Quick Answer
Every non-accredited purchaser in the no-solicitation private placement exemption must have enough financial knowledge and experience, alone or with a purchaser representative, to evaluate the investment's merits and risks, or the issuer must reasonably believe this immediately before the sale. A purchaser representative must meet independence, knowledge, and written-disclosure requirements.
A purchaser representative exists for one reason: to let a purchaser who lacks the financial sophistication to evaluate a deal alone borrow someone else's expertise. The role carries independence and disclosure conditions precisely because a representative too close to the issuer could rubber-stamp a bad deal instead of testing it.
What Must a Non-Accredited Purchaser Show to Qualify?
The purchaser, alone or together with a purchaser representative, must have enough knowledge and experience in financial and business matters to evaluate the merits and risks of the investment. Alternatively, the issuer must reasonably believe this immediately before the sale.
Who Qualifies as a Purchaser Representative?
A person qualifies as a purchaser representative, or is treated as one where the issuer reasonably believes the person qualifies, and generally must not be:
- An affiliate, director, or officer of the issuer
- Any other employee of the issuer
- A 10%-or-greater owner of the issuer
Narrow exceptions exist where the purchaser is a relative of the representative by blood, marriage or adoption no more remote than a first cousin. They also reach a trust or estate in which the representative and those relatives hold more than 50 percent, or whose trustee or executor is the representative, and an entity they own more than 50 percent of.
A qualifying representative must also:
- Have the requisite financial knowledge and experience
- Be acknowledged in writing by the purchaser as serving that role for that specific investment
- Disclose in writing, a reasonable time before the sale, any material relationship between the representative or its affiliates and the issuer or its affiliates, plus any related compensation. The disclosure reaches a relationship that exists now, one both sides understand is planned, and one that existed at any time in the previous two years
Exam Tip: Gotchas
- The purchaser's written acknowledgment of a purchaser representative must be specific to that one transaction. A standing acknowledgment covering "all private placements" or "all securities transactions" does not satisfy the requirement.
What Should You Check on Exam Day?
- Confirm sophistication can come from the purchaser alone, from a purchaser representative, or from the issuer's reasonable belief formed immediately before the sale.
- Rule out a purchaser representative who is an affiliate, director, officer, other employee, or 10%-or-greater owner of the issuer, absent a narrow family exception.
- Confirm the purchaser's written acknowledgment names that specific investment, not a blanket acknowledgment covering future deals.
- Confirm the written relationship disclosure reaches back two years and covers affiliates on both sides, not just a relationship existing today.