SEC offers clarity on general solicitation

The US Securities and Exchange Commission (SEC) posted a series of questions and answers regarding general solicitation on its website earlier this month, offering private fund managers further guidance on the agency’s recently written Rule 506(c).

The rule ends a decades old ban on private issuers from publicly advertising their funds. Private issuers relying on the rule must take reasonable steps to ensure that only accredited investors can purchase their securities, but confusion around some of the rule’s more technical aspects have remained since its introduction in September.

The SEC clarified that private issuers would not lose general solicitation rights if investors misrepresented themselves as accredited investors, so long as the private fund managers can demonstrate they reasonably believed the investors were accredited at the time of the sale.   

However, an issuer would lose the ability to rely on Rule 506(c) if no reasonable steps were taken to verify the accredited status of investors, even if all of the issuer’s investors met the financial and other criteria to be an accredited investor, the SEC said.

“The message here is you can’t simply assume that an investor is accredited,” said Debevoise & Plimpton funds partner Ken Berman. “You have to put in place some type of verification process.”

In a separate item, the SEC also clarified that investors must be verified for each successive fundraise. An existing LP for instance who subscribes to a fund manager’s follow-on vehicle must be tested again for their accredited status. 

A series of questions and answers on general solicitation were posted to the US Securities and Exchange Commission’s (SEC) website earlier this month, offering private fund managers further guidance on the agency’s recently written Rule 506(c).

The rule ends a decades old ban on private issuers from publicly advertising their funds. Private issuers relying on the rule must take reasonable steps to ensure that only accredited investors can purchase their securities, but confusion around some of the rule’s more technical aspects have remained since its introduction in September.

The SEC clarified that private issuers would not lose general solicitation rights if it was ultimately discovered that an investor did not meet the accredited test so long as they reasonably believed they were at the time of the sale. 

However, an issuer would lose the ability to rely on Rule 506(c) if no reasonable steps were taken to verify the accredited status of investors, even if all of the issuer’s investors met the financial and other criteria to be an accredited investor, the SEC said.

“The message here is you can’t simply assume that an investor is accredited,” said Debevoise & Plimpton funds partner Ken Berman. “You have to put in place some type of verification process.”

In a separate item, the SEC also clarified that investors must be verified for each successive fundraise. An existing LP for instance who subscribes to a fund manager’s follow-on vehicle must be tested again for their accredited status.

The full list of questions and answers on the rule can be found HERE.