Narrowing the Safe Harbors

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narrow safe harbor compliance

The Securities and Exchange Commission rolled out the accredited investor verification requirement and made it principle-based for purposes of Rule 506(c). You have to take reasonable steps to verify that an investor meets the accredited investor standard. In the same release it created four non-exclusive safe harbors that would deemed to be taking “reasonable steps.”  The SEC recently released six new Compliance and Disclosure Interpretations on the verification of prospective investors as accredited investors.

One safe-harbor method is to review the IRS filings for the two most recent years. That seems straightforward. Just deliver me the two latest tax filings. But the SEC has made that safe harbor nearly  impossible to navigate during the first part of a calendar year. In Question 260.35, the SEC takes a very strict view of the safe harbor. The filings must be for the two most recent years. So if you were to use that safe harbor in 2014, the issuer must get the 2013 and 2012 tax filings.

For most potential investors this safe harbor is inaccessible in January and may extend further into the year depending on when the investor files his or her tax return. I’ve filed an extension for the past few years and don’t get my taxes done until August. I couldn’t prove myself to be an accredited investor using the safe harbor until that point in the calendar year.

The SEC’s solution is to switch to the principles-based approach by reviewing the two most recent available years and getting written representations from the potential investor that:

(i) an Internal Revenue Service form that reports the purchaser’s income for the recently completed year is not available,
(ii) specify the amount of income the purchaser received for the recently completed year and that such amount reached the level needed to qualify as an accredited investor, and
(iii) the purchaser has a reasonable expectation of reaching the requisite income level for the current year.

The SEC is clearly making it hard to navigate the investor verification requirement. It seems to laying mines around the entrances to the safe harbor.

Sources:

Image is US Navy 060628-N-4776G-144 The Nimitz-class aircraft carrier USS Ronald Reagan (CVN 76) navigates its way through the narrow strait that make up the inlet to Pearl Harbor for a port visit.jpg

 

Author: Doug Cornelius

You can find out more about Doug on the About Doug page

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