How to use minimum investment amounts as verification of accredited investor status in Regulation D offerings using general solicitation
On March 12, 2025, Latham obtained SEC Staff guidance on the use of general solicitation in private placements. The guidance unlocks the full potential of Regulation D Rule 506(c) by clarifying that issuers may satisfy the verification requirements of Rule 506(c) by relying on minimum investment amounts and related representations from investors. The new guidance is summarized in our Client Alert, which attaches the Latham letter.
Below we answer Frequently Asked Questions arising out of the new guidance.
1. What is an “exempt offering” and why does it matter?
A core requirement of the US federal securities laws is that all offerings of securities must either be registered with the SEC or take advantage of an available exemption from registration. Exempt offerings can take a number of forms; for these purposes, we will focus on exempt offerings under Securities Act Regulation D.
Regulation D sets forth conditions that, if satisfied, provide a safe harbor to establish that a given securities offering fits within a statutory exemption from registration. It is important to comply with these conditions because any offering that does not runs the risk of potential sanctions such as SEC fines and penalties, as well as a statutory right of investors to rescind their original investment.
2. What is a “general solicitation” and why does it matter?
Throughout most of Regulation D’s history, the conditions it imposed limited the manner of conducting the offering. In particular, under the most important provision of Regulation D for large-scale capital raising, Rule 506(b), neither the company issuing the securities nor any person acting on its behalf could “offer or sell the securities by any form of general solicitation or general advertising.”
As a result, securities offerings under Rule 506(b) could occur only in non-public ways. This means no “advertisement, article, notice, or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio.” The limitation also excludes the use of internet advertising, social media, and the like.
This limitation on general solicitation meant that any form of publicity about an offering needing an exemption would risk losing the exemption. And that’s potentially catastrophic (see FAQ 1 above).
3. Who are “accredited investors” and why do they matter?
In addition to limiting how offerings occur, Rule 506 limits who the purchasers of the securities are. In particular, Rule 506 draws a critical distinction between those who qualify as accredited investors and those who do not. The accredited investor designation exists to ensure that those participating in these exempt offerings have the financial sophistication or resources to understand and bear the risks of making the investment.
For this purpose, Regulation D defines accredited investor to mean a natural person or legal entity satisfying specified financial and other criteria.
The financial criteria require natural persons to have:
- annual income exceeding $200,000 (or $300,000 combined with a spouse or spousal equivalent) in each of the prior two years, with a reasonable expectation of the same income level in the current year; or
- a net worth exceeding $1 million, either alone or with a spouse or spousal equivalent, excluding the value of their primary residence (though certain mortgage debt may affect this calculation).
The financial criteria for legal entities (such as corporations, LLCs, trusts, and partnerships) require them to have:
- total assets exceeding $5 million; or
- equity owners who are all accredited investors.
4. How did the JOBS Act affect Regulation D offerings?
Congress changed the Regulation D limitation on general solicitation in the Jumpstart Our Business Startups (JOBS) Act of 2012. The JOBS Act directed the SEC to permit issuers to engage in general solicitation and advertising in exempt offerings, provided that:
- all purchasers in the offering are accredited investors;
- the issuer takes reasonable steps to verify purchasers’ accredited investor status; and
- other conditions of Regulation D are satisfied.
In 2013, the SEC adopted Regulation D Rule 506(c) in response to this statutory mandate.
Rule 506(c), in contrast to Rule 506(b), permits general solicitation and advertising, but only if (as described above) all purchasers in the offering are accredited investors and the issuer takes “reasonable steps” to verify the accredited investor status of each purchaser.
5. Why have Rule 506(c) offerings failed to take off?
Despite its promise, Rule 506(c) has not gained the level of market acceptance seen with traditional Rule 506(b) offerings without general solicitation. In fact, the total value of Rule 506(c) offerings (using general solicitation with verification steps) represented a mere 6% of the total value of Rule 506(b) offerings (without general solicitation or verification steps) in the twelve months ended June 30, 2023.
The private capital markets have not made broad use of Rule 506(c) largely because market participants have found its verification steps to be cumbersome for issuers and intrusive for investors. Under Rule 506(b), an issuer can rely on an investor’s self-certification of accredited investor status. In contrast, market participants have in the past not been willing to rely on Rule 506(c) unless issuers spend time and money verifying the accredited investor status of every single purchaser of securities (whether through an in-house process or a third-party verification service). Beyond that, the most sophisticated investors have no desire to provide the highly sensitive and confidential information required for verification. Taken together, these factors have led to Rule 506(c)’s launch failure.
6. Why is the Latham letter on Rule 506(c) a big deal?
In response to the Latham letter, the SEC Staff has confirmed the Latham interpretive position under which issuers may satisfy the verification requirements of Rule 506(c) by relying on minimum investment amounts, including uncalled capital commitments, and related representations from investors.
The guidance creates a bright line for verification based on minimum investment amounts — generally $200,000 for natural persons and $1 million for legal entities — together with supporting representations from those investors. That eliminates the uncertainty for market participants in implementing reasonable steps to verify accredited investor status, without imposing additional burdens that may slow the offering process or require investors to provide confidential or sensitive information.
The new guidance for the first time gives market participants a clear path to make full use of this method of demonstrating reasonable verification steps. The guidance will make Rule 506(c) an integral part of their fundraising efforts. We could see Rule 506(c) go from launch failure to hypersonic rocket.
7. The Latham letter quotes statements from the SEC in 2013 supporting the use of minimum investments amounts as a verification step for Rule 506(c), so why is this a new thing at all?
This is a new, significant development that will change established practice in the marketplace. Investors often require legal opinions that an offering does not require SEC registration, but third-party legal opinion practice generally looks to some type of SEC safe harbor. When the SEC adopted Rule 506(c), its verification steps were principles-based rather than using an easy-to-apply bright-line standard. The Latham letter applies the SEC’s principles-based requirements to a specific fact pattern that gives market participants a clear and straightforward way to complete the required verification steps. The SEC Staff has now confirmed the Latham interpretation. That will make no-registration opinions more straightforward to provide in offerings that satisfy the conditions described in the Latham letter.
8. Can an issuer begin an offering under Rule 506(b), without general solicitation or verification steps, and then switch to an offering under Rule 506(c), using general solicitation and verification steps?
Yes. That’s been the case long before today, as the SEC Staff has previously stated. See C&DI 256.34 (confirming that “offers and sales of securities made in reliance on Rule 506(b) prior to the general solicitation would not be integrated with subsequent offers and sales of securities pursuant to Rule 506(c)”).
But now, exempt offerings with general solicitation will be much easier using the verification steps in the Latham letter. That provides a meaningful fix in a number of common situations.
9. What are some examples of situations where the Latham letter offers a new solution?
Here are examples of how the Latham letter will provide an easy path to complete an exempt offering using general solicitation:
- Investment funds can publicly launch at the outset to raise a new private fund and broadly advertise it through social media, online, in published interviews, etc.
- Traditional Rule 506(b) offerings that begin without any general solicitation can easily pivot to a Rule 506(c) offering under the Latham letter if the original offering experiences an inadvertent general solicitation (e.g., news or other publicity including CEO quotes about the ongoing offering).
- Rule 506(b) offerings can choose to upsize the offering by switching to a Rule 506(c) offering using general solicitation to attract additional investors.
- Previously announced PIPE offerings can take on new investors after the public announcement of the completed PIPE.
- Cross-border transactions in which foreign offering practices permit general solicitation will have a clear path to doing a concurrent exempt offering to US investors.
10. Can a newly formed entity give the representations required in the Latham letter?
Yes. A newly formed purchaser can give the required purchaser representations if it was not formed for the “specific purpose” of making the “particular investment” in the issuer. For example, a purchaser formed at the time of a particular offering might be formed for the purpose of making several investments that include but are not limited to the particular investment in the current offering. In that case, the purchaser could provide the required representation that it was not formed for the specific purpose of making the particular investment in the issuer.
11. Can an investor use proceeds from debt or equity financings to satisfy the minimum investment condition?
Yes, if the financing was not for the specific purpose of making the particular investment in the issuer. A purchaser under the Latham letter must represent 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. However, there are several ways under the Latham letter in which the purchaser may apply financing proceeds to make its minimum investment. For example, the purchaser may obtain capital through a financing program, including a secured credit facility, that has other purposes than solely making the particular investment in the issuer. Also, a purchaser may use proceeds from binding commitments or financing to the purchaser that predate the commencement of the offering under Rule 506(c). Finally, the purchaser can apply the guidance in the Latham letter to conduct the purchaser’s own financing transaction if the purchaser, as an issuer, has satisfied the conditions that apply to an issuer under the Latham letter. See footnote 4 of the Latham letter.
12. Can an investor privately place its own equity in anticipation of a future Rule 506(c) offering by a different issuer?
Yes. A purchaser could raise its own committed financing in advance of an issuer’s Rule 506(c) offering and then apply that financing to satisfy the purchaser’s minimum investment in the issuer’s offering. See clause (ii) of footnote 4 of the Latham letter.
13. In a particular offering, can an investor (e.g., a feeder fund, special purpose entity or other entity that will become a limited partner in the issuer) simultaneously raise its own financing using the same process available to the issuer?
Yes. In effect, the guidance in the Latham letter can be applied recursively in multiple simultaneous offerings by an issuer as well as by purchasers themselves acting as issuers. For example, a purchaser could, while an issuer’s Rule 506(c) offering is ongoing, use the process described in the Latham letter to raise the purchaser’s own investment capital, which could then be deployed toward the purchaser’s minimum investment in the issuer’s offering. See clause (iii) of footnote 4 of the Latham letter.
14. What format is required for the representations required in the Latham letter?
The purchaser’s representations must be in writing, but there is broad flexibility for any form of written representation as the issuer reasonably determines. In particular, the purchaser may provide the written representations in a standalone document, in a subscription agreement for the offering, in an email or other written electronic communication, or any other written means “as the issuer shall reasonably determine under the circumstances of the offering.” See footnote 3 of the Latham letter.
15. When must the purchaser pay the minimum investment amount to the issuer?
The purchaser may make the minimum investment 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.
16. May a purchaser finance amounts above the minimum investment amount?
Yes. A purchaser may choose to finance amounts above the minimum investment. The requirement regarding the lack of financing in respect of the purchaser’s minimum investment amount applies solely to the funds applied or committed to the minimum investment amount but not to any greater investment amount made or committed by a purchaser or by an equity owner of a purchaser. See footnote 5 of the Latham letter.
