SEC: "Verify Means Verify"

As I have blogged about previously, the JOBS Act required the SEC to adopt rules which would permit general solicitation in connection with a Rule 506 private offering made strictly to accredited investors if the issuers "take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the [SEC]."

So, of course, securities law practitioners have been anxiously waiting for the SEC to adopt those new rules and clarify what actions an issuer must take to "verify" the accredited investor status of purchasers of its securities in Rule 506 offerings.  

On August 29, the SEC proposed amendments to Rule 506 to implement the changes required by the JOBS Act.  Those proposed amendments are available here.  Under the proposed amendments, the SEC addressed the question of what is required to "verify" accredited investor status by stating that the issuer must "take reasonable steps to verify that purchasers of securities sold in any offering under this § 230.506(c) are accredited investors."  The SEC's proposing Release explains that "reasonableness" "would be an objective determination, based on the particular facts and circumstances of each transaction."  The determination would include the following factors:

• the nature of the purchaser and the type of accredited investor that the purchaser claims to be;
• the amount and type of information that the issuer has about the purchaser; and
• the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

In short, the SEC is saying "verify means verify."

Fortunately, the Release goes on to provide quite a bit of helpful commentary describing different types of accredited investors and how an issuer might verify their status.  For example, an issuer could verify the status of an investor who claims to be an accredited by virtue of the fact that he is a registered broker-dealer by going to FINRA's BrokerCheck website.  The Release acknowledges that verifying the status of a natural person who claims to meet the net worth or annual income test for accredited investor might be more challenging.  Among other possible verification methods, the Release suggests that one or more private companies might get into the business of providing accredited investor certifications upon which an issuer might be able to reasonably rely for more difficult determinations.

Praise for NVCA Model VC Legal Documents

One of my favorite resources for venture capital transactions is the National Venture Capital Association's (NVCA) Model Legal Documents, which are available here.

I feel the same way about model legal documents that Irwin M. "Fletch" Fletcher feels about file cabinets, as he told us in the 1989 classic film, Fletch Lives:  "I love them when they're unlocked, neatly organized and tell me exactly what I wanna know."

Well, no model legal document is as terrific as Fletch's model file cabinet, but the NVCA model forms have an amazing amount of information and commentary on venture capital terms.  They are "unlocked" in that they are freely available to the public at NVCA's website (www.nvca.org).  They are certainly neatly organized.  Whether or not they tell you exactly what you "wanna know" of course depends upon the specifics terms of your particular deal.

The NVCA model legal documents attempt to reflect "best practices" from both the West Coast and the East Coast and include the following typical VC documents:

• Term Sheet
• Stock Purchase Agreement
• Certificate Of Incorporation
• Investor Rights Agreement
• Voting Agreement
• Right of First Refusal and Co-Sale Agreement
• Management Rights Letter
• Indemnification Agreement
• Model Legal Opinion

JOBS Act article in Texas Lawyer

Regular readers of this blog will know that I am very interested in the Jumpstart Our Business Startups (JOBS) Act.  The JOBS Act represents probably the most significant change to the US securities laws since I began practicing law in 1998.  The JOBS Act should make it easier for many business to raise capital in the public and private markets.

Today, the Texas Lawyer published an article that I wrote about the JOBS Act, which is available here.  The article was part of their Special Report on Banking and Finance.

Jason Villalba, Republican for Texas House

How many times have you said, "The world would be a better place if it was run by corporate and securities lawyers"?  Okay, probably not that often.  But the State of Texas could certainly benefit by adding one such person to the Texas House.

One of my best friends and one of the top corporate and securities lawyers around, Jason Villalba, has just won the Republican Party primary for the Texas House District 114 (which includes North Dallas, Preston Hollow, Lake Highlands, etc.).  

If elected, Jason will be a huge asset to the State of Texas in Austin.  Congratulations, Jason, and good luck in November!