On July 3rd, the SEC updated their list of common questions related to the Securities Act Update.
This series will detail the most pertinent of these updates, as many are relevant to Regulation D and accredited investor regulation. If anything is difficult to understand, we have provided simple translations and examples that should help clear up any confusion.
Question: A purchaser is not a U.S. taxpayer and therefore cannot provide an Internal Revenue Service form that reports income. Can an issuer review comparable tax forms from a foreign jurisdiction in order to rely on the verification method provided in Rule 506(c)(2)(ii)(A)?
Answer: No, the verification safe harbor provided in Rule 506(c)(2)(ii)(A) would not be available under these circumstances. In adopting this safe harbor, the Commission noted that there are “numerous penalties for falsely reporting information” in Internal Revenue Service forms. See Securities Act Release No. 33-9415 (July 10, 2013). Although the safe harbor is not available for tax forms from foreign jurisdictions, we believe that an issuer could reasonably conclude that a purchaser is an accredited investor and satisfy the verification requirement of Rule 506(c) under the principles-based verification method by reviewing filed tax forms that report income where the foreign jurisdiction imposes comparable penalties for falsely reported information.
Where the issuer has reason to question the reliability of the information about the purchaser’s income after reviewing these documents, it must take additional verification measures in order to establish that it has taken reasonable steps to verify that the purchaser is an accredited investor.
Translation: When dealing with foreign investors who don’t pay US taxes, the issuer must rely on tax forms from a foreign jurisdiction to verify accreditation. Since these are not IRS forms, the issuer is not protected by the safe harbor clause outlined in Rule 506c. However, this does not mean the issuer cannot use the foreign revenue service’s information to verify that the investor is accredited. If the foreign jurisdiction imposes penalties for falsely reported information equivalent to those detailed in the Securities Act, the information is acceptable for verification purposes./
Advice: The SEC continually reminds issuers that if they have any reason to doubt the authenticity of income reports, they should take additional steps to verify that they are dealing with an accredited investor. This is extremely important, as the penalties for falsely reporting information far outweigh the cost of dropping a questionable investor.
If you haven’t read through our other Securities Act Updates, you can find other valuable information for issuers. We have two more updates left to go over, so be sure to check back!