Under Regulation D Rule 506(c) of the Securities Act of 1933, private funds may generally solicit and advertise their offerings, but all purchasers must be verified as accredited investors before being allowed to invest. The requirements for verification go beyond self-certification (such as checking a box in the subscription documents, which is the common practice for private offerings made under Regulation D Rule 506(b). When making an offering under Rule 506(c), fund managers must “take reasonable steps to verify” accredited investor status through documentation and diligence.
Previously, this involved obtaining copies of bank and/or brokerage account statements to confirm an investor’s net worth, copies of prior tax returns to confirm an investor’s annual income and/or an attestation from a licensed professional (such as an attorney, accountant, or investment adviser) who was familiar with the person’s net worth and/or annual salary. On March 12, 2025, the U.S. Securities and Exchange Commission’s (the “SEC”) Division of Corporate Finance (the “Division”) issued a no-action letter (the “No-Action Letter”) that provides a new method for satisfying the requirements of Rule 506(c) without requesting otherwise private and personal financial information from investors.
Background
Section 201(a) of the Jumpstart Our Business Startups Act, passed in 2012, required the SEC to revise its rules issued in Rule 506. Specifically, it required the SEC to provide that the prohibition against general solicitation or general advertising did not apply to Rule 506 offers and sales of securities (1) made only to accredited investors and (2) where the issuer takes reasonable steps to verify that the investors are accredited investors.
Under Rule 506(b), general solicitation or advertising to market securities is not allowed for an offering, but the securities may be sold to up to 35 non-accredited investors in addition to any accredited investors included in such offering. Unlike Rule 506(b), Rule 506(c) does allow general solicitation and advertising of an offering, but the securities may only be sold to accredited investors. Rule 506(c) also requires an issuer to take reasonable steps to verify that all purchasers in a securities offering are accredited investors.
New Guidance
The Division’s No-Action Letter provides that the verification requirements of Rule 506(c) may be satisfied if three conditions are met, including:
- the investor’s minimum investment amount is at least $1,000,000 for legal entities and $200,000 for natural persons;
- the issuer obtains written representations from the investor that the investor:
- is an accredited investor; and
- is not financing its minimum investment amount in whole or in part by any third party for the specific purpose of making the particular investment in the issuer; and
- the issuer has no actual knowledge of any facts that indicate:
- that any investor is not an accredited investor; or
- that the minimum investment amount of any investor is financed in whole or in part by any third-party for the specific purpose of making the particular investment in the issuer.
While this new method for satisfying the verification requirements may require updates to a private fund’s subscription documents, it will make the subscription process easier for investors, address privacy concerns related to the disclosure of personal financial information, and reduce administrative friction.
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