New SEC Guidance Eases Burden in Rule 506(c) Accredited Investor Verification Requirements

SEC staff issued no-action guidance on Rule 506(c) of Regulation D private securities offerings on March 12, 2025, which should provide issuers with an easier path to rely on Rule 506(c) and solicit and advertise their private investment funds to investors in the United States.

Regulation D, which is a safe harbor from the registration requirements of the Securities Act of 1933, is commonly used by issuers who conduct private offerings in the United States. On March 12, 2025, the US Securities and Exchange Commission’s Division of Corporation Finance issued a no-action letter that provides helpful guidance on the verification of accredited investor status in private offerings conducted under Rule 506(c) of Regulation D. Specifically, the staff agreed that issuers may rely on minimum investment amounts as a reasonable step to verify a purchaser’s accredited investor status.

To date, issuers have more commonly relied on Rule 506(b) of Regulation D despite its limits on general solicitation and public advertising. In contrast to a 506(b) offering, an issuer in a 506(c) offering may engage in general advertising/solicitation provided that the issuer takes reasonable steps to verify that each investor is an accredited investor, rather than merely relying on responses in the subscription agreement to form a reasonable belief that an investor is accredited, as described below.

Rule 506(c) allows for the use of general solicitation with respect to the private offering of securities if (1) the offering is limited to accredited investors and (2) the issuer takes reasonable steps to verify that all purchasers are accredited investors. Historically, issuers have had limited guidance from the SEC staff on how to meet the verification requirement under the rule, and in many cases have shied away from use of 506(c) to avoid the need to request back-up materials to verify the accredited investor status of its investors.

Similarly, some investors have been reluctant to participate in an offering relying on Rule 506(c) due to the nature of the materials requested for verification, which could include personally identifiable or sensitive information about the investor, and the administrative burden associated with collecting such materials. For example, Rule 506(c)(2)(ii) provides a nonexclusive list of the types of information that could be used for verification, which includes two years of income tax returns, bank statements, brokerage statements and third-party appraisals, a consumer report from one of the nationwide consumer reporting agencies, and/or written confirmations from brokers, attorneys, or accountants.

The new guidance issued by the SEC staff simplifies the verification process that issuers must undertake to verify a purchaser’s accredited investor status.

CONDITIONS

• Minimum Investment Amount: The SEC staff agreed that issuers may rely on minimum investment amounts as a reasonable step to verify a purchaser’s accredited investor status. Specifically, the SEC staff concurred that the minimum investment amounts be at least $200,000 for natural persons and at least $1 million for legal entities.
• Written Representations: Issuers must obtain representations from the purchaser confirming that it is an accredited investor and it has not financed its investment through a third party.
• No Actual Knowledge: The issuer must have no actual knowledge of any facts that indicate a purchaser (1) is not an accredited investor or (2) has financed the investment.

TAKEAWAYS AND ADDITIONAL CONSIDERATIONS

Prior to the adoption of Rule 506(c) in 2013, private offerings seeking to rely on Regulation D were prohibited from using “general solicitation,” which is marketing or advertising the offering via means that are aimed at a broad audience (e.g., newspapers, unrestricted public websites, television or radio broadcasts).

Although Rule 506(c) was a significant departure from the longstanding prohibition on the use of general solicitation in private offerings, most private offerings continued to be conducted under other provisions in Regulation D that prohibit general solicitation. The no-action letter, which is the first no-action letter that the staff has issued on the interpretation of Rule 506(c) since the rule was adopted, should give issuers comfort that they are taking the proper steps to verify a purchaser’s accredited investor status and eliminate the oftentimes burdensome verification requirements of making a 506(c) offering.

The no-action relief will also help issuers with an ongoing offering that seek to transition from relying on Rule 506(b) to relying on Rule 506(c). However, issuers will still need to consider other federal, state, and non-US rules and regulations that are relevant when making a 506(c) offering. For example, there will still be state notice filings and fees (blue sky filings) required under state securities regulations where the private securities offerings are made. The number of states in which those filings and fees are required may be increased if there is a solicitation that reaches the public in general.

Further, 506(c) offerings are still subject to antifraud provisions, limitations under the Investment Company Act of 1940, and certain foreign restrictions on public marketing, among other constraints, if the securities are being offered to investors outside of the United States. Nevertheless, this additional clarity from the SEC staff should be a welcome update to issuers seeking to broaden the distribution of their interests to investors in the United States.