Corporate Finance & Securities

The Definition of “Accredited Investor” and Why It Matters

The definition of accredited investor is a topic we’ve touched on briefly in several posts throughout the years, but today’s post dives specifically into the definition of “accredited investor” as defined in Rule 501 of Regulation D of the Securities Act of 1933. We’ll also point out why it’s important for you to understand who is considered an accredited investor.

Definition under Rule 501

The SEC states that the definition of accredited investor is “intended to encompass those persons whose financial sophistication and ability to sustain the risk of loss of investment or ability to fend for themselves render the protections of the Securities Act’s registration process unnecessary.” The definition of accredited investor under Rule 501 includes several types of individuals and...

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Corporate Finance & Securities

Hedge Fund Accredited Investors

We are continuing our series on understanding hedge funds; we will be discussing the definition of “accredited investors” and why it is important to your hedge fund.

As a brief primer, you should know that all hedge funds considering a securities offering must comply with federal and state securities laws. The Securities Act of 1933 and 1934 (“Acts”) were put in place to protect investors after the market crashed in 1929, and prior to this point in time, securities were chiefly governed by state law (which still applies in may situations). The two main objectives of the Acts were: 1) to require that investors receive significant (or “material”) information concerning securities being offered for public sale; and 2) to prohibit deceit, misrepresentations, and other fraud in...

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Corporate Finance & Securities

SEC Issues Guidance on Securities Offerings Under Rule 506(b) and Rule 506(c)

Last Thursday, the SEC issued Compliance and Disclosure Interpretations (C&DIs) related to securities offerings under Rule 506. Specifically, the C&DIs address the issue of Rule 506 offerings that began prior to September 23, 2013, which was when the new Rule 506(c) exemption became effective.

As we’ve discussed in prior articles, as of September 23, 2013, companies can now use general solicitation to raise funds from investors under the new Rule 506(c). The new Rule 506(c) was detailed in the Securities Act Release No. 9415. In the release, the SEC pointed out that for offerings that had already commenced under Rule 506(b) (the classic Rule 506 that does not allow general solicitation), an issuer could choose to continue the offering under Rule...

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Corporate Finance & Securities

Helpful Guide for General Solicitation and Start-up Fundraising

Joe Wallin, editor at Startup Law Blog, recently collaborated with Lauren Hakala, editor at Practical Law Company, on a guide that discusses the law, guidance and open questions on what activities constitute general solicitation or advertising in the context of transactions relying on the Rule 506 safe harbor from Securities Act registration. For those interested in learning more about the changing landscape of startup capital raising, you should check out this guide.

Specifically, the guide provides information about:

Implications of Using General Solicitation Public Website, Social Media and Print or Broadcast Mentions of Offerings Online Funding Platforms Product Advertising and Business Announcements Demo Days, Pitch Events and Other Meet-Ups

Check out the full article here.

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Corporate Finance & Securities

SEC Examining Accredited Investor Standard

Last Friday SEC Chair Mary Jo White explained in a letter responding to Representative Scott Garrett, that the SEC “has begun a comprehensive review of the accredited investor definition.” Mr. Garrett had written to Ms. White at the end of October, asking for a review of the accredited investor definition as mandated by Dodd-Frank. Ms. White’s correspondence to Mr. Garrett suggests that a major overhaul of the accredited investor standard could be in the works.

Letter From Chair White by Steve Quinlivan

Background Generally the Rule 506 private placement market is restricted to accredited investors. As Mr. Garrett...

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Corporate Finance & Securities

Early Numbers Show that Companies are Using Rule 506(c) to Raise Funds

If you are as curious as we are about the consequences of the new Rule 506(c), I’ve got some good news for you. There’s some early data that points to how issuers are taking advantage of the recent SEC rule changes.

Keith Higgins, the newly appointed director of the SEC’s Division of Corporate Finance, recently commented on the preliminary effects Rule 506(c) on the investment landscape. For those of you that have been following the JOBS Act and its various moving parts, you are well aware of Rule 506(c) and the fact that the SEC lifted the ban on general solicitation for securities offerings. For the rest of you, here’s a primer on Rule 506(c) and the lifting of the ban...

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Corporate Finance & Securities

A New Way to Solicit Investment in Private Funds, 506(c) “Crowdfunding”

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As of September 23, managers of hedge funds and other types of private funds can publicly solicit investment for their funds. As part of the JOBS Act, there’s a new way to conduct “private placements”.

Private placements are the offering of securities without the filing of a registration statement. Filing a registration statement, sometimes called “going public”, is an (often prohibitively) expensive process and requires annual and quarterly public disclosures, including information many funds would consider to be trade secrets.

Before the provisions of the JOBS Act were enacted, private funds could only offer interests in the fund to individuals with which the fund operators had an existing relationship. Now, if funds comply with all...

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