What Happened
On March 6, 2025, Latham & Watkins submitted to the U.S. Securities and Exchange Commission (SEC) a request for interpretive guidance on the use of minimum investment amounts – over $1 million for entity investors and $200,000 for individual investors – to verify accredited investor status under Rule 506(c) offerings. Previously, issuers would have been required to take additional steps and collect additional information to verify the accredited status of all investors in a 506(c) offering, regardless of the minimum investment amount.
The SEC granted the requested relief in its March 12, 2025 no-action letter. The SEC also updated its compliance and disclosure interpretations (C&DIs) with two new questions (Questions 256.35 and 256.36) about verification of accredited investor status in Rule 506(c) offerings. The SEC’s C&DIs follow the no-action letter’s guidance permitting issuers to rely on investment minimums for verification purposes.
Accredited Investor Verification Process
Rule 506(c) under Regulation D allows private offerings to engage in general solicitation if all purchasers are accredited investors, but also requires issuers “to take reasonable steps to verify” the accreditation status of investors. Issuers traditionally comply with the “reasonable steps” requirement by following one or more of the “non-exclusive and non-mandatory methods” of verifying investor accreditation set forth in the rule, including:
- Reviewing IRS documents to confirm investor income.
- To confirm investor net worth:
- Reviewing bank statements, brokerage statements, and other statements issued by independent third parties.
- Obtaining a consumer report from at least one of the nationwide consumer reporting agencies to confirm liabilities.
- Obtaining a written confirmation of the investor’s accreditation status from one of the following:
- A registered broker-dealer.
- An investment adviser registered with the SEC.
- A licensed attorney who is in good standing under the laws of the jurisdictions where he or she is admitted to practice law.
- A certified public accountant who is duly registered and in good standing under the laws of the place of his or her residence or principal office.
New Guidance
Following the SEC’s new guidance, issuers in offerings with high minimum investments (and otherwise comply with the guidance below) will no longer need to collect the foregoing documents for verification purposes. According to the SEC’s no-action letter and C&DIs, investment minimums must exceed $1 million for entity investors and $200,000 for individual investors. Additionally, the purchaser must certify (1) that it is an accredited investor; and (2) that its 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, and the issuer can have no actual knowledge of contrary information.
Key Takeaways
- Issuers relying on Rule 506(c) and conducting offerings meeting the investment minimums in the SEC’s new guidance should review their subscription documents and consider whether they can reduce or eliminate the collection of verification documents.
- Current verification practices are unaffected for 506(c) offerings below the thresholds or for issuers that otherwise cannot meet the requirements of the no-action letter.
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