SEC Staff No-Action Letter Eases Rule 506(c) Accredited Investor Verification

On March 12, 2025, the SEC Division of Corporation Finance published a no-action letter that facilitates compliance with Regulation D Rule 506(c), which permits general solicitation, for offerings with certain minimum investment amounts.  Under Rule 506(c), issuers must take reasonable steps to verify a purchaser’s accredited investor status.  Under the letter, that requirement is now met, without any invasive verification documentation required, if: (i) the issuer requires purchasers to agree to certain minimum investment amounts, and (ii) it obtains certain purchaser representations and meets other conditions. 

The relevant minimum investment amount requirements are:

1. $200,000 for individuals;
2. $1 million for legal entities qualifying as an accredited investor under the asset test; and,
3. for entities qualifying as accredited investors solely because each equity owner is an accredited investor, a minimum investment amount of $1 million or $200,000 for each of the purchaser’s equity owners if all of the purchaser’s equity owners are fewer than five natural persons.

Background

Under Rule 506(c) of Regulation D, an offering that is made only to accredited investors and that is otherwise qualified under Regulation D may make use of general solicitation and advertising, so long as the issuer takes “reasonable steps” to verify that all purchases of securities are made by accredited investors or by purchasers reasonably believed by the issuer to be accredited investors at the time of the sale. Rule 506(c) took effect in September 2013.

The rule sets forth certain non-exclusive and non-mandatory methods that are deemed such “reasonable steps” of verification, including review of certain IRS forms, review of bank and brokerage statements, or obtaining written confirmations from certain types of financial institutions, among other means. 

March 2025 No-Action Letter

Under the letter, an issuer will have taken reasonable steps to verify a purchaser’s accredited investor status in an offering conducted under Rule 506(c) if the issuer requires purchasers to agree to certain minimum investment amounts, obtains certain purchaser representations, and meets certain conditions.

Minimum Investment Amounts

As noted above, the relevant minimum investment amount requirements for offerings are:

1. for individuals, $200,000;
2. for legal entities, the amount depends on the method of qualification for accredited investor status:

a. for entities accredited by total assets (i.e., the entity has at least $5 million in assets), $1 million;
b. for entities accredited solely because of each of their equity owners’ accredited investor status, a minimum investment amount of $1 million or $200,000 for each of the purchaser’s equity owners if all of the purchaser’s equity owners are fewer than five natural persons. 

The letter provides that, “[m]inimum investment amounts include investment amounts made pursuant to a binding commitment to invest a minimum amount in one or more installments, as and when called by the issuer.”

Purchaser Representations

The issuer must obtain written representations that:

• the purchaser is an accredited investor; and,
• 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.

The letter provides more detail as to the representations that should be obtained from (i) natural persons, (ii) entities accredited by total assets, and (iii) entities accredited solely due to all equity owners’ accredited investor status.  In the case of a purchaser that is an entity accredited solely by all equity owners’ accredited investor status, the issuer also must obtain a representation that each of the purchaser’s equity owners has a minimum investment obligation to the purchaser of at least $200,000 for natural persons and $1,000,000 for legal entities.

With respect to third party investor financing, the letter clarifies that the following would not preclude the purchaser from providing the necessary representations:

• financing programs, including a secured credit facility, that have other purposes than solely making the particular investment in the issuer;
• binding commitments or financing to the purchaser that predate the commencement of the offering under Rule 506(c); and/or,
• financing transactions conducted by the purchaser in which the purchaser, as an issuer, has satisfied the conditions applicable to an issuer under the letter.

Actual Knowledge Condition

The letter requires that the issuer have “no actual knowledge of any facts that indicate that any purchaser is not an accredited investor or that any purchaser’s minimum investment amount was financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.”

Concluding Thoughts

With this relief, firms currently fundraising or anticipating doing so in the future in offerings meeting the letter’s conditions, who have not previously relied on 506(c), may want to consider that as an option going forward.  The King & Spalding team would be glad to discuss the letter and its uses and impacts.