SEC Labels Accountant's Letter "Irrelevant" To Rule 506(c)

Rule 506(c) under the Securities Act of 1933 allows an issuer to solicit and generally advertise an offering exempt pursuant to Regulation D if:

  • The investors in the offering are all accredited investors; and
  • The issuer takes reasonable steps to verify that the investors are accredited investors.

Recently, PIC Renegade Properties, LLC agreed to the SEC's entry of a cease and desist order and the payment of a $400,000 civil penalty for violations of Section 5 of the Securities Act of 1933.  PIC Renegade Properties is the general partner of a real estate fund that raised $54 million from approximately 140 investors in various states.  According to the SEC,

Although the fund was purportedly relying on the registration exemption of Rule 506(c) of Regulation D, it failed to comply with the requirements necessary to avail itself of the exemption.  Specifically, PIC Renegade Properties failed to take reasonable steps to verify the accreditation of a number of investors and improperly sold interests in the fund to certain unaccredited investors.

The SEC alleges that the fund sold to four unaccredited investors.  One of these four caught my eye because it was a trust and the rules governing trusts under Regulation D can be confusing, a subject that wrote about 12 years ago.  See A Brief Rumination On Metaphysics, Trusts and Accredited Investors.  In this case, the SEC took the position that the receipt of an accountant's letter was irrelevant:

PIC Renegade Properties failed to obtain information or documents about this trust’s assets.  PIC Renegade Properties received an accountant’s letter purportedly verifying that the trust was accredited as a natural person with over $1 million in net worth. This letter was irrelevant because the investor was an irrevocable trust, not a natural person.

According to the SEC, the trust had only about $600,000 in assets, which is far less than the $5 million required for trusts under Rule 501(a)(7) (which also requires that the purchase be directed by a sophisticated person).