Investor Questionnaire

An issuer conducting a Rule 506(b) offering collects a completed investor questionnaire from each purchaser and finds nothing inconsistent with it. One purchaser turns out later to have overstated his net worth. Is the exemption lost?

1. A.Yes. Accreditation is an objective fact, so a purchaser who was not accredited defeats the exemption.Wrong. The definition itself extends to persons the issuer reasonably believes to be accredited.
2. B.Yes, unless the issuer obtained tax returns or brokerage statements from the purchaser.Wrong. Documentary verification is the Rule 506(c) standard, not what Rule 506(b) requires.
3. C.Not necessarily. The definition reaches a purchaser the issuer reasonably believed to be accredited.Correct. Reasonable belief is written into the definition and fits an offering with no solicitation.
4. D.Not necessarily, and the same reasonable belief would suffice in a Rule 506(c) offering.Wrong. Rule 506(c) replaces reasonable belief with an obligation to take reasonable verification steps.

Why: The accredited investor definition applies to any person who comes within a category or who the issuer reasonably believes comes within one. In a Rule 506(b) offering, where no general solicitation has occurred, a completed questionnaire that the issuer has no reason to doubt can support that reasonable belief. So a purchaser who lies does not automatically destroy the exemption, provided the issuer belief was reasonable at the time of the sale. The position changes under Rule 506(c), where reasonable belief is not enough and the issuer must have taken reasonable steps to verify.

An issuer is conducting a Rule 506(c) private placement using general solicitation. A prospective purchaser completes and signs an investor questionnaire checking a box that says, "I certify that I am an accredited investor." No other information or documentation is requested. Does this satisfy the issuer's obligation to verify accredited-investor status for a Rule 506(c) offering?

1. A.Yes -- a signed written certification of accredited status is, by itself, sufficient verification under Rule 506(c), regardless of the offering's use of general solicitation.Wrong. Rule 506(c) requires more than a bare self-certification; the issuer must take its own reasonable steps to verify the claimed status.
2. B.Yes -- but only because the purchaser's certification was made under penalty of perjury, which substitutes for any independent verification.Wrong. Language invoking penalty of perjury does not substitute for the issuer's own independent verification steps.
3. C.No -- Rule 506(c) requires the issuer to take reasonable steps to independently verify accredited status; an unsupported self-certification alone does not satisfy that obligation.Correct. A signed self-certification alone does not satisfy Rule 506(c)'s requirement that the issuer take reasonable steps to verify accredited status.
4. D.No -- but only because Rule 506(c) offerings specifically require verification through a government agency rather than through the issuer's own reasonable steps.Wrong. Verification is the issuer's own reasonable-steps obligation; there is no requirement that it come from a government agency specifically.

Why: Rule 506(c) requires the issuer to take reasonable steps to verify that purchasers are accredited investors; a self-certification alone, without any supporting documentation or independent confirmation, does not satisfy that verification obligation, even though it might reflect the purchaser's own good-faith belief about his status.

How does an investor questionnaire differ in purpose from the subscription agreement in the same offering?

1. A.They serve the identical purpose and are used interchangeablyWrong. The two documents serve sequential, distinct purposes rather than duplicating each other.
2. B.The questionnaire is a public disclosure document while the subscription agreement is kept confidentialWrong. Both documents are private offering documents; neither is a public disclosure filing.
3. C.The questionnaire gathers information to determine eligibility, while the subscription agreement is the contractual commitment to purchase based on that determinationCorrect. This is the actual sequential relationship between the two documents.
4. D.The subscription agreement is completed only after the offering closes, while the questionnaire is completed before the offering existsWrong. This misorders the process; the subscription agreement is completed as part of subscribing, not after closing.

Why: The questionnaire gathers the factual information needed to determine the investor's eligibility, such as accredited investor or sophistication status, while the subscription agreement is the contractual commitment to purchase based on that eligibility determination. The two documents serve sequential, complementary purposes rather than duplicating each other.

A representative personally knows, from a prior conversation with a subscriber, that her actual net worth falls well short of what the accredited-investor net-worth test requires. The subscriber nonetheless checks the box on the investor questionnaire representing that she meets the net-worth test. May the representative accept and process the subscription based on the written representation, since the document itself says she qualifies?

1. A.Yes -- a written representation in a signed investor questionnaire controls regardless of any information the representative separately possesses about the subscriber's actual situation.Wrong. A representative's own specific knowledge that a representation is false is not overridden by the mere existence of a signed document stating otherwise.
2. B.No -- the representative's actual knowledge that the representation is false means he cannot simply rely on the written document as if that knowledge did not exist, and should not process the subscription on the strength of a representation he has specific reason to know is untrue.Correct. Actual knowledge that the representation is false means the representative cannot simply rely on the written document and should not process the subscription on that basis.
3. C.Yes -- but only because the representative's prior conversation with the subscriber was not documented in writing and therefore does not count as actual knowledge.Wrong. Whether the prior conversation was documented does not determine whether it constitutes actual knowledge; the representative's own awareness is what matters.
4. D.No -- but only because net-worth representations specifically require notarization before a representative may ever rely on them.Wrong. There is no notarization requirement described here; the issue is the representative's actual knowledge overriding reliance on the written representation.

Why: A written representation does not cure a representative's actual knowledge that the representation is false; a representative who knows, from information already available to him, that a subscriber's checked box misstates her actual financial situation cannot simply rely on the written document as if that independent knowledge did not exist, and should not process the subscription on the strength of a representation he has specific reason to know is untrue.