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From Securities Regulation Daily, July 3, 2014
By John M. Jascob, J.D.
The SEC’s Division of Corporation Finance updated today its Compliance and Disclosure Interpretations (C&DIs) of the requirements for issuers to verify the status of accredited investors under Regulation D. Among other things, the updates deal with verification questions concerning investor income which is not reported in U.S. dollars; jointly held property; and the review of investor tax forms and assessments.
Income not reported in U.S. dollars. Question 255.48 concerns the exchange rate an issuer should use to determine whether the purchaser's income meets the income test for qualifying as an accredited investor. The staff response indicates that an issuer may use either the exchange rate that is in effect on the last day of the year for which income is being determined or the average exchange rate for that year.
Jointly held assets or property. The staff has indicated that assets in an account or property held jointly with another person who is not the purchaser's spouse may be included in a determination of whether the purchaser satisfies the net worth test in Rule 501(a)(5). The purchaser, however, may only include these assets to the extent of his or her percentage ownership of the account or property.
IRS forms. Under Rule 506(c)(2)(ii)(A), an issuer may verify that a purchaser is an accredited investor by reviewing any IRS form that reports the purchaser's income for the "two most recent years." The staff response to Question 260.35 clarifies that this verification safe harbor would not be available in instances where an IRS form is not yet available for the most recently completed year (e.g., 2013).
The staffs believes, however, that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement by: (1) reviewing the IRS forms that report income for the two years preceding the recently completed year; and (2) obtaining certain specified written representations from the purchaser. If the issuer has reason to question the purchaser's claim to be an accredited investor after reviewing these documents, it must take additional verification measures in order to establish that it has taken reasonable steps to verify the purchaser’s accredited investor status.
Tax forms from non-U.S. jurisdictions. The response to Question 260.36 states that the verification safe harbor provided in Rule 506(c)(2)(ii)(A) is not available where a purchaser is not a U.S. taxpayer and cannot provide an IRS form that reports income. Although the safe harbor is not available for tax forms from foreign jurisdictions, the staff believes that an issuer could reasonably conclude that a purchaser is an accredited investor under the principles-based verification method by reviewing tax forms filed with foreign jurisdictions that impose penalties for falsely reported information that are comparable to the penalties imposed in the United States.
Tax assessments. Rule 506(c)(2)(ii)(B) provides that an issuer can verify that a purchaser is an accredited investor on the basis of net worth by reviewing certain documentation of the purchaser's assets and liabilities "dated within the prior three months." Although tax assessments are one of the types of documentation listed in this provision, the staff believes that an issuer would not be able to rely on this verification method by reviewing tax assessments that are dated more than three months, even if they are the most recent assessments that are available.
The staff believes that an issuer could still reasonably satisfy the verification requirement under the principles-based verification method, however, if it uses the most recently available tax assessment when determining whether the purchaser has the requisite net worth. For example, if the most recent tax assessment shows a value that, after deducting the purchaser's liabilities results in a net worth substantially in excess of $1 million, the assessment may be sufficient verification that the purchaser has met the net worth test.
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