Purchaser Representative

A private offering conducted without general solicitation admits a limited number of purchasers who are not accredited investors. What does the presence of those purchasers require of the issuer?

1. A.Nothing further, since a stated allowance means they are treated the same as accredited purchasers.Wrong. The allowance is what admits them; it does not put them on equal terms.
2. B.That each of them appoint the sponsor to serve as purchaser representative for the transaction.Wrong. A representative supplied by the sponsor could not perform the function the role exists for.
3. C.That the offering be re-filed as a registered public offering before any of them may subscribe.Wrong. Their presence conditions the exemption rather than destroying it.
4. D.That each be sophisticated, alone or through a purchaser representative, and be furnished specified information.Correct. Sophistication and disclosure together replace what accreditation would otherwise stand in for.

Why: An offering with no general solicitation may include a limited number of non-accredited purchasers, but each must have enough financial and business knowledge to evaluate the merits and risks, either personally or through a purchaser representative who does. Their presence also triggers an information delivery obligation that never arises when every purchaser is accredited. Both conditions exist because accreditation is a proxy for the ability to fend for oneself, and where the proxy is missing the issuer has to supply the substance directly. If every purchaser were accredited, neither the sophistication finding nor the information package would be required.

An issuer expects to sell to about sixty investors, most of whom are neither accredited nor financially sophisticated, and wants to stay inside Regulation D. Which rule accommodates that investor mix, and what does it cost the issuer?

1. A.Rule 506(b), because sixty purchasers is inside its ceiling once accredited investors are excluded.Wrong. Most of these buyers are non-accredited, so they are counted and the ceiling is breached.
2. B.Rule 506(c), because verification is only required where the issuer advertises the offering.Wrong. Rule 506(c) requires every purchaser to be accredited, which this group is not.
3. C.Rule 504, at the price of a capped raise and no preemption of state registration.Correct. It carries neither a purchaser ceiling nor a sophistication condition.
4. D.Rule 504, and the offering will also be preempted from state registration as a covered security.Wrong. Only Rule 506 offerings are covered securities; Rule 504 offerings are not preempted.

Why: Rule 504 imposes no ceiling on the number of purchasers and no sophistication condition; those are Rule 506(b) conditions. An issuer with sixty unsophisticated buyers therefore fits Rule 504 and does not fit Rule 506(b), whose purchaser ceiling counts every non-accredited buyer and whose nature-of-purchasers condition requires sophistication alone or with a purchaser representative. The cost is that Rule 504 caps the raise at ten million dollars measured with a twelve-month look-back, and that Rule 504 securities are not covered securities, so the issuer must clear state registration or a state exemption everywhere it sells. Rule 506(c) is no help here either, since every purchaser in that branch must be accredited.

Verity Optics runs a generally solicited offering under Rule 506(c) and verifies accredited status for every purchaser but one, who is highly sophisticated but meets no accredited investor category. What is the effect of that one sale?

1. A.None, so long as the issuer furnishes that purchaser the Rule 502(b) information package first.Wrong. That package cures nothing under Rule 506(c), which admits no non-accredited purchaser on any terms.
2. B.None. Rule 506(c) tolerates up to 35 non-accredited purchasers, exactly as Rule 506(b) does.Wrong. The 35-purchaser allowance belongs only to Rule 506(b), which forbids general solicitation.
3. C.It breaches Rule 506(c) only if that purchaser also lacked a purchaser representative.Wrong. Purchaser representatives are a Rule 506(b) mechanism and have no role under Rule 506(c).
4. D.It breaches Rule 506(c), which requires that all purchasers be accredited investors.Correct. A single non-accredited purchaser defeats the condition, however sophisticated that purchaser is.

Why: The two branches of Rule 506 trade different things away. Rule 506(b) forbids general solicitation and in exchange tolerates up to 35 non-accredited but sophisticated purchasers. Rule 506(c) permits general solicitation and in exchange requires that all purchasers be accredited investors and that the issuer take reasonable steps to verify it. Sophistication, purchaser representatives and the Rule 502(b) information package are Rule 506(b) devices, and none of them rescues a non-accredited sale under Rule 506(c). Had Verity never advertised, the identical sale could have been made under Rule 506(b).

A subscription package for an accredited investor centers on representations and supporting documentation establishing her accredited status. What should a subscription package look like for a non-accredited purchaser relying on Rule 506(b)'s sophistication path instead?

1. A.It should look identical to an accredited investor's package, since accredited-investor documentation is the only form of eligibility documentation recognized under Rule 506(b).Wrong. Accredited-investor documentation is not the only recognized path; a non-accredited, sophisticated purchaser requires documentation appropriate to that different path.
2. B.It should contain no supporting documentation at all, since Rule 506(b)'s sophistication path does not require any representations or documentation whatsoever.Wrong. The sophistication path still requires supporting representations and, where applicable, documentation of a purchaser representative arrangement; it is not documentation-free.
3. C.It should include documentation supporting the sophistication finding, such as representations and information about her own knowledge and experience, or documentation of a purchaser representative arrangement if she is relying on one, rather than accredited-investor documentation that does not apply to her.Correct. The package should reflect documentation supporting the sophistication finding relevant to this different eligibility path, not accredited-investor documentation that doesn't apply.
4. D.It should include a certification from a government agency confirming her sophistication, since only official government certification satisfies Rule 506(b)'s sophistication path.Wrong. There is no government-agency sophistication certification requirement; sophistication is established through representations and, where applicable, a purchaser representative arrangement.

Why: A subscription package for a non-accredited purchaser relying on the sophistication path should include documentation supporting that sophistication finding, such as representations and information about her own knowledge and experience, or documentation of a purchaser representative arrangement if she is relying on one, rather than centering on accredited-investor representations and documentation that do not apply to her since she is not accredited.