The SEC just finished its open meeting to consider a proposed rule, which the Commission passed with a 4-1 vote. To be clear, the SEC only approved proposing the rule. Here are the main takeaways from the proposal:
- The current 506 exemption will remain in place, and 506(c) will provide for the new rule, which lifts the ban on general solicitation.
- The SEC is proposing a flexible “facts and circumstances” test to determine whether offerors took reasonable steps to verify the accredited status of an investor.
- Form D will be amended to include a check box for 506(c) offerings, enabling the Commission to track the quantity of 506(c) offerings being made.
- Almost all of the “protective provisions” suggested by commenters are absent from the proposed rule. The absence of sufficient protections was the source of the one vote (Commissioner Aguilar) opposing the proposed rule.
The biggest decision was the decision not to include specific instructions or details on what satisfies the “reasonable steps to verify the accredited status of an investor” requirement. On the one hand, the flexible approach proposed makes sense because the facts and circumstances around each offering can vary widely. But on the other hand, it might not be the most pragmatic approach: because the proposed rule provides no direction whatsoever, I suspect many responsible offerors will do more than they need to, to satisfy the rule, which will, in turn, result in additional costs. It’s an interesting solution to a challenging problem. It is my hope that the final rule would contain some non-exclusive safe harbors to the verification process. The safe harbors would provide certainty where applicable, and an example of what the SEC expects of offerors when it comes to the verification process.