SEC Provides Further Guidance on Accredited Investor Verification under Rule 506(c) of Regulation D
03.14.25
On March 12, 2025, the Securities and Exchange Commission (SEC) published a No Action Letter which clarifies that in offerings of securities that are exempt from registration with the SEC under the Securities Act of 1933 by relying on the exemption under Rule 506(c) of Regulation D, issuers will be deemed to have taken “reasonable steps to verify” an investor’s accredited investor status if certain minimum investments are made along with certain supporting written representations. Before this guidance was issued, Rule 506(c) of Regulation D, which exemption permits general solicitation and advertising, unlike the exemption under Rule 506(b) of Regulation D, was less commonly used because it also required that issuers take “reasonable steps to verify” the accredited investor status of each investor without providing clear guidelines on what would be deemed to be “reasonable steps to verify.”
As a result of the ambiguity surrounding the requirements of Rule 506(c) prior to the recent clarifications, issuers were uncertain about the appropriate methods or measures to take in order to comply with the verification process, aside from the non-exclusive and non-mandatory safe harbors provided in Rule 506(c)(2)(ii), which included:
- Reviewing an investor’s two years’ prior income tax returns and having the investor certify that it expects these income levels to continue in the current year; or
- Reviewing documents (from the last three months) that verify an investor’s assets via bank or brokerage statements, appraisal reports or similar documents and verify credit liabilities via a credit report; or
- Receiving a written confirmation from an investor’s registered broker-dealer, registered investment advisor, attorney or CPA that confirms that such investor is accredited based on information verified in the last three months.
According to the new guidance, an issuer will be deemed to have taken “reasonable steps to verify” an investor’s accredited investor status if:
- The investor invests a minimum of $200,000 for individuals or $1 million for legal entities; and
- The investor provides written representations confirming that it is an accredited investor (as defined under Rule 501(a)); and
- The investor provides written representations confirming that its minimum investment (and, if the investor is a legal entity accredited solely from the accredited investor status of all of its equity owners, the minimum investment amount of any such equity owner) is not funded, in whole or in part, by any third party for the specific purpose of making an investment in the issuer.
This new guidance certainly simplifies the process for an issuer to rely on the 506(c) exemption to the extent that all of the new criteria can be met by each incoming investor in an issuer. However, if any investor in the issuer cannot fully comply with all of the new criteria, the issuer will need to otherwise take “reasonable steps to verify” that any such investor is an accredited investor, and thus will likely need to rely on one of the non-exclusive and non-mandatory safe harbors provided in Rule 506(c)(2)(ii), and certain investors may be reluctant to provide the information required by such safe harbors.
If you have any questions, please contact the authors Keith W. Kaplan at kkaplan@klehr.com or 215.569.4143, Nicole S. Haiem at nhaiem@klehr.com or 215.569.1496 or Madison J. Mueller at mmueller@klehr.com or 215.400.2850.
Co-author Keith Kaplan is a partner and Nicole Haiem and Madison Mueller are associates in the Corporate and Securities Department at Klehr Harrison.