Sophisticated Investor

A customer has twenty years of experience actively trading exchange-listed stocks and options and considers himself a sophisticated investor on that basis. He has no prior experience with illiquid, unregistered private placements. Does his extensive experience with listed securities, by itself, establish that he has the relevant experience to evaluate this private placement's unique risks?

1. A.Yes -- extensive experience trading any type of security establishes sophistication that automatically extends to evaluating any other security type, including illiquid private placements.Wrong. Sophistication developed in one asset class does not automatically transfer to an entirely different class of risk that the prior experience never addressed.
2. B.No -- experience with liquid, exchange-listed securities develops familiarity with different risks than those unique to illiquid, unregistered securities, such as the absence of a secondary market and valuation uncertainty, so it does not automatically establish relevant experience with this different risk profile.Correct. Illiquid securities present risks, like the absence of a secondary market and valuation uncertainty, that experience trading listed securities does not necessarily develop familiarity with.
3. C.Yes -- but only because twenty years is a specific, regulation-defined experience threshold that automatically qualifies an investor for any security type.Wrong. There is no specific number-of-years threshold that automatically qualifies an investor across all security types; relevant experience with the specific risks involved is what matters.
4. D.No -- but only because private placements may only be recommended to customers who hold a professional securities license.Wrong. There is no requirement that a customer hold a professional securities license to be recommended a private placement; the point is about the relevance of his actual experience, not licensure.

Why: Experience trading liquid, exchange-listed securities develops familiarity with market risk, volatility, and similar concepts, but it does not automatically translate into an understanding of the risks unique to illiquid, unregistered securities, such as the absence of a secondary market, valuation uncertainty, and an indefinite holding period; those are different risks than the ones his listed-securities experience has exposed him to.

A non-accredited investor wants to invest in a Regulation A Tier 2 offering. Separately, a non-accredited but sophisticated investor wants to invest in a Rule 506(b) offering. Does either investor face a regulatory limit on how much they personally may invest, based on their income or net worth?

1. A.Neither investor faces any investment limit under either regulation, since investment limits are exclusively a feature of crowdfunding offerings.Wrong. This denies Regulation A Tier 2's actual investment-limit feature for non-accredited investors.
2. B.Both investors face an identical income- or net-worth-based investment limit, since Regulation A and Regulation D apply the same non-accredited investor protections.Wrong. Regulation D's protections for a non-accredited 506(b) purchaser do not include this specific type of investment cap.
3. C.Only the Rule 506(b) investor faces an income- or net-worth-based investment limit, while Regulation A Tier 2 investors face no such limit regardless of accreditation status.Wrong. This reverses which regime actually includes this specific protection.
4. D.The Regulation A Tier 2 investor faces an income- or net-worth-based investment limit as a structural protection; the Rule 506(b) investor does not face an analogous cap.Correct. This is the accurate contrast between the two regimes' non-accredited investor protections.

Why: The Regulation A Tier 2 investor is subject to an investor-level investment limit tied to income or net worth for non-accredited investors, a specific protection built into Tier 2's structure. Regulation D's Rule 506(b) does not impose an analogous income- or net-worth-based investment cap on the individual non-accredited purchaser, though other protections, like the limited number of such purchasers and required disclosure, apply instead.

An Exchange Act reporting company is conducting a Rule 506(b) offering and will sell to two non-accredited but sophisticated investors. How does its reporting status change what it must give those two purchasers?

1. A.It owes them nothing, because its Exchange Act filings are already public.Wrong. The duty to furnish survives; public availability does not discharge it.
2. B.It must furnish the same package a non-reporting issuer would assemble, since Rule 502(b) draws no distinction.Wrong. The rule expressly sets out different content for reporting and non-reporting issuers.
3. C.It owes the package to all purchasers, accredited and not, because it is a reporting company.Wrong. The rule states the information need not be furnished to accredited investors whatever the issuer status.
4. D.It still owes a package before the sale, but may build it from the Exchange Act reports it already files.Correct. Reporting status changes the permitted content, not the existence of the duty.

Why: Rule 502(b) requires the issuer to furnish specified information to any non-accredited purchaser a reasonable time before the sale, but the content of that package depends on whether the issuer reports under Section 13 or 15(d) of the Exchange Act. A non-reporting issuer must assemble non-financial and financial information of the kind a registration statement or Form 1-A would call for. A reporting issuer may instead furnish the reports it already files, together with the additional items the rule specifies. Its reporting status changes the shape of the package, not whether one is owed.

An issuer sells to 29 accredited investors and 2 non-accredited but sophisticated investors under Rule 506(b), triggering Regulation D's specific disclosure package requirement. Must the issuer provide that disclosure package only to the 2 non-accredited purchasers, or to all 31 purchasers?

1. A.Only to the 2 non-accredited purchasers, since accredited investors are presumed capable of obtaining information on their own and are excluded from the delivery requirement once triggered.Wrong. This assumes the delivery obligation tracks the same accredited/non-accredited line as the triggering condition.
2. B.To none of the 31 purchasers, since the disclosure package requirement applies only to entirely non-accredited offerings, and any accredited participation cancels it.Wrong. The presence of any non-accredited purchaser triggers the requirement; accredited participation does not cancel it.
3. C.Only to purchasers who affirmatively request the disclosure package in writing, regardless of accredited status, since delivery is opt-in once triggered.Wrong. Delivery is an affirmative obligation to the whole group once triggered, not opt-in.
4. D.To all 31 purchasers, since once triggered by a non-accredited purchaser's presence, the delivery obligation extends to the entire purchaser group.Correct. This is the actual scope of the triggered delivery obligation.

Why: To all 31 purchasers. Once the presence of even one non-accredited purchaser triggers Regulation D's specific disclosure package requirement for a Rule 506(b) offering, the issuer must furnish that same information to the accredited purchasers as well, not just to the non-accredited ones.