On March 12, 2025, the Division of Corporation Finance (the “Division”) of the SEC issued a no-action letter (the “No-Action Letter”) providing new guidance on Rule 506(c) of Regulation D under the Securities Act. Specifically, the No-Action Letter confirmed an additional method through which an issuer can demonstrate that it has taken “reasonable steps” to verify a purchaser’s “accredited investor” status in exempt offerings conducted under Rule 506(c): mandating minimum investment amounts and obtaining purchaser self-certifications.
The SEC adopted Rule 506(c) under the Jumpstart Our Business Startups (JOBS) Act in 2013 as part of a broader effort to make capital raising easier for US small businesses. Under Rule 506(c), issuers are permitted to engage in general solicitation and advertising while still relying on the private placement safe harbor under Regulation D, provided purchasers of the Rule 506(c) offering are “accredited investors” and issuers take reasonable steps to verify such “accredited investor” status. Rule 506(c) provides certain non-exclusive and non-mandatory methods of verification, including reviewing a purchaser’s tax documents, bank records or brokerage statements, or obtaining written confirmation from certain professionals or regulated entities that such professional or entity has taken reasonable steps to verify that the purchaser is an accredited investor.
In the No-Action Letter, the Division confirmed that an issuer will be deemed to have taken reasonable steps to verify a purchaser’s accredited investor status in a Rule 506(c) offering if the issuer:
- obtains a written representation (including in a subscription document) that (i) the purchaser is an accredited investor and (ii) 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;
- requires minimum investment amounts (including investment amounts made pursuant to a binding commitment to invest the total amount in one or more installments, as and when called by the issuer) of at least $200,000 for natural persons and at least $1,000,000 for legal entities; and
- has no actual knowledge of any facts that indicate that the purchaser is not an accredited investor or that the purchaser’s minimum investment amount was financed in whole or in part by any third party for the specific purpose of making the particular investment.
Takeaway
Private funds and other private issuers have been reluctant to utilize the general solicitation and advertising tools allowed under Rule 506(c) due to its onerous accredited investor verification requirements. The new, less imposing guidance for verification described in the No-Action Letter should lead more issuers to rely on Rule 506(c). As a result, general solicitation and advertising for exempt securities offerings under Regulation D may become the norm, increasing the avenues available to issuers, including private funds, to raise capital from a broader pool of investors.
