Rule 506(b) Information Delivery Requirements to Non-Accredited Investors
As we know, Regulation D of the United States Securities Act of 1933, as amended (the “Act”), provides exemptions from the Act’s securities registration requirements, most notably, the registration exemptions found in Rule 506: Rule 506(b) and Rule 506(c). Many people get very excited when they learn that they can include up to 35 non-accredited, but “sophisticated” in an offering under Rule 506(b) (no use of advertising or general solicitation). Rule 502(b)(1) sets forth specific information delivery requirements that must be satisfied for issuers selling securities to non-accredited investors relying on Rule 506(b). As a practical matter, for disclosure purposes, once the issuer shares this information with one investor, the issuer likely would be foolish not to share it with all of their investors, accredited and non-accredited alike.
Under Rule 502(b)(1), the following information must be provided to non-accredited investors in a Rule 506(b) offering:
1. Assuming that the issuer is not subject to reporting under the Exchange Act of 1934 [NOTE: most private issuers of securities will not be subject to Exchange Act reporting], prior to the sale, the issuer must provide the investor with a disclosure document including the same information that would be included in a statement filed with the SEC if the securities were registered under either the Act, or pursuant to the exemption from full registration found under Regulation A. This information delivery requirement should be satisfied if the issuer makes available to investors an offering memorandum (also known as an offering circular or private placement memorandum) prepared by a competent securities attorney.
2. The issuer also must deliver financial statements to the investors within 120 days of the start of the offering. Very generally, assuming an issuer cannot obtain audited financial statements without unreasonable effort or expense, financial statements may be unaudited but the issuer’s balance sheet (dated within 120 days of the start of the offering) must be audited.
Rule 502(b) also requires that the issuer provide a summary of any written material concerning the offering that the issuer provided to accredited investors but had not previously delivered to the non-accredited investor. If the issuer provides all of the offering materials to the non-accredited investor that it provided to the accredited investor, then this requirement should be satisfied as being inapplicable.
Importantly, the issuer must make available to each non-accredited investor at a reasonable time prior to the purchase of securities the opportunity to ask questions and receive answers concerning the terms and conditions of the offering and to obtain any additional information that the issuer possesses or can acquire without unreasonable effort or expense that is necessary to verify the accuracy of the other issuer information required to be provided (described above). It is always advisable for issuers to include a representation in their subscription agreement that the investor has been given such opportunity to ask questions, and that the information about the issuer has been made available to them.
The issuer should include in their disclosure document specific disclosure that the securities have not be registered, and, therefore, cannot be resold unless they are registered or unless an exemption from registration is available.
These are not the only requirements that must be satisfied for a Rule 506(b) offering, but these are important requirements that are frequently overlooked in the initial excitement that an offering is available to non-accredited investors.