04-04-25 SEC Issues Guidance Clarifying Verification of Accredited Investor Status Under Rule 506(c)
Overview:
On March 12, 2025, the U.S. Securities and Exchange Commission (“SEC”) issued guidance, via a no-action letter, clarifying the “reasonable steps” issuers can take to verify the accredited investor status of purchasers, as required by Rule 506(c) of Regulation D under the Securities Act of 1933 (“Rule 506(c)”). This guidance makes it easier for issuers to verify accredited investor status in a Rule 506(c) offering and provides issuers greater flexibility for fund offerings.
Background:
Rule 506(c), introduced in 2013, permits general solicitation in private offerings, unlike its more popular Rule 506(b) counterpart, but requires issuers to verify accredited investor status. Historically, the complex verification process has deterred many issuers due to administrative burdens and compliance risks.
New SEC Guidance:
The SEC’s new guidance confirms that issuers conducting offerings under Rule 506(c) can rely on a combination of minimum investment amounts and investor written representations to verify accredited investor status. Specifically, the SEC outlined the following criteria:
1. Minimum Investment Amounts (including binding capital commitments):
- For individual investors: at least $200,000.
- For legal entities not formed for the purpose of making the investment: at least $1 million.
- For legal entities that are formed for the purpose of making the investment or are otherwise accredited based on the status of its equity owners: at least $1 million, or $200,000 per equity owner if fewer than five natural persons own the entity.
2. Written Representations to be Provided by Investors:
- The investor is an accredited investor, and their investment is not financed by a third party for the purpose of the specific offering.
- The issuer has no knowledge of any facts that indicate an investor is not accredited or that the minimum investment amount is financed by a third party.
Conclusion:
The SEC’s guidance makes it easier for issuers to take advantage of Rule 506(c) and may lead many issuers currently relying on Rule 506(b) offerings to consider transitioning to Rule 506(c) for future offerings. This opens new opportunities for public communication during fundraising without violating securities laws. Issuers should remain mindful of other considerations and limitations associated with relying on Rule 506(c), including state “blue sky” compliance.
For further guidance on structuring your offering, please reach out to your Woods Oviatt Gilman attorney or any member of the Business and Tax Department at Woods Oviatt Gilman LLP.
