SEC’s Corp Fin Issues No-Action Letter Response Regarding Issuer Verification Steps for Accredited Investor Status

On March 12, 2025, the SEC’s Division of Corporation Finance issued a no-action letter providing interpretive guidance with respect to the requirement to verify a purchaser’s accredited investor status in a Rule 506(c) offering under Regulation D.

In the no-action letter, the Staff agreed that an issuer offering securities under Rule 506(c) could reasonably rely on self-certifications from investors as to their accredited investor status if they meet certain minimum investment requirements. This no-action letter has the potential to significantly broaden opportunities for private funds and other businesses to raise capital from prospective investors.

Background

The U.S. Securities Act of 1933 (Securities Act) generally requires issuers to register U.S. offerings of securities. Section 4(a)(2) of the Securities Act provides an exemption from registration for securities issued in “transactions not involving any public offering.” Rule 506 of Regulation D is a non-exclusive safe harbor under Section 4(a)(2); offers and sales of securities satisfying the conditions of the rule are exempt from such registration as “transactions not involving any public offering.” From the time of its adoption in 1982 and consistent with the nature of the Section 4(a)(2) exemption, Rule 506 provided that it was unavailable to securities offered or sold “by any form of general solicitation or general advertising.” This prohibition under Rule 506(b) can significantly hinder an issuer’s ability to raise capital, especially for newer market entrants, such as sponsors that are seeking to raise first-time investment funds, who do not have existing relationships with prospective investors.

In 2012 Congress enacted the JOBS Act,¹ in which it directed the SEC to amend Rule 506 to provide that “the prohibition against general solicitation or general advertising . . . shall not apply to offers and sales of securities made pursuant to [Rule 506], provided that all purchasers of the securities are accredited investors” and subject to a requirement that the issuer “take reasonable steps to verify that purchasers of the securities are accredited investors, using such methods as determined by the [SEC].” The SEC responded by bifurcating the Rule 506 exemption. Rule 506(b) is the old version of the rule, while Rule 506(c) contains the modifications required by the JOBS Act: elimination of the prohibition on general solicitation or advertising, a requirement that all purchasers of the securities be accredited investors,² and the new verification requirement. Rule 506(c)(2)(ii) includes a “non-exclusive and non-mandatory” list of acceptable verification procedures, which generally require obtaining documentation or information from third parties, including a review of W-2s or 1099s, tax returns, bank or brokerage statements, or similar items.

However, Rule 506(c) has not been a great success. Far more capital is raised in Rule 506(b) offerings than in Rule 506(c) offerings, probably reflecting the administrative burden and increased risk on issuers and their placement agents created by the verification requirement and the potential reluctance of purchasers to provide the required documentation.

The New Guidance

In the no-action letter, the Staff expressed its approval of a more streamlined approach to the verification requirement based on the amount of each purchaser’s investment and without requiring any documentation from third parties. As the SEC noted in the adopting release for Rule 506(c),³ if a purchaser is able to meet a required high minimum investment amount, the likelihood that such purchaser will satisfy the accredited investor definition may be high enough that “absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”

The no-action letter accepts minimum investment amounts of $200,000 for purchasers that are natural persons and $1,000,000 for purchasers that are entities as satisfying this standard⁴ if accompanied by written representations from the purchaser that: (i) such purchaser is an accredited investor under applicable definitions, and (ii) such purchaser’s minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) 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 Staff noted that the Rule 506(c) exemption would not be available if the issuer had actual knowledge of any facts indicating that any purchaser is not an accredited investor, or that the minimum investment amount of any purchaser (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of any such equity owner) is financed in whole or in part by any third-party for the specific purpose of making the particular investment in the issuer.

The no-action letter response concluded by stating that whether an issuer has taken reasonable steps to verify that a purchaser is an accredited investor is an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances of each purchaser and transaction, but expressed the Staff’s agreement with the view that an issuer could reasonably conclude that satisfaction of the criteria described above meant that it has taken reasonable steps to verify accredited investor status for purposes of Rule 506(c). Of course, because the Staff’s views are based on the representations set forth in the no-action letter, any different facts or conditions might require the Staff to reach a different conclusion.

New York State Securities Laws

Under New York’s Martin Act, a transaction conducted under Rule 506(c) may be considered tantamount to an offering made to the public if it involves general solicitation or advertising. This in turn will require compliance with the Martin Act’s filing provisions if the issuer is based in New York, or residents of New York will be offered the opportunity to participate in the offering.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.