On March 12, 2025, the Securities and Exchange Commission (SEC) issued a No-Action Letter (NAL) that clarified and expanded the definition of “reasonable steps” an issuer must take when making an offering under Rule 506(c). The new guidance increases the ability for small funds to raise capital and solicit investors by decreasing the administrative burdens previously applicable to Rule 506(c) offerings.
Background: SEC Rules 506(b) and 506(c)
Generally, under Section 5 of the Securities Act of 1933, any offers or sales of securities must be registered with the SEC unless an exemption applies. Regulation D contains SEC Rules 506(b) and 506(c), safe harbor exemptions commonly used to allow issuers to offer and sell securities without registration. Each of 506(b) and 506(c) requires investor accreditation, with an exception for up to 35 unaccredited investors under 506(b). Rule 506(b) restricts advertising, while Rule 506(c) permits general solicitation. Furthermore, Section 12(g) of the Securities Act of 1934 imposes a registration requirement if an issuer has more than 2,000 investors in a fiscal year.
Rule 506(b) allows issuers to raise capital from investors with whom the issuer has a preexisting, substantive relationship. A relationship is substantive when the issuer has enough information to evaluate an investor’s financial circumstances and sophistication, including their ability to determine the merits and risks of an investment. Under 506(b), issuers may raise capital from up to 35 non-accredited investors and an unlimited number of accredited investors.
To qualify as accredited, an investor must meet certain SEC criteria. Individuals are accredited if they had an annual income equal to or exceeding $200,000, or $300,000 in combination with their spouse or partner, in each of the prior two years, with a reasonable expectation of the same or greater income in the current year. Alternatively, an individual may be accredited if their net worth exceeds $1 million, excluding their primary residence. Professionals may also be accredited if they meet specialized criteria and qualify as “knowledgeable employees” of the sponsor. An entity may be accredited if it owns investments in excess of $5 million or, in certain situations, holds assets over $5 million. When making an offering under 506(b), issuers may rely on investors’ self-verification of accreditation.
Rule 506(c), on the other hand, allows issuers to solicit generally, but only accredited investors may contribute capital. Additionally, unlike under 506(b), issuers must take “reasonable steps to verify” an investor’s accreditation status. Previously, “reasonable steps” were limited to a handful of options, such as obtaining the investor’s tax returns for the previous two years to confirm the investor met the income threshold, evaluating information about an investor’s assets and liabilities to determine whether they met the net worth threshold, or obtaining written certification from the investor’s attorney, broker dealer, registered investment adviser or CPA that they took reasonable steps to verify the investor’s accreditation status within the past three months.
506(c)’s “reasonable steps” requirement historically imposed a substantial administrative burden for sponsors of private investment funds because investors were often reluctant to share sensitive information with an issuer, and third parties were frequently unable or unwilling to certify accredited status. As a result, offerings under 506(c) have been less popular, making up only six percent of capital raised under 506(b) and (c) offerings between 2022 and 2023, according to SEC statistics.
NAL Guidance and Impact
The NAL provides that an issuer who does the following has taken “reasonable steps” to verify an investor’s accreditation for purposes of Rule 506(c):
1. Requires a minimum investment amount1 of at least $200,000 for individuals or $1,000,000 for entities;2 and
2. Obtains written representations that the investor is accredited, and that the minimum investment amount is not financed, in whole or in part, by a third party.
Additionally, the issuer must not have actual knowledge of facts indicating that the investor does not qualify as accredited or that the minimum investment amount was financed.
On the same day as the NAL was issued, the SEC also updated its Compliance and Disclosure Interpretations (C&DI). In C&DI 256.35, the SEC reminded issuers that the list of verification methods set out in 506(c) is “non-exclusive and non-mandatory,” and that “particular facts and circumstances…should be considered in an interconnected manner.” Although the minimum investment limits and representation requirements in the NAL seem to set a clear example, the SEC continues to signal that different verification methods may still be appropriate in some situations.
Additional Considerations for Issuers
Although the interpretation in the NAL eases administrative burdens, even exemptions under 506(c) do not clear offerings from all oversight. As we discussed in an earlier blog post, issuers relying on Regulation D and its exemptions must electronically file with the SEC on “Form D,” which notifies the SEC and the general public about the exempt offering. Additionally, although federal law preempts states from substantively regulating offerings made under 506(c), states may still require some filings and fees.
While the NAL provides more flexibility for offerings made inside the U.S., there may be additional marketing restrictions or requirements for offerings made outside the U.S. Issuers relying on 506(c) should also be careful to navigate and comply with foreign laws regulating public offerings.
No-action letters reflect the SEC staff’s views on whether they would recommend the Commission take action against an entity for engaging in a specific proposed action. While these letters provide more certainty about the consequences of particular actions, they are not formal opinions and are not necessarily binding on the Commission. Because the SEC may also retract no-action letters and the guidance within them at any time, securities regulation is a constantly evolving area.
While engaging in general solicitations under Rule 506(c), a fund sponsor may still rely on the investment company registration exemptions under Section 3(c)(1) or 3(c)(7) of the Investment Company Act. Both exemptions state that an issuer may not engage in a “public offering,” but the SEC confirmed that a “public offering” in this context has the same meaning as under Section 4(2) of the Securities Act, which means an offering that complies with Rule 506(b) or (c) is not a public offering.3
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1 Minimum investment amounts may be made pursuant to a binding commitment to be called over time.
2 If an entity has fewer than five natural person equity owners, however, the minimum investment amount may be $200,000 per equity owner.
3 https://www.sec.gov/about/divisions-offices/division-investment-management/investment-company-registration-regulation-package
Kaitlyn Snyder, a rising third-year law student at Wake Forest Law School and summer associate at Robinson Bradshaw, contributed to this post.
