March 22, 2013
As amended by the JOBS Act, the '33 Act limits an investor's maximum purchase amount in a 4(6) transaction based on the investor's annual income or net worth. One question left to be determined, then, is: (1) How will the investor purchase limits be enforced.
First, I believe that net worth should only be used for determining whether an investor is accredited for Reg D purposes - not 4(6) transactions. Instead, investors participating in a 4(6) transaction should only be permitted to rely on annual income to determine their applicable purchasing limits. To that end, I believe that intermediaries meeting 4A(a) compliance should be required to report all individual investor purchase amounts and tax ID numbers to the IRS as well as issue 1099s to investors showing the cost basis of all 4(6) purchases. The investor would then be held responsible for reporting the 4(6) cost basis amounts from his or her 1099s to the IRS. Ultimately, the IRS would implement the investor safeguards by checking investor purchase amounts against investor adjusted gross income and issuing tax penalties accordingly.