Less Red Tape, More Capital? SEC Clarifies 506(c) Verification Rules

On March 12, 2025, the Securities and Exchange Commission (“SEC”) issued a significant no-action letter clarifying the use of high minimum investment amounts as a method for verifying accredited investor status under Rule 506(c) of Regulation D (the “Letter”).^[1]

Background: Rule 506(c) and Accredited Investor Verification

Rule 506(c), introduced under the Jumpstart Our Business Startups (“JOBS”) Act of 2012 and effective since 2013, allows issuers to engage in general solicitation and advertising when offering securities, provided that all purchasers are accredited investors and the issuer takes “reasonable steps to verify” their accredited status.^[2] This marked a significant shift from previous regulations that prohibited general solicitation in private offerings.

The SEC has previously outlined methods for verifying accredited investor status, including reviewing income or net worth documentation and obtaining written confirmations from certain professionals.^[3] However, these methods can be intrusive and deter potential investors. The Letter helps to clarify an alternative approach centered on high minimum investment thresholds.^[4]

Details of the No-Action Letter

In the Letter, the SEC concurred that an issuer could reasonably conclude it has taken the necessary steps to verify a purchaser’s accredited investor status if the following conditions are met:

1. High Minimum Investment Amounts:
   1. Natural persons must make a minimum investment of at least $200,000.
   2. Legal entities must invest at least $1 million.
2. Written Representations from Purchasers:
   1. Purchasers must provide written confirmation of their accredited investor status under Rule 501(a).
   2. They must also represent that their investment is not financed in whole or in part by any third party specifically for making the investment in the issuer.
3. Issuer’s Knowledge:
   1. The issuer must not have actual knowledge of any facts indicating that the purchaser is not an accredited investor or that the investment is financed in whole or in part by a third party.

This approach aligns with the SEC’s earlier statements that a high minimum investment amount can serve as a reliable indicator of an investor’s financial sophistication and ability to bear the risks associated with private offerings.^[5] On the same day as the Letter, the SEC also released additional staff guidance through its Compliance and Disclosure Interpretations (“CDI”).^[6]

Benefits to the Marketplace and Issuers

The SEC’s guidance offers several advantages:

1. Simplified Verification Process: Issuers can streamline the verification process by relying on high minimum investment amounts and written representations, reducing the need for extensive due diligence.
2. Increased Confidence in Compliance: Issuers can have greater assurance in their compliance with Rule 506(c) requirements, knowing that high minimum investment amounts are considered a reasonable verification step.
3. Attraction of Accredited Investors: The guidance may attract more accredited investors willing to meet high minimum investment thresholds without the intrusive accreditation process, potentially increasing the pool of eligible investors.
4. Reduced Administrative Burden: The reduced need for additional verification steps can lower administrative burdens and costs associated with conducting offerings under Rule 506(c).

Conclusion

The Letter and the related CDI provides valuable guidance for issuers seeking to raise capital under Rule 506(c) of Regulation D. By allowing high minimum investment amounts and written representations to serve as reasonable steps for verifying accredited investor status, the SEC has simplified the verification process, potentially making it easier for issuers to attract and secure investments from accredited investors. However, it must be remembered that SEC No Action Letters and CDI are expressly stated to have no legal force or effect and do not alter existing law, so issuers should be careful not to stray too far from the Letter’s fact pattern and conclusions.

[1] Available at https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225.

[2] 17 CFR § 230.506(c)(2)(ii).

[3] See 17 CFR §§ 230.506(c)(2)(ii)(A), (B), and (C).

[4] See SEC Release No. 33-9415, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings (July 10, 2013) at 20, 28, 34, available at https://www.sec.gov/files/rules/final/2013/33-9415.pdf (elaborating upon minimum investment amount as a factor that issuers may consider when determining the reasonableness of the steps to verify that a purchaser is an accredited investor).

[5] See, e.g., infra note 4 at pp. 27-28, 34 (elaborating on minimum investment considerations and stating that “The terms of the offering will also affect whether the verification methods used by the issuer are reasonable. We continue to believe that there is merit to the view that a purchaser’s ability to meet a high minimum investment amount could be a relevant factor to the issuer’s evaluation of the types of steps that would be reasonable to take in order to verify that purchaser’s status as an accredited investor. By way of example, the ability of a purchaser to satisfy a minimum investment amount requirement that is sufficiently high such that only accredited investors could reasonably be expected to meet it, with a direct cash investment that is not financed by the issuer or by any third party, could be taken into consideration in verifying accredited investor status.”).

[6] See https://www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/securities-act-rules#256.35 www.sec.gov/rules-regulations/staff-guidance/compliance-disclosure-interpretations/securities-act-rules#256.35.

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