What are the advantages of selling to accredited investors?
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Rule 502(b)(1)
(b) Information requirements—
(1) When information must be furnished. If the issuer sells securities under Rule 505 or 506 to any purchaser that is not an accredited investor, the issuer shall furnish the information specified in paragraph (b)(2) of this rule to such purchaser a reasonable time prior to sale. The issuer is not required to furnish the specified information to purchasers when it sells securities under Rule 504, or to any accredited investor.
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Rule 501(e)(iv)
(e) Calculation of number of purchasers. For purposes of calculating the number of purchasers under Rule 505(b) and 506(b) only, the following shall apply: (1) The following purchasers shall be excluded:
*** (iv) Any accredited investor.
Rule 506(b)(2)(ii)
(ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.
Problem 5-14 (pp. 294-95)
• Sybil--Vice President for Governmental Relations
– Coordinates lobbying – Disseminates information about regulatory developments
Accredited investor?
***
Rule 501(f)
(f) Executive officer. “Executive officer” shall mean the president, any vice president in charge of a principal business unit, division or function (such as sales, administration or finance), any other officer who performs a policy making function, or any other person who performs similar policy making functions for the issuer. Executive officers of subsidiaries may be deemed executive officers of the issuer if they perform such policy making functions for the issuer.
Problem 5-15 (p. 295)
• Mel’s Assets:
Checking and savings account Estimated value of art collection U.S. savings bonds Household furnishings/personal effects Estimated value of house Vested interest in retirement plan TOTAL ASSETS Liabilities (Home mortgage balance) NET WORTH $ 25,000 250,000 125,000 50,000 450,000 350,000 $1,250,000 ($45,000) $1,205,000
Rule 501(a)
“(a) Accredited investor. “Accredited investor” shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:”
Problem 5-16 (p. 295)
• Three purchasers in a Rule 506 offering
– No attempt by issuer to check whether accredited or not (no reasonable belief) – In fact, qualified as accredited investors
Rule 501(a)
“(a) Accredited investor. “Accredited investor” shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:”
Rule 506(b)(2)(ii)
“(ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”
Rule 506(b)(2)(ii)
“(ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”
Rule 506(b)(2)(ii)
“(ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”
Rule 506(b)(2)(ii)
501(h)
“(ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.”
Problem 5-17 (pp. 298-99)
• Marvella
– Does not meet the sophistication requirement – Purchaser representative: George
• Brother-in-law • Meets the sophistication standard
a. Marvella divorces her husband.
Problem 5-17 (pp. 298-99)
• Marvella
– Does not meet the sophistication requirement – Purchaser representative: George
• • Brother-in-law Meets the sophistication standard
b. George is an officer of the issuer.
[c. Does not tell Marvella]
Problem 5-17 (pp. 298-99)
• Marvella
– Does not meet the sophistication requirement – Purchaser representative: George
• Brother-in-law • Meets the sophistication standard
d. George plans to buy a substantial block of stock from the issuer.
Problem 5-18 (p. 299)
• Marvella (not sophisticated) • Purchaser representative: Priscilla
– Attorney? – CPA? – CPA and attorney?
“Has such knowledge and experience in financial and business matters that he is capable of evaluating . . . the merits and risks of the prospective investment”
Problem 5-20 (p. 299)
• May issuer pay the fee for Marvella’s purchaser representative?
Rule 505(b)(2)(ii)
(ii) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Rule 506(b)(2)(i)
(i) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Rule 505(b)(2)(ii)
(ii) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Rule 506(b)(2)(i)
(i) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Rule 505(b)(2)(ii)
(ii) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Rule 501(e): How to Count
Rule 506(b)(2)(i)
(i) Limitation on number of purchasers. There are no more than or the issuer reasonably believes that there are no more than 35 purchasers of securities from the issuer in any offering under this rule.
Problem 5-21 (pp. 299-300)
• Purchasers:
– Priscilla (Cal. resident; not accredited) – Father (N.Y. resident; not accredited) – Corporation (Priscilla and Father each own 50%)
Problem 5-22 (p. 300)
• Partnership
– Not an accredited investor – Has ten partners
Problem 5-22 (pp. 294-295)
• Partnership
– Not an accredited investor – Has ten partners
What if created just to invest in this offering?
Problem 5-22 (pp. 294-295)
• Partnership
– Not an accredited investor – Has ten partners
What if created just to invest in this offering . . . •and all the partners are accredited?
Problem 5-22 (pp. 294-295)
• Partnership
– Not an accredited investor – Has ten partners
What if created just to invest in this offering . . . •And five of the partners are accredited?
Problem 5-23 (p. 300)
• Individual
– Accredited investor (meets net worth standard)
• Brother of wife
– Lives in same home as individual and wife – Not accredited investor
Rule 501(e)(1)(i)
“(e) Calculation of number of purchasers. For purposes of calculating the number of purchasers under rule 505(b) and 506(b) only, the following shall apply: (1) The following purchasers shall be excluded: (i) Any relative, spouse or relative of the spouse of a purchaser who has the same principal residence as the purchaser; . . .”