The Securities and Exchange Commission (SEC) has issued a no-action letter providing interpretive guidance on the verification of accredited investor status in offerings conducted pursuant to Rule 506(c) of Regulation D under the Securities Act of 1933. Rule 506(c) permits issuers to engage in general solicitation or advertising in private offerings, provided that all purchasers are accredited investors and the issuer takes “reasonable steps” to verify the accredited status of all investors. The no-action letter introduces a streamlined approach, stating that, absent contrary indications known to the issuer, reliance on sufficiently high minimum investment thresholds—coupled with specific written representations from purchasers—may satisfy the verification requirement.
Background on Rule 506(c)
Enacted under the Jumpstart Our Business Startups (JOBS) Act of 2012, Rule 506(c) marked a significant shift in private capital raising. Unlike the traditional Rule 506(b), which prohibits general solicitation but allows self-certification by investors, Rule 506(c) permits issuers, including investment funds, to broadly market their offerings. This expansion aimed to facilitate access to capital by connecting issuers with a larger pool of accredited investors. However, the trade-off is a heightened obligation that issuers must take reasonable steps to verify that each purchaser meets the accredited investor definition under Rule 501(a) of Regulation D, beyond merely accepting an investor’s self-certification.
Rule 506(c) provides a non-exclusive, non-mandatory list of verification methods—such as reviewing tax returns, bank statements, or obtaining third-party confirmations (e.g., from a broker or accountant). 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.
The No-Action Letter’s Guidance
The SEC’s no-action letter, dated March 12, 2025, responds to a request for relief and articulates a practical verification framework. It posits that an issuer may satisfy Rule 506(c)’s verification requirement by establishing a substantial minimum investment amount, $200,000 for individuals or $1,000,000 for entities, provided the following conditions are met:
- Written Representations: The purchaser must provide a written statement identifying the specific category of the accredited investor definition under Rule 501(a) on which it relies (e.g., satisfying the income or net worth tests).
- No Third-Party Financing: The purchaser must represent that the minimum investment will not be financed, in whole or in part, by a third party specifically for the purpose of participating in the offering. For entities qualifying as accredited investors solely based on the status of their equity owners, each equity owner must similarly represent that their portion of the investment is not third-party financed.
The SEC’s position is conditional in that this verification method is viable only if the issuer has no knowledge of facts suggesting the purchaser does not qualify as an accredited investor (e.g., indications of misrepresentation or reliance on undisclosed loans).
Implications for Capital Raising
This guidance builds on a longstanding practice in private placements, where high minimum investment thresholds have served as a proxy for financial sophistication and accredited status and assists capital raising by issuers and investment funds. This approach reduces the burden of verification, which often involves costly and time-consuming due diligence—such as requesting sensitive financial documents—or engaging third-party verifiers. For issuers and investment funds, this streamlined process could lower compliance costs and accelerate offering timelines, while for investors, it minimizes intrusive inquiries into personal finances.
The no-action letter aligns with the JOBS Act’s intent to enhance capital formation. By making Rule 506(c) more accessible, it may encourage greater use of general solicitation, particularly for smaller issuers or emerging funds that lack resources for extensive verification processes. However, issuers must remain vigilant. The SEC’s caveat regarding contrary indications underscores the need for a principles-based assessment, ensuring that reliance on minimum investments and representations is reasonable under the circumstances.
Conclusion
The SEC’s no-action letter offers issuers and investment funds a valuable tool to navigate Rule 506(c)’s verification requirement. By permitting substantial minimum investment amounts, $200,000 for individuals or $1,000,000 for entities, alongside targeted written representations to serve as reasonable steps for verifying accredited investor status, the guidance balances regulatory compliance with practical efficiency. While not a blanket safe harbor, this approach could simplify the process of complying with Rule 506(c), potentially broadening participation in private offerings and reinforcing the flexibility intended by the JOBS Act. Issuers should consult legal counsel to tailor subscription documents and ensure compliance with the letter’s conditions, maintaining the integrity of the Rule 506(c) exemption in an evolving capital-raising landscape.
For further information, please contact:
Matthew Moisan, Partner, Crowell & Moring
mmoisan@crowell.com
