SEC Issues No-Action Letter on Rule 506(c) Verification

On March 12, 2025, the Securities and Exchange Commission (SEC) issued a no-action letter which provided assistance for issuers and investment funds relying on Rule 506(c) of Regulation D.

While prior guidance existed on the application of minimum investment amounts as a factor in determining whether an issuer has satisfied the requirement to take reasonable steps to verify purchasers’ accredited investor status, further clarification has now arrived.

History

Rule 506(c), effective since 2013, is used for private placements, which are offerings of securities that are not registered with the SEC. Prior to the introduction of Rule 506(c), issuers were prohibited from engaging in general solicitation or advertising when offering securities under Regulation D. This changed the regulatory environment by introducing a new requirement allowing issuers to broadly solicit and advertise to raise capital in an offering provided all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited investor status. This can include reviewing documentation like tax returns, IRS forms, bank and brokerage statements, credit reports, or asset verification letters.

Current Impact

While there was some prior guidance, now registered investment advisers have clarified direction, which has potential to significantly affect capital raising. The determination of whether an issuer has taken reasonable steps to verify accredited investor status has historically been circumstance dependent.

Now, the SEC has recognized that requiring a high minimum investment amount can be a relevant factor in verifying accredited investor status. Under the new guidance, a private fund issuer could reasonably conclude that it has taken reasonable steps to verify a purchaser’s accredited status of the private fund.

The issuer would do this by requiring purchasers to agree to certain minimum investment amounts ($200,000 in the case of a natural person or $1,000,000 in the case of a legal entity). The minimum investment amount would be accompanied by written representations noted below:

The purchaser must also provide representations that the purchaser is an accredited investor;
The fact that the purchaser’s minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer; and
The issuer does not have actual knowledge of any facts or circumstances contrary to the of the above.

Summary

This new guidance has simplified the verification process, making it easier for issuers to attract and secure investments from accredited investors and potentially reduce administrative costs associated with conducting offerings under Rule 506(c).

The No-Action letter provides helpful guidance on the verification of accredited investor status in offerings by allowing issuers to rely on high minimum investment amounts, coupled with written representations from purchasers, as a reasonable step to verify accredited investor status.

Author: Lauren Grossi, CPA | [email protected]