June 30, 2015
June 29, 2015
June 28, 2015
June 27, 2015
Questions About Third-Party Confirmations Of Accredited Investor Status
Countless memoranda and alerts have been issued about the SEC’s adoption of rule amendments eliminating the prohibition against general solicitation and general advertising in Rule 506 and Rule 144A offerings. Congress ordered the SEC to adopt these amendments as part of the Jumpstart Our Business Startups Act, or JOBS Act. Issuers that wish to engage in general solicitation take “reasonable steps” to verify the accredited investor status of purchasers. One, but not the only, way for issuers to meet this requirement is for the issuer to obtain a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a certified public accountant stating that such person or entity has taken reasonable steps to verify that the purchaser is an accredited investor within the last three months and has determined that such purchaser is an accredited investor. Rule 506(c)(2)(ii)(C).
The rule makes clear that not just any CPA will suffice – the CPA must be duly registered and in good standing under the laws of the place of his or her residence or principal office. As far as I can tell, the California Board of Accountancy does not provide “good standing” certification per se. However, the Board’s website does allow the public to look up a CPA’s status. That part is easy but after that matters get murky. There are fifteen different possible status levels – everything from “clear” to “deceased”. How these standards correspond to the SEC’s rule is anybody’s guess. For example, a California CPA might have a “Clear, Probation” status. The Board defines this as follows:
The license is current and valid. The licensee can engage in the practice of public accountancy prior to the license expiration date. Additionally, the licensee has been disciplined and may have part of the disciplinary order (for example, revocation or suspension) stayed and may continue to practice under specific terms and conditions. Please contact the CBA for further information.
Is a CPA holding “Clear, Probation” in “good standing”?
In the adopting release, the SEC suggests that CPA confirmations are, or could be, ”attest services” (“The Commission recognizes that there may be particular considerations a certified public accountant would need to take into account to comply with applicable professional standards for attestation engagements to provide a report that constitutes a confirmation in the context of this rule.”). California’s Accountancy Act and the Board’s rules also use the term “attest services”. As I understand the rules, only CPAs with sufficient experience are authorized to sign attest engagements. Cal. Bus. & Prof. Code § 5095. The Board describes an “attest engagement” as follows:
One in which the practitioner is engaged to issue, or does issue a written communication that expresses a conclusion about the reliability of a written assertion that is the responsibility of another party. Attest services include an audit, a review of financial statements, or an examination of prospective financial information; however, attest services do not include the issuance of compiled financial statements.
How to Select A CPA. Cf. 16 CCR § 2.4. Fortunately, the Board’s website provides information about a licensee’s experience. If an “A” appears, the licensee is authorized to perform the full range of accounting services, including signing attest reports on attest engagements.
Finally, CPAs and other third-party verifiers should note that if an individual’s accredited investor status is based on income, the person making the verification will need to assess the reasonableness of the investor’s income expectations. Under Rule 501(a)(6), an investor must not only have the required income in each of the two most recent years, but must have a “reasonable expectation of reaching the same income level in the current year”. The SEC did not explain what reasonable procedures might be used to assess the reasonableness of a prospective purchaser’s expectations.