Private offerings are increasingly attractive options for companies raising funds ever since Regulation D was amended to add Rule 506(c) which permits use of general solicitation methods in certain private offerings. The ability to advertise broadly adds another toolbox to your search for investors: However, to take advantage of Rule 506(c), all purchasers in the offering must be accredited, among other requirements.
What is an “accredited investor?”
The definition of “accredited investor” was amended in 2020 to expand the categories of investors eligible to participate in certain Regulation D offerings. A review of the definition reveals certain qualities that the SEC considers in designating an accredited investor. These include:
- Assets: Individuals, groups or companies that meet net-worth and/or income requirements
- Knowledge: Certain persons who have the requisite ability to assess an investment or who attain specified certifications
- Institutions: Certain institutions, such as banks and some investment companies, provided they meet necessary statutory requirements
For many Rule 506(c) offerings, the purchasers are individual investors or entities owned by individual accredited investors. Some individuals qualify based on wealth, such as those with net worth of over $1,000,000 excluding their primary residence, or individual income over $200,000 per year for the past two years or over $300,000 with a spouse, and a reasonable expectation of the same in the current year. Others qualify because they meet standards for the ability to assess an investment opportunity or they have a qualifying regulatory certification.
Why are 506c offerings a good way to reach individual purchasers?
With a Rule 506(c) offering, you may rely on email, social media, the internet or other general solicitations to reach investors. This can be an effective technique to mine your contacts and connections for potential investors.
Verification of accreditation
One key to any 506(c) offering is that the issuer must take reasonable steps to verify that each investor is accredited. We will cover this process next week when we wrap up this series on 506(c) offerings.