On March 12, 2025, the staff of the Division of Corporation Finance (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) issued an interpretive letter (the “Interpretive Letter”) and published two new Securities Act Rules Compliance and Disclosure Interpretations (“CDIs”), all related to compliance with Rule 506(c) of Regulation D in connection with a generally solicited offering of securities. At the same time, the Staff revised or withdrew several other CDIs in response to changes made in connection with prior Commission rule changes and releases.
General Solicitation Guidance
Regulation D provides an exemption and a safe harbor from registration under the Securities Act of 1933 for offers and sales of securities, subject to certain conditions. In particular, Rule 506(c) permits an issuer to engage in general solicitation in the offer and sale of securities, provided that all purchasers in the offering are accredited investors (historically, high net worth individuals, although this definition has been expanded in recent years). The issuer is required to take “reasonable steps” to verify that the investor is, indeed, accredited, prior to sale. Rule 506(c) provides a principles-based method for verification of accredited investor status as well as a non-exclusive list of methods that can be sufficient to constitute “reasonable steps.”
The incoming letter described a fact pattern in which an issuer requires minimum investment amounts of at least $200,000 for natural persons and at least $1,000,000 for legal entities, and also obtains written purchase representations that include (i) confirmation of accredited status and (ii) that the minimum investment amount was not in any way financed by a third party for the specific purpose of making the investment. In addition, the issuer would be required to not have actual knowledge that any investor is not accredited or that any minimum investment amount was financed for the specific purpose of making the particular investment in the issuer. In the Interpretive Letter, the Staff concurred that such an issuer that “requires purchasers to agree to certain [high] minimum investment amounts,” along with the other written purchaser representations and related conditions, could “reasonably conclude” that it had taken “reasonable steps” to verify accredited investor status under the principles-based method of verification. The Interpretive Letter noted that issuers are responsible for determining whether they have taken reasonable steps, and should consider the particular facts and circumstances of their transaction when making this determination.
The Staff simultaneously published two new Securities Act Rules CDIs building on the guidance in the Interpretive Letter. In the first of these, CDI 256.35, the Staff reiterated existing guidance that the list of verification methods in Rule 506(c) is “non-exclusive and non-mandatory.” In other words, issuers are free to choose any or none of the methods of verification detailed in the rule, and should consider what is reasonable based on the particular facts and circumstances in question. Steps that are “reasonable” for a sophisticated, high net worth repeat investor may not be the same as those for a new, less sophisticated purchaser with little information about the issuer or the offering, and all factors should be considered together.
The second CDI, 256.36, directly addresses the situation covered by the Interpretive Letter, where (i) an accredited investor is required to make a high minimum investment in cash, (ii) the issuer has no actual knowledge that any purchaser is not an accredited investor and (iii) the issuer has confirmed that the investment is not being financed by a third party. The Staff again pointed to existing guidance stating that whether steps are “reasonable” is a determination that must be made by the issuer based on the entirety of the facts and circumstances. Both the Interpretive Letter and CDI 256.36 cite Commission guidance stating that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”[1]
While it is helpful to have Staff guidance regarding the effect of minimum investment amounts on an issuer’s reasonable steps analysis, the impact of the new guidance should not be overstated. Issuers must continue to look at the totality of the circumstances and affirmatively take reasonable steps to verify– investor self-certification alone is not sufficient to constitute reasonable steps, even where minimum investment amounts are high. It is also important to remember the consequences of failing to both take and document reasonable steps to verify for all investors—if an issuer has not done so, they may not be eligible to rely on Rule 506(c),[2] and, absent another applicable exemption or safe harbor for the offering in question, may have violated the federal securities laws.
Revisions to, and Withdrawals of, Compliance and Disclosure Interpretations
In addition to the two new CDIs discussed above, the Staff updated 12 CDIs and withdrew an additional ten CDIs across a wide variety of federal securities law topics. Each CDI is accompanied by a marked version showing the deleted language.
The majority of the revised CDIs reflect updates made in response to the SEC’s 2020 “harmonization release,”[3] rather than reflecting materially changed Staff positions, as follows:
The withdrawn CDIs deal with subjects such as changes to Form D that became effective in each of 2009 (see withdrawn CDI 130.11) and 2013 (see withdrawn CDI 257.01), or requirements of Regulation A that are no longer in effect (see withdrawn CDI 182.04). In other words, these CDIs represent guidance the Staff no longer believes is helpful, or, in some cases, accurate, due to the passage of time or intervening changes in the federal securities laws or rules.
Overall, these changes harmonize the CDIs with the existing landscape of the federal securities laws, and bring Staff guidance into alignment with existing rules, changes which should be appreciated by issuers and other private market participants.
Read the Interpretive Letter here and see the CDIs here.
[1] See Securities Act Release No. 9415 (July 10, 2013).
[2] See Securities Act Rules CDI 260.07.
[3] See Securities Act Release No. 33-10884 (Nov. 2, 2020).
[View source.]
