SEC No-Action Letter Eases Accredited Investor Verification Requirements Under Regulation D Rule 506(c)
In March 2025, the SEC issued a "no-action" letter clarifying what constitutes the “reasonable steps” necessary for verifying accredited investor status under Regulation D Rule 506(c). The letter offers companies raising capital increased flexibility in conducting general solicitation offerings under Regulation D without the need for intrusive income or net worth verification of potential investors so long as certain investment thresholds and written representations are met.
This is significant relief to companies who wish to market securities publicly, but have been deterred by burdensome accredited investor verification procedures. The letter encourages broader adoption of Regulation D issuances under Rule 506(c) by reducing administrative hurdles, particularly for offerings involving higher minimum investment amounts.
Background: Regulation D Rule 506(c) + Accredited Investor Verification
Regulation D's Rule 506(c) is a safe harbor under the Securities Act of 1933 that permits "general solicitation and advertising of private offerings" provided that:
- all purchasers are accredited investors, and
- the issuing company takes “reasonable steps” to verify their status.
This has historically required review of supporting documentation or reliance on third-party verifications, which many companies viewed as overly invasive or impractical. The SEC has attempted to address these concerns by providing a non-exclusive safe harbor listing acceptable verification methods. However, these methods have limited the use of Regulation D Rule 506(c), especially among smaller issuers and early-stage fund sponsors.
The No-Action Letter: Key Points
The letter introduces a more flexible standard for verification when using larger minimum investment thresholds with appropriate representations from the investor.
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For Natural Persons:
- Minimum Investment: $200,000
- A written representation that the investor is an accredited investor
- Confirmation that the investment is not financed, directly or indirectly, by a third party for the purpose of making the investment
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For Legal Entities (accredited based on total assets):
- Minimum Investment: $1,000,000
- A written representation of accredited investor status
- Confirmation that the investment is not third-party financed
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For Entities Accredited Solely Based on Their Equity Owners:
- Minimum Investment: $1,000,000 in total, or $200,000 per equity owner if there are fewer than 5 natural persons
- Written representation of accredited investor status
- Confirmation that each equity owner meets the applicable minimum investment thresholds and that no third-party financing is involved
Additional No Actual Knowledge Standard
Regardless of the investment threshold, issuers must not have actual knowledge that the purchaser is not an accredited investor or that the investment was financed by a third party for the purpose of the offering.
“Blue Sky” Compliance Considerations
Although Regulation D Rule 506(c) offerings are exempt from substantive state regulation, companies are still subject to state notice filing requirements. Under Rule 503, a Form D must be filed with the SEC within 15 days of the first sale. Many states require similar filings and fees within that same timeframe.
Unlike Regulation D Rule 506(b) exempt offerings, far fewer state-level exemptions apply to Regulation D Rule 506(c) exempt offerings. Late filings can result in penalties, including consent orders and fines. Additionally, failure to meet all Regulation D Rule 506(c) conditions may jeopardize reliance on Section 4(a)(2), which otherwise provides a statutory private placement exemption.
Implications for Companies Raising Capital Under Regulation D
The letter substantially lowers the administrative burden for issuers relying on Regulation D Rule 506(c), particularly those targeting higher-net-worth investors. It is expected to increase the use of general solicitation by:
- Allowing broader public communications, including internet-based marketing
- Reducing the need for intrusive financial verification
- Supporting more streamlined capital raising for private funds and startups
While other barriers—such as investor sophistication, ongoing disclosure obligations, and illiquidity—remain, the SEC’s letter is a significant step toward making general solicitation a more practical option in private offerings.
