The new Rule 506(c) is a big substantive change on how private placements can be run. That leaves many, including me, with a lot of questions. The Securities and Exchange Commission just posted a series of new questions and answers on the new rule. Most of the answers are expected confirmations, but there are a few surprises.
Question 260.05 If you switch a pre-rule offering to new Rule 506(c) offering, do you need to file an amendment to From D. YES.
Question 260.06 If you take reasonable steps to verify that all investors are accredited, but after the sale you find out that an investor did not meet the standard. The SEC says that’s okay as long you took reasonable steps and had a reasonable belief.
Here was a surprise.
Question 260.07 All of your investors are accredited investors, but you didn’t take reasonable steps to verify that they were accredited. The SEC says that you failed the exemption. “The verification requirement in Rule 506(c) is separate from and independent of the requirement that sales be limited to accredited investors.”
The other item for fund managers to take a look at is Question 260.10 regarding existing investors. The SEC makes it clear that the exemption for existing investors in the non-exclusive list of verification methods only apples to the same issuer. So you can’t rely on this exemption when raising a new fund.
Another small surprise is that the SEC will allow you to retreat from a 506(c) offering back to a 506(b) offering. Question 260.11 makes it clear that as long as you did not engage in general solicitation you can amend the Form D to change the exemption. And vice-versa. Question 260.12 explicitly allows an offering to switch from 506(b) to 506(c). Many people I talked to thought you could make switch, but it’s good to hear it explicitly form the SEC.