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Regulation D: “Accredited Investor” Determination Must be Made Before the Sale

In a recent decision from the Securities and Exchange Commission (“SEC”), the SEC has held that the determination of whether investors are “accredited” must be done before the sale, not after. The administrative proceeding was captioned In The the Matter of COINALPHA ADVISORS, LLC, File No. 3 – 18913 (SEC Adm. December 7, 2018).

In general, if you are offering or selling securities, you must register with the SEC. The filings that are required are voluminous and it is expensive to prepare an SEC registration. There are some exceptions — or exemptions — from the registration requirements for certain smaller offerings and sales of securities. These generally are called Regulation D offerings/sales under Rules 504, 506(b), and 506(c). When dealing with securities — either buying or offering — it is important to seek the advice and counsel of a trusted San Diego corporate attorney with experience in Regulation D offerings.

Depending on the Rule being used, there are various conditions that must be met before your security offering/sale can be eligible for exemption. When using Rule 506(c), for example, the exemption is only available if the number of investors is limited (under 35) and if all of the investors are considered “accredited.” These investors are deemed by the law to be sophisticated enough to make reasoned decisions about investments and are deemed less likely to be swindled. The most common method of being deemed an “accredited investors” is based on income and wealth. Based on these criteria, you are an “accredited investor” if you have net worth exceeding $1 million (not including the value of one’s house) or having yearly income that has exceeded $200,000 over the previous two years and there is a “reasonable expectation” of the same amount of income level in the current year.

Of importance, an offeror/seller of securities must “take reasonable steps” to ensure that each investor that buys the securities is an “accredited investor.” Now with COINALPHA INVESTORS being handed down, issuers must be aware of the following legal principles:

  • Taking the reasonable steps to ensure “accredited” status is mandatory
  • There is no “safe harbor” even if all the investors are “accredited”; the issuer will still be penalized by the SEC for failing to take “reasonable steps”
  • Timing matters; the “reasonable steps” must be taken before the sale (not after)

Coinalpha Investors, LLC was fined by the SEC $50,000 and is now subject to a Cease and Desist Order.

Contact San Diego Corporate Law

For more information, contact attorney Michael Leonard of San Diego Corporate Law. To schedule a consultation, contact Mr. Leonard via email or by calling (858) 483-9200. Mr. Leonard has been named a “Rising Star” four years running by and “Best of the Bar” by the San Diego Business Journal. Mr. Leonard provides a full array of legal services for businesses including contract review and drafting, mergers and acquisitions, corporate formations, and drafting private placement memorandums.  Like us on Facebook.

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