On March 12, 2025, the SEC published a No-Action Letter clarifying accredited investor verification requirements under Rule 506(c).
Background
Rule 506 of Regulation D offers two safe harbors from Securities Act registration for companies obtaining investment through private offerings.
- Rule 506(b) allows companies to raise an unlimited amount of money from an unlimited number of accredited investors and up to 35 other purchasers, but companies are not permitted to engage in general advertising and/or solicitation.
- Rule 506(c) allows companies to raise an unlimited amount of money only from accredited investors, but companies are permitted to engage in general advertisement and/or solicitation.
A natural person is an “accredited investor” if:
- They had an income in excess of $200,000 in each of the two most recent years or joint income with their spouse or spousal equivalent in excess of $300,000 in each of those years; or
- They have a net worth over $1,000,000, either alone or together with a spouse or spousal equivalent, excluding the value of the person’s primary residence.
An entity is an “accredited” investor if:
- It has assets exceeding $5,000,000.
Rule 506(c) requires companies to take “reasonable steps” to verify that each investor is an “accredited investor.”
Updated Guidance
The SEC’s letter states that “[w]hether 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.” The SEC’s letter then provides insight and guidance on what qualifies as “reasonable steps”. Those steps include:
- Requiring a minimum investment of at least $200,000 for natural persons or at least $1,000,000 for entities (ie, a sufficiently high threshold that it is reasonable for the issuer to take fewer steps to verify accredited investor status).
- Obtaining a written representation from the investor that (i) it is an accredited investor and (ii) it is not financed in whole or part for the purpose of making the current investment.
- Confirming that the issuing company has no actual knowledge that either 1 or 2 above are untrue.
Conclusion
The SEC’s guidance offers companies looking to raise investment more clarity on the steps required to comply with Rule 506(c). Flaster Greenberg attorneys have experience assisting companies and are prepared to speak to you about your company’s options for raising capital.
