Rule 506(c) of Regulation D, enacted under the JOBS Act, allows issuers to offer unregistered securities in a private placement via general solicitation and advertising to the general public.
Although the advertising can reach the general public, the issuer can only sell to accredited investors. An “accredited investor” is an individual (i) whose net worth or joint net worth with a spouse exceeds $1 million at the time of the purchase, excluding the value of a primary residence, or (ii) whose annual income exceeded $200,000 (or $300,000 jointly with a spouse) during the last two years with a reasonable expectation of the same income in the current year.
The issuer must take reasonable steps to verify that anyone buying its securities is in fact an accredited investor. “Reasonable steps” can include reviewing tax returns or bank statements or obtaining a letter from the investor’s attorney, CPA or registered broker-dealer.
If an issuer is aware that the investor is not accredited, the issuer may only sell to them through the traditional private placement, which involves no advertising or general solicitation and requires a much more detailed disclosure to the investor.