Last month, the SEC issued a No Action Letter interpreting Rule 506(c) that effectively provides a streamlined path for private fund sponsors to conduct an exempt general solicitation offering pursuant to Regulation D of the Securities Act of 1933. The guidance reduces administrative burdens by allowing issuers to rely on minimum investment thresholds and investor self-certifications.
Rule 506(c) of Regulation D
Rule 506(c) of Regulation D provides a safe harbor exemption from registration allowing issuers to raise capital through general solicitation and advertising without having to register the offering and sale with the SEC, provided certain conditions are met. A key condition to the 506(c) exemption is that the issuer takes “reasonable steps to verify” that the purchasers of securities are accredited investors.
Rule 506(c) provides a non-exclusive, non-mandatory list of verification methods to verify a purchaser’s status, such as reviewing tax returns, bank statements, or obtaining third-party confirmation through an investor’s external advisors. The SEC has emphasized that what constitutes “reasonable steps” depends on the facts and circumstances, but reliance solely on an investor’s self-certification has generally been insufficient.
New Verification Framework Under Rule 506(c)
Under the new guidance provided in the No Action Letter, the SEC offered a simplified framework for verifying a purchaser’s accredited investor status. Now, issuers will meet the “reasonable steps to verify” requirement if they meet each of the following criteria:
- Minimum Investment Amount: Issuers can use minimum investment thresholds as a reasonable method to verify a purchaser’s status. The SEC staff specified the following thresholds:
- Natural Persons: A minimum investment of $200,000.
- Legal Entities: A minimum investment of $1 million.
For entities formed specifically to make the investment, each equity owner must meet the applicable minimum threshold (i.e., $200,000 for individuals or $1 million for entities).
- Written Representations: Issuers must obtain representations from the purchaser confirming that it is an accredited investor, and that the purchaser has not financed its investment through a third party. Entities formed specifically to make the investment must make representations as to each of its investors.
- No Actual Knowledge: Issuers must have no actual knowledge that the purchaser does not meet the accredited investor status or has financed the investment.
Impact on Capital Raising
The SEC’s new guidance provides issuers and investment funds with a practical framework for conducting general solicitations under Rule 506(c). By allowing reliance on minimum investment amounts and written certifications, the SEC has made it easier to attract and secure investments while maintaining compliance with regulatory requirements.
