On March 12, 2025, the Securities and Exchange Commission issued a significant No-Action Letter, providing clarity on how issuers can satisfy the “reasonable steps” requirement for verifying accredited investor status in Rule 506(c) Regulation D offerings. This guidance responds to an inquiry from Latham & Watkins LLP and effectively endorses the use of high minimum investment thresholds paired with specific investor representations as an acceptable method for verifying accredited investor status for certain large offerings.
Specifically, the SEC Staff stated that issuers could meet the verification requirement by offering a high minimum cash investment threshold—suggested thresholds being around $200,000 for individuals and $1,000,000 for entities—combined with written investor confirmations. These confirmations must include statements affirming that investors qualify as accredited under Regulation D definitions, and importantly, that their investment funds are not financed by third parties specifically for the investment. Additionally, the issuer must also have no actual knowledge contradicting these investor representations.
Industry specialists believe this practical approach will streamline the onboarding processes for private fund managers and reduce investor friction, eliminating the need for invasive financial document reviews. Investors merely need to provide certifications they are accredited investors and that the funds invested are their own. This self-certification process is less burdensome and may encourage more high-net-worth individuals to participate in 506(c) offerings, enhancing the utility and appeal of general solicitation permitted under Rule 506(c).
However, the SEC Staff emphasized that issuers should maintain vigilance for “red flags.” If there is any indication or knowledge that an investor does not genuinely meet the accredited criteria or if their funds are sourced from prohibited financing, issuers cannot rely solely on this streamlined verification method, and additional due diligence would be necessary.
While this No-Action Letter provides valuable guidance, certain limitations and open questions remain. For instance, the SEC did not define a universally applicable “sufficiently high” threshold for minimum investments, leaving issuers to exercise prudent judgment relative to their specific contexts. Additionally, the SEC Staff underscored that this guidance addresses typical investment scenarios and does not necessarily extend to atypical or borderline investor situations. In those cases, further scrutiny and traditional verification methods, such as financial document reviews or third-party verification letters, may still be prudent.
Ultimately, the SEC’s clarification is intended to make the process more efficient for private fund sponsors using Rule 506(c), provided the outlined conditions—high minimum investments, explicit investor representations, and absence of contradictory information—are adhered to and properly documented.
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