SEC Issues No-Action Letter Clarifying Rule 506(c) Accredited Investor Verification

On March 12, 2025, the Securities and Exchange Commission (the “SEC”) Division of Corporate Finance issued a no-action letter (the “Letter”)¹ clarifying “reasonable steps” issuers can take to verify purchasers’ accredited investor status, as required under Rule 506(c) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”) (“Rule 506(c)”). The Letter provides an alternative path for compliance with Rule 506(c) and thereby additional flexibility for offering fund products including certain privately placed funds registered under the Investment Company Act of 1940.

Issuers relying on Rule 506(c) should nonetheless remain mindful of other considerations and limitations associated with relying on Rule 506(c), such as states’ “blue sky” compliance and implications for marketing in non-U.S. jurisdictions.

Accredited Investors under Rule 506(c)

Rule 506(c) permits issuers to broadly solicit and generally advertise an offering (including making public statements) without having to register the offering and sale with the SEC, provided that the issuer “take[s] reasonable steps to verify that purchasers of securities sold in any offering … are accredited investors.”

The rule includes a non-exclusive safe harbor pursuant to which an issuer will be deemed to have taken reasonable steps to verify if it uses certain specified methods that generally require the review of additional investor documentation or obtaining supplemental written confirmations from an investor’s external advisers. While some managers have been willing to undertake these additional steps (or hired third parties for these purposes), these requirements are generally understood to have had a chilling effect on more widespread adoption of, and reliance on, Rule 506(c) by fund managers.

In response to the incoming letter, the Letter concurred that issuers may also satisfy the verification requirements of Rule 506(c) by relying on minimum investment amounts — generally $200,000 for natural persons and $1 million for legal entities — and related written representations from investors.

• Reasonable Steps to Verify Accredited Investor Status: The Letter states that an issuer could reasonably conclude that it has taken reasonable steps to verify that purchasers of securities sold in an offering under Rule 506(c) are accredited investors, which may include:
1. High Minimum Investment Amounts and Written Representations: If a purchaser meets the high minimum investment threshold, it may be reasonable for the issuer to take fewer steps to verify the purchaser’s accredited status, provided there are no facts indicating otherwise.
1. For natural persons, the issuer should require a minimum investment of at least $200,000 and obtain written representations that the purchaser is an accredited investor and that the minimum investment amount is not financed by a third party.
2. For legal entities accredited by total assets, the issuer should require a minimum investment of at least $1,000,000 and obtain similar written representations as described in (A) above.
3. For entities accredited solely by all equity owners’ accredited investor status, the issuer should require a minimum investment of at least $1,000,000 or $200,000 for each equity owner if fewer than five natural persons and obtain similar written representations.
2. No Actual Knowledge of Contrary Facts: The issuer must not have any actual knowledge of facts indicating that a purchaser is not an accredited investor or that the investment is financed by a third party for the purpose of making the particular investment.
• “Blue Sky” Compliance: Rule 503 under Regulation D requires that an issuer relying on Rule 506(c) must file a Form D with the SEC within 15 days of the first sale of securities under Rule 506(c). While substantive state regulation of the offering is preempted by provisions of the National Securities Markets Improvement Act of 1996, which added Section 18(b)(4)(F) to the Securities Act, the states still retain authority to require that notice filings be made and corresponding fees be paid. In many states, notice filings may be required to be completed within 15 days after the first sale of the securities in the state, unless an exemption is available.
  
  Unlike Rule 506(b) offerings, however, many fewer state exemptions are available for Rule 506(c) offerings, and states can impose late filing fees or even consent orders for late filings. In addition, an issuer that relies on Rule 506(c) would not be able to rely on the Section 4(a)(2) statutory private placement exemption should the issuer fail to meet a condition of the Rule 506(c) exemption. Thus, issuers must be more diligent with “blue sky” compliance for Rule 506(c) offerings.
• Marketing outside of the U.S.: While the guidance provides additional flexibility in the U.S., managers need to be careful that any public marketing in reliance on Rule 506(c) is in compliance with requirements for marketing in non-U.S. jurisdictions, which may limit public offerings of funds. For example, the Alternative Investment Fund Managers Directive regulates the marketing of funds in the European Economic Area and general advertising may impact a manager’s ability to comply with the relevant rules or allow it to rely on exemptions for reverse solicitation. These and other non-U.S. offering regimes should therefore be considered in advance of any broad marketing under 506(c).
• 1940 Act Registered Funds: Additional flexibility under Rule 506(c) could also ease compliance burdens associated with offering, maintaining and operating privately placed funds that are registered under the Investment Company Act of 1940 (“1940 Act-Only Funds”). Managers of retail fund complexes establish 1940 Act-Only Funds for a range of purposes, including fund-of-funds structures, institutional-oriented products and private BDCs. Making 506(c) operationally accessible gives such managers additional freedom to streamline offering these in parallel to their public funds, to private fund investors with easier access to fund documentation (combined website), and generally to present more widely the full breadth of a complex that combines 1933 Act registered funds and 1940 Act-Only Funds.

For further details or assistance, please contact Ropes & Gray.

Disclaimer: This summary is for informational purposes only and does not constitute legal advice.