Agency implements measures of the JOBS law, allows general solicitation.
The Securities and Exchange Commission has issued implementing regulations for an aspect of last year’s Jumpstart Our Business Startups (JOBS) law that lifts the ban on advertising and general solicitation for certain types of private placements. The rules go into effect on September 10.
Under the SEC’s rule, a company can use general solicitation and advertising if the transaction meets two criteria:
1. All purchasers of securities are accredited investors or the company reasonably believes that the purchasers are accredited investors (the “Accredited Investor Requirement”) and
2. The company takes reasonable steps to verify that the purchasers are accredited investors (the “Verification Requirement”). The Verification Requirement is separate from and independent of the Accredited Investor Requirement, and must be satisfied even if all purchasers are accredited investors.
While the media attention regarding the JOBS law has focused on hedge funds, which will also be able to advertise, the SEC implementation guidelines may be helpful to corporates by making a wider syndication of private securities possible, thereby, possibly, getting a better interest rate on those securities.
According to a client update written by Jun Ho Song of Clark Wilson LLP, the SEC has set the following two tests that a company will have to perform to prove a buyer is an accredited investors:
The Income Test: This involves reviewing any IRS form that reports the purchaser’s income for the two most recent years and obtaining a written representation from the purchaser that he or she has a reasonable expectation of reaching the income level necessary to qualify as an accredited investor during the current year;
Net Worth Test: This involves reviewing a enough financial forms and documentation dated within the prior three months to determine the investor’s net work. Also, investors have to promise they’ll make enough to qualify in the current year. Companies or their agents would need to obtain documents such as: bank statements, brokerage statements and other statements of securities holdings, certificates of deposit, tax assessments and appraisal reports issued by independent third parties; and with respect to liabilities: a consumer report from at least one of the nationwide consumer reporting agencies.