In a groundbreaking no-action letter issued on March 12, 2025, the Securities and Exchange Commission has significantly simplified the accredited investor verification process for Rule 506(c) offerings. This new guidance applies to accredited investors who meet high minimum investment thresholds and provide certain representations. The no action letter marks a pivotal shift in private offerings, potentially increasing the utilization of Rule 506(c) offerings and streamlining the investment process for private issuers and accredited investors.
Previous Accreditation Verification Requirements
Under Rule 506(c) of Regulation D, private issuers can engage in general solicitation and broad advertising of their offerings without registration, provided they sell exclusively to accredited investors whose status has been verified. Historically, the SEC required issuers to take “reasonable steps” to verify an investor’s accreditation status, which typically meant collecting sensitive financial documentation such as tax returns, obtaining verification letters from CPAs, or using third-party verification platforms. While investor representations were always part of this process, the additional verification requirements were often seen as time consuming, burdensome, and overly intrusive which deterred some investors and issuers from utilizing or investing in Rule 506(c) offerings.
New Guidance Under the No-Action Letter
The no action letter provides that issuers may satisfy the accreditation verification requirements by relying on certain minimum investment amounts along with written representations. The letter provides that if an investor meets a high minimum investment threshold and provides certain representations, then it may be reasonable for the issuer to take fewer steps to verify the investor’s accreditation status. The minimum investment thresholds indicated in the letter are as follows:
- For natural persons, the issuer should require a minimum investment of $200,000
- For legal entities accredited by total assets, the issuer should require a minimum investment of $1 million.
- For entities accredited by the equity owner’s accreditation status, the issuer should require a minimum investment of $1,000,000 or $200,000 for each equity owner.
In addition to the accredited investor making certain representations and contributing the minimum investment amounts described above, the issuer must also ensure that it does not have any knowledge of facts indicating that the investor is not accredited.
This new guidance is significant for issuers relying on Rule 506(c) for private exempt offerings and requiring high minimum investment amounts, as it substantially reduces compliance costs and administrative burden while maintaining investor protection. By allowing the issuer to rely on certain representations and high minimum investment amounts, the guidance significantly streamlines the verification process and reduces diligence requirements. The guidance may furthermore attract a greater number of accredited investors and issuers to rely on 506(c) over 506(b).
For detailed guidance on implementing these new verification procedures or to discuss how these changes might affect your capital raising strategy, please contact our Corporate and Securities department.