Accredited Investor Standard

NASDAQ Private Markets and Morrison & Foerster recently described the process for verifying the status of investors when a company chooses to use general solicitation to conduct a Rule 506(c) offering.  In this video blog, Anna Pinedo reviews the SEC Staff’s principles-based guidelines for verification of an accredited investor and also non-exclusive methods for verification.

To watch this video, visit the NASDAQ Private Markets Resource Center.

 

NASDAQ Private Markets and Morrison & Foerster recently discussed the conditions a private company must satisfy in order to rely on Rule 506 for a private placement.  In this video blog, Anna Pinedo highlighted general reminders related to conducting a private placement; general solicitation considerations; approaching accredited and non-accredited investors; bad actor requirements; and Form D filings.

To watch this video, visit the NASDAQ Private Markets Resource Center.

 

HR 1585, sponsored by Rep. Schweikart, titled The Fair Investment Opportunities for Professional Experts Act, passed the House by a voice vote.  This bill would amend the “accredited investor” definition to add persons, regardless of the net worth/net income test, holding certain financial services licenses as well as persons determined by the SEC to be financially sophisticated by virtue of education or job experience.

The House also passed the Meeks bill, HR 3903, Encouraging Public Offerings Act, about which we previously blogged, which would extend JOBS Act IPO-related accommodations, including the ability to test the waters, to all issuers.  HR 3903 passed 419-0.

On September 13, 2017, the SEC Advisory Committee on Small and Emerging Companies held an open meeting to discuss the Sarbanes-Oxley (“SOX”) auditor attestation requirement, the final report that will be issued prior to the expiration of the Committee’s current charter and whether updates are needed to Securities Act Rule 701.  In its discussion of the SOX auditor attestation requirement, the Committee considered the associated compliance costs and a proposal to change the “smaller reporting company” (“SRC”) and “non-accelerated filer” definitions to a company with either (1) a public float of less than $250 million or annual revenues of less than $100 million.  The SEC’s proposed amendments to the SRC definition from June 2016 did not cover non-accelerated filers.  The Committee then discussed its draft report to the SEC, which emphasized a number of recommendations it has made in the past, including the following:

  • Providing regulatory certainty for finders, private placement brokers and platforms that are not registered as broker-dealers and are involved in primary and secondary offerings of unregistered securities in order to help smaller businesses raise capital.
  • Supporting an expansion of the “accredited investor” definition to take into account measures of sophistication, regardless of income or net worth, thereby expanding rather than contracting the pool of accredited investors.
  • Extending to SRCs the same accommodations made to EGCs with respect to disclosure requirements, and finalizing the proposed amendments to increase the financial thresholds in the SRC definition and revising the definition of “accelerated filer” to include companies with a public float of $250 million or more, but less than $700 million.
  • Amending Item 407(c)(2) of Regulation S-K to require issuers to describe, in addition to their policy with respect to diversity, if any, the extent to which their boards are in fact diverse, by including disclosure regarding race, gender and ethnicity of each board member.
  • Preempting state regulation of secondary trading in securities of Tier 2 Regulation A issuers that are current in their ongoing reports in order to improve secondary market liquidity.
  • Allowing smaller exchange-listed companies to voluntary choose trading increments or tick-sizes greater than the one penny in order to help small and mid-cap companies raise capital.

The Committee then turned to a discussion of various proposed changes to Securities Act Rule 701, including, among others, removing the requirement that consultants be “natural persons,” removing the $5 million aggregate limitation (the “hard cap limit”), clarifying that material amendments to any security previously issued under Rule 701 does not result in a new grant or sale, clarifying the application of Rule 701 to RSUs, clarifying that expanded disclosure is only required to be provided for sales that occur after the hard cap limit is exceeded, and clarifying the timing and delivery requirements for expanded disclosure.

A copy of the Committee’s draft report is available here.

Many groups have come forward in recent weeks with their lists of regulations that should be reviewed or amended, as well as their list of areas that merit close review in light of the potential burdens that may be imposed by current regulation.  As far as securities regulation is concerned, much of the focus, at least in the popular press, has been placed on measures that relate to IPOs; however, modest changes in other areas would have a positive impact on capital formation—here is our current list:

  • Adopting the proposed amendments relating to smaller reporting companies;
  • Continuing to advance the disclosure effectiveness initiative;
  • Continuing the review of the industry guides in order to modernize these requirements and eliminate outdated or repetitive requirements;
  • Revisiting the WKSI standard in order to see if similar accommodations and offering related flexibility should be made available to a broader universe of companies;
  • Reviewing existing communications safe harbors in order to modernize these and make communications safe harbors available to a broader array of companies, including business development companies;
  • Adopting the proposed amendment to Rule 163(c) that would allow underwriters or other financial intermediaries to engage in discussions on a WKSI’s behalf relating to a possible offering;
  • Assessing whether a policy rationale remains for including MLPs within the definition of “ineligible issuer” when MLPs undertake public offerings on a best efforts basis;
  • Assessing who suffers when ineligible issuers are prevented from using FWPs other than for term sheet purposes;
  • Removing the limitations that require certain issuers to conduct live only roadshows;
  • Eliminating the need for “market-maker” prospectuses;
  • Reviewing the one-third limit applicable to primary issuances off of a shelf registration statement for certain smaller companies;
  • Modernizing the filing requirements for BDCs, permitting access equals delivery for BDCs and modernizing the research safe harbors to include BDCs;
  • Adding knowledgeable employees to the definition of accredited investor;
  • Eliminating the IPO quiet period;
  • Working with the securities exchanges to review their “20% Rules” (requiring a shareholder vote for private placements completed at a discount that will result in an issuance or potential issuance of securities greater than 20% of the pre-transaction total shares outstanding);
  • Addressing the Rule 144 aggregation rules for private equity and venture capital fund related sales;
  • Shortening the Rule 144 holding period for reporting companies;
  • Including sovereign wealth funds and central banks within the definition of QIBs;
  • Shortening the 30-day period in Rule 155; and
  • Shortening the six-month integration safe harbor contained in Regulation D.

On July 19, 2016, the Advisory Committee on Small and Emerging Companies met to discuss the “accredited investor” definition, the Regulation A market, and the Commission’s recent proposal regarding the definition of “small reporting companies.”  In introductory remarks, Chair White shared that the Commission has received 40 comment letters regarding the Commission’s study on the definition of “accredited investor” and hopes to receive further input from the investment community and the Advisory Committee.  The Advisory Committee confirmed its proposed recommendations to the Commission Staff, which include expanding the definition of “accredited investor” to encompass those with professional accreditations (including Series 7, 65, 82 and Chartered Financial Analyst), prior investment experience and, those who pass an accredited investor examination, among other criteria.  Commissioner Stein, in discussing the proposal for modifying the thresholds for SRCs, expressed particular concern about whether the benefits of scaled disclosure will outweigh the potential lower liquidity and high cost of capital that may result from such changes.  By expanding the definition to include companies with up to a $250 million public float, Committee members stressed that companies, including those prospering through successful Regulation A+ offerings, will enjoy a lighter regulatory burden, which should make offerings more attractive.  The SEC has requested comment on this proposal.

Chair White’s remarks are available at https://www.sec.gov/news/statement/opening-remarks-before-the-sec-advisory-committee-on-small-and-e.html

The agenda for the July 19 meeting of the SEC Advisory Committee on Small and Emerging Companies was recently announced.  During the meeting, the Committee will consider the “Accredited Investor” definition recommendation as discussed during the May 18 meeting.  There will also be an update and review of the first year of Regulation A+. The meeting will conclude with the SEC’s proposal to amend the “Smaller Reporting Company” definition.

The meeting will be live-streamed via the SEC website: https://www.sec.gov/info/smallbus/acsec.shtml

On June 14, 2016, the D.C. Circuit Court of Appeals in Lindeen v. SEC upheld Regulation A+, including the SEC’s definition of “qualified purchaser.”  The decision comes after petitioners William F. Gavin and Monica J. Lindeen, the chief securities regulators for Massachusetts and Montana, respectively, petitioned the court to vacate the SEC’s promulgation of Regulation A+, arguing that it failed the statutory construction test established by the U.S. Supreme Court in Chevron, U.S.A., Inc. v. Natural Resources Defense Council, Inc.  Regulation A+ defines “qualified purchaser” as any person to whom securities are offered or sold pursuant to a Tier 2 offering, thus preempting all state registration and qualifications for Tier 2 securities.  However, Tier 2 offerings are still subject to an investment limit of no more than 10% of the greater of the investor’s annual income and net worth (for non-accredited, non-natural persons, the 10% limit is based on annual revenues and net assets), although the 10% investment limitation is not applicable to accredited investors or to offerings of listed securities.

The petitioners argued that (1) the commonly understood definition of “qualified,” which modifies “purchaser,” means that the SEC must in some way reduce the universe of “purchasers” from “any purchaser;” (2) the SEC’s definition is not consistent with the public interest and the protection of investors; (3) Regulation A+ renders the word “qualified” superfluous and otherwise conflicts with the structure of the Securities Act of 1933; (4) federal securities law has always linked the term “qualified” with a purchaser’s wealth or sophistication; and (5) the legislative history of the National Securities Markets Improvement Act (NSMIA) demonstrates that Congress wanted the SEC to limit a “qualified purchaser” to one with a certain level of wealth or sophistication.  The court denied the petition on the grounds that Congress explicitly authorized the SEC to define qualified purchaser and to adopt different definitions for different types of securities.  The court noted that the SEC acted within its grant of authority in determining that any Tier 2 securities purchaser would be qualified so long as it complied with the 10% investment limitation.  The court held that the SEC appropriately balanced the goals of mitigating regulatory burdens for certain small offerings and adequately protecting investors in the securities markets.  The court also noted that Tier 2 offerings provided sufficient protection, even in the absence of substantive state law review.  Furthermore, both the federal and state antifraud statutes still apply to such offerings and the 10% investment limitation weighed in favor of reducing the need for additional state securities law review.

The court’s decision is available at:  https://www.cadc.uscourts.gov/internet/opinions.nsf/2A89FF33F1B350E185257FD200505A56/$file/15-1149-1619182.pdf

The SEC recently adopted rules implementing Title V and Title VI of the Jumpstart Our Business Startups Act (the “JOBS Act”) and Title LXXXV of the Fixing America’s Surface Transportation Act (the “FAST Act”). Title V and Title VI of the JOBS Act, in relevant part, amended Sections 12(g) and 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) to adjust the thresholds for registration, termination of registration and suspension of reporting, while Title LXXXV of the FAST Act remedied the omission from the JOBS Act of savings and loan holding companies in the revised thresholds for registration, termination of registration and suspension of reporting. The SEC’s implementing rules under the JOBS Act were originally proposed in December 2014, and the SEC received 11 comments letters that generally supported the proposals. With the adoption of these rule changes, the SEC has completed all rulemaking mandated by the JOBS Act. The amended rules reflect the new, higher registration, termination of registration and suspension of reporting thresholds. The amendments also establish a non-exclusive safe harbor for issuers when determining if securities held by persons who received them pursuant to an employee compensation plan in transactions exempted from the registration requirements of Section 5 of the Securities Act may be excluded when determining whether they are required to register under Exchange Act Section 12(g)(1).

Read our client alert.

The SEC has announced the agenda for its May 18 meeting of the Advisory Committee on Small and Emerging Companies.  The meeting will focus on the definition of “accredited investor”, where the recent SEC staff report will be discussed. The Committee is then set to discuss unregistered securities offerings under Regulation D.

The meeting will begin at 9:30am ET and is open to the public. For more information, please see the SEC’s press release.