Interpretive Advice About Verification Safe Harbors Under Rule 506(c)

Background

The availability of the private placement exemption under SEC Rule 506 depends in large measure upon determinations that purchasers are "accredited investors" under the rules. Where there is no general solicitation, Rule 506(b) applies, and accredited investors have been able to self-certify their status, typically by checking a box about the basis for their accredited investor status in the subscription documents prepared by the issuer of the securities.

However, if the Rule 506 transaction involves general solicitation, new Rule 506(c) is applicable, and issuers are required to comply with an accredited investor verification process that requires more than the simple completion of an investor questionnaire. In explaining its position on verification, the SEC Staff has generally been quite strict about application by issuers of the four non-exhaustive "safe harbors" which include, among other things, the use of tax records to verify investor income,