Background – Rule 506(c) General Solicitation
The rules of the Securities and Exchange Commission provide exemptions from registration under federal securities laws, allowing companies to raise capital in private placements without registering their offering with the SEC, subject to restrictions on investor types and solicitation methods. Rule 506(c)[1] under the Securities Act of 1933 permits issuers to market and generally advertise private placements if each of the purchasers is an accredited investor[2], the issuer takes reasonable steps to verify the purchasers’ accredited investor status, and certain other conditions are satisfied.
On March 12, 2025, the Corporate Finance staff of the SEC issued a no action letter (“NAL”)[3] significantly simplifying the verification process for Rule 506(c) deals with larger minimum investment amounts, including utilization of self-certification under such circumstances.[4] The prior interpretation of “reasonable steps” for all minimum investment amounts included such things as obtaining copies of an investor’s sensitive personal information or third party (expert) certification. As a result, the industry has almost exclusively relied on another exemption from registration, Rule 506(b), which does not permit general solicitation, but allows issuers to rely on a purchaser’s self-certification (and avoid the onerous Rule 506(c) process) for verifying a purchasers’ accredited investor status. Now, under the higher minimum investment amounts proposed in the request letter from Lathan & Watkins LLP (“RFNA”)[5], the Rule 506(c) process will be easier and less invasive to use. Rule 506(c) offerings with lower minimums, however, must continue to engage in the pre-existing onerous process for verifying accredited investor status.
The No Action Letter
In the NAL, SEC staff confirmed its previously stated view that a high minimum investment amount is a relevant factor in verifying accredited investor status. It noted that the SEC had previously stated that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such 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.”[6] The verification of accredited investor status in “large minimum” investment transactions can be obtained by use of self-certifying accredited investor questionnaires similar to those utilized in Rule 506(b) transactions – with certain modifications summarized below.
Summary of Accredited Investor Questionnaire Requirements, Issuer Certification and Minimum Investment Amounts
Briefly, the NAL agreed that in large minimum investment amount financings outlined in the RFNA, an issuer will have taken reasonable steps to verify a purchaser’s accredited investor status if the issuer:
- obtains written representations that:
- the purchaser is an accredited investor; and
- the purchaser’s 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
- requires minimum investment amounts of at least $200,000 for natural persons and at least $1,000,000 for legal entities; and
- has no actual knowledge of any facts that indicate that any purchaser is not an accredited investor or that any purchaser’s minimum investment amount was financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.
SEC Staff caveats
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.
The NAL reflects the views of the staff of the Division of Corporation Finance. It is not a rule, regulation, or statement of the Commission, and the Commission has neither approved nor disapproved its content. The NAL, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. Because the Division’s views were based on the representations in the RFNA, any different facts or conditions might require the Division to reach a different conclusion.
Changes to Rule 506(c) High Minimum Accredited Investor Questionnaires & Subscription Agreements
The RFNA contains a helpful, more detailed and very important list of items to be included in a 506(c) offering questionnaire and subscription package with the requisite higher minimum investment amounts. Documentation for such Rule 506(c) financings should be updated to include all of these items.
Conclusion
The NAL significantly simplifies, and reduces the invasiveness, of the verification process for private placements with larger minimum investment amounts, including utilization of self-certification under such circumstances. Careful attention should be given to evidencing the eligibility of the financing for Rule 506(c) compliance through written documentation from all investors, and the issuer should ascertain and confirm that it has no reason to question the information set forth in the self-certifications.
For questions on Rule 506(c), please contact Russ Hansen or any member of Prince Lobel’s Business Transactions group.
[1] https://www.law.cornell.edu/cfr/text/17/230.506
[2] https://www.law.cornell.edu/cfr/text/17/230.501
[3] SEC.gov | No Action Letter: Latham & Watkins
[4] The No Action Letter came in response to a “request for no action” written by Latham & Watkins LLP. latham-watkins506c-031225-incoming.pdf
[5] Id.
[6] Securities Act Release No. 9415 (July 10, 2013) 33-9415.pdf
