Client Alert: New SEC Updates Simplify Accredited Investor Verification for Rule 506(c) Offerings
Simplifying Investor Verification in Private Offerings: New SEC Guidance
Date: March 25, 2025
Historical Context and Rule 506(c)
Rule 506(c), adopted in 2013, is a provision under Regulation D of the Securities Act of 1933, which governs private placements of securities. Generally speaking, Rule 506(c) allows issuers to engage in general solicitation and advertising when offering and selling securities, provided that all purchasers of the securities are “accredited investors” and the issuer takes “reasonable” steps to verify their accredited status. The adoption of Rule 506(c) marked a significant shift. This adoption aimed to stimulate economic growth by easing restrictions on capital raising. However, the SEC’s stringent verification examples it provided initially were seen as overly complex, deterring widespread adoption of Rule 506(c).
The Latest SEC Guidance
The SEC’s March 2025 guidance offers a fresh perspective, simplifying the accredited investor verification process. The no-action letter provides that an issuer could reasonably conclude it has taken reasonable steps to verify accredited investor status of purchasers as required under Rule 506(c) where:
- the purchaser agrees to make a minimum investment of $200,000 (in the case of a natural person) or $1,000,000 (in the case of a legal entity), including pursuant to a binding commitment to invest at least a minimum cash amount in one or more installments, as and when called by the issuer;
- the purchaser provides representations that the purchaser is an accredited investor and that 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 in the issuer; and
- the issuer does not have actual knowledge of any facts indicating that the purchaser’s representations as described above are untrue.
The C&DI’s further clarify the method of verifying “accredited investor” status:
- Flexibility in Verification: Rule 506(c)(2)(ii) provides specific mandatory methods that issuers can use to verify the accredited investor status of purchasers. C&DI Question 256.35 makes clear that if an issues does not meet the specific verification methods listed in Rule 506(c)(2)(ii), they can still verify accredited investor status using other methods. The methods listed in Rule 506(c)(2)(ii) are not mandatory or exclusive. Issuers can determine the reasonableness of verification measures based on specific offering circumstances and investor profiles. Factors to consider include the type of accredited investor, the amount any type of information available about them, and the offering's nature and terms, including how the purchaser was solicited and the terms of the offering, such as minimum investment amounts (C&DI - Question 256.35).
- High Minimum Investments as Verification: C&DI Question 256.36 provides a significant update, which is the acknowledgment that high minimum investments can serve as a reasonable verification measure of an “accredited investor.” For instance, individual investors committing at least $200,000, or entities investing $1,000,000, who affirm their accredited status and confirm that their investments are not financed by third parties, may now satisfy verification requirements. Therefore, in these instances, the issuer may not need to take many additional steps to verify the investor's status (C&DI - Questions 256.36). This approach by the SEC is not entirely new, as the concept of using significant investment thresholds as a proxy for verification was discussed in 2013. Nevertheless, this formal recognition in the C&DIs offers issuers more concrete ground to stand on, reducing the ambiguity that previously made many hesitant to utilize Rule 506(c).
Practical Implications and Cautions
While this new guidance simplifies the verification process, allowing for more effective use of general solicitation under Rule 506(c), it is important to note that issuers must remain diligent as rules regarding fraudulent communications still apply. Ensuring that public communications do not inadvertently lead to fraud claims is crucial, necessitating thorough reviews and pre-approvals of marketing materials.
The SEC's new guidance provides valuable clarity and a more accessible framework for issuers to verify “accredited investors” under Rule 506(c) and is a significant step forward, particularly for issuers seeking to engage a broader audience while adhering to regulatory requirements. By easing the verification process and reducing the need for burdensome due diligence, the SEC is helping to rejuvenate interest in Rule 506(c) offerings, potentially leading to increased capital formation and economic growth.
If you have any questions on the issues covered in this publication, please contact Whiteford attorneys in the Corporate and Securities Law Practice.
The information contained here is not intended to provide legal advice or opinion and should not be acted upon without consulting an attorney. Counsel should not be selected based on advertising materials, and we recommend that you conduct further investigation when seeking legal representation.