SEC No-Action Letter Relaxes Burden for Verifying Accredited Investor Status in Rule 506(C) Offerings

On March 12, 2025, the U.S. Securities and Exchange Commission (SEC) issued a no-action letter in response to a request seeking interpretative guidance on verifying accredited investor status in securities offerings under Rule 506(c) of Regulation D. Under the new guidance, issuers raising funds under Rule 506(c) will have reasonably satisfied the requirement of accredited investor status verification by using high minimum investment amounts and obtaining certain written representations from prospective purchasers.  

Let’s Level set: Background 

Under Section 5 of the Securities Act of 1933, all offers and sales of securities must register under the Securities Act unless an exemption from registration is available. One such exemption is provided under Section 4(a)(2) of the Securities Act for “transactions by an issuer not involving any public offering”, i.e. private offerings. In 1982, in response to a request for regulatory clarity with respect to complying with the definition of private placements, the SEC adopted Regulation D to streamline and clarify the private offering exemptions. Rule 506 of Regulation D established a “safe harbor” under Section 4(a)(2), thereby providing issuers with more certainty that complying with the requirements of the safe harbor would qualify their offerings as exempt private placements while maintaining the exemption under Section 4(a)(2) as a backstop should the safe harbor become unavailable.  

Under the original Rule 506 (which is now Rule 506(b)), private funds and companies could raise an unlimited amount of capital from an unlimited number of accredited investors and up to 35 non-accredited but sophisticated investors. However, consistent with the notion of “transactions by an issuer not involving any public offering” the original rule strictly prohibited general solicitation and advertising, requiring issuers to have pre-existing relationships with potential investors. Nonetheless, the rule was well received by market participants, as the private capital markets grew exponentially.  

In April 2012, the Jumpstart Our Business Startups (JOBS) Act was signed into law, which was aimed at increasing access to capital for small businesses and in response to criticism faced by Rule 506 for limiting capital access, particularly for early-stage companies that lacked extensive networks or resources to engage broker-dealers. Title II of the JOBS Act directed the SEC to eliminate the prohibition on general solicitation for certain private offerings, provided that all purchasers were accredited investors and issuers took reasonable steps to verify accredited status—creating the current Rule 506(c).  

The Dilemma of Rule 506(c) 

Although Rule 506(c) theoretically relaxed the requirements for private offerings, practically, however, the industry has almost exclusively relied on Rule 506(b).  The compliance cost associated with verifying accredited investor status has served as a deterrence to conducting 506(c) offerings. For example, the verification process may lead to more intrusive and time-consuming verification processes, higher legal and administrative costs, potential investor resistance to providing personal financial documentation, and the need for ongoing verification systems—all of which not only additional complicated costs but also delay the actual fundraising process for private fund managers and companies. As such, Rule 506 (b) has remained widely popular and issuers generally forgo including non-accredited investors in the offerings, although the rule allows up to 35 non-accredited investors.  

The no-action letter  

Under the no-action letter, the SEC agreed that an issuer would have reasonably taken reasonable steps to verify the accredited investor status of an investor in a Rule 506(c) offering if: 

• The offering requires a minimum investment amount (including binding capital commitments) of: 

• • for natural persons, at least $200,000; 

• • for legal entities not formed for the purpose of making the investment, at least $1 million; or 

• • for legal entities that are formed for the purpose of making the investment or otherwise are accredited investors solely based on the accredited investor status of their equity owners, $1 million, or $200,000 for each of the purchaser’s equity owners if all of the equity owners are fewer than five natural persons; and 
    
    

• The purchaser provides written representations that: 

• • the purchaser is an accredited investor; 

• • the minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer; and 
    
    

• The issuer has no actual knowledge of any facts that indicate that any purchaser is not an accredited investor, or that the minimum investment amount of any purchaser is financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer. 

Market Implications and Cautionary Guidance 

This new guidance provides significant opportunities for issuers in the private markets, particularly large private funds. Issuers that are certain that their offering will comply with the requirements of the no-action letter can now engage in general solicitation or advertising in 506(c) private offerings without the burden of verification. Offerings that anticipate relying on this no-action letter should consider their marketing strategy, including the potential pool of investors, possible implications of the integration doctrine under Rule 152, and the implications of other regulatory regimes. For example, under the National Securities Markets Improvement Act 1996 (NSMIA), offerings under Rule 506 are considered “covered” securities and are exempt from state registration requirements–although states can still require notice filings and collect fees. As noted above, Rule 506 provides a safe harbor under Section 4(a)(2). To the extent that the offering fails to satisfy the safe harbor requirements, Section 4(a) 2 may serve as a backstop with respect to registration under federal securities laws. However, because Section 4(a)(2) does not preempt state laws, the issuer would have to analyze the implications of the applicable state laws if Rule 506 safe harbor becomes unavailable.  

We hope the overview above was helpful. Feel free to reach out to us if you have any questions about your specific situation.