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The Recent Simplification to the Reasonable Steps Verification Requirement

In November of 2020, the Securities and Exchange Commission (SEC) changed several regulations to harmonize specific requirements of exempt securities offerings. These modifications are now effective. The revised rules were created to assist small issuers conductingcapital raises in private markets. The rule changes also help real estate sponsors raise funds via private placements that they already use frequently.

Rule 506(c) and Its Shortcomings
Rule 506(c) restricts sales to only accredited investors who fulfill requirements most commonly associated with income, assets, or net worth. In addition, even though investors are permitted to certify their status as accredited investors under Rule 506(b) offerings, the accredited investor requirement is required for all investors under Rule 506(c). More scrutiny applies under Rule 506(c) regarding the financial status of investors compared to Rule 506(b). Under 506(c), investors are required to perform reasonable steps verification regarding the accredited status of investors.

Due to the greater scrutiny of Rule 506(c), Rule 506(b) outpaces it when it comes to raising capital real estate equity and small business offerings. The verification of investor status as accredited or not is one of the steps that come with Rule 506(c) offerings.

Per Rule 506(b), accredited investors are only required to reveal the information that proves they fulfill the net worth or income requirements. The added focus on the finances of prospective investors necessary to invest in a Rule 506(c) offering can deter high net worth individuals who wish to maintain a certain level of financial privacy from investing in this type of offering. Also, since the safe harbors require up-to-date documents, these investors may repeatedly demonstrate their accredited status and be subjected to reasonable steps verification.

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