On March 12, 2025, the SEC’s Division of Corporation Finance issued guidance affirming that issuers in a 506(c) offering could reasonably be considered to have properly “verified” an investor’s accredited status based simply on certain representations by an investor if the amount invested is “sufficiently high.” This would provide an alternate path for issuers in certain offerings to avoid requiring investors to produce financial documents, tax returns, or third-party verification, which can be time consuming, costly, and off-putting to potential investors.
Issue:
Businesses engaged in raising private capital sometimes find it desirable to present their offering to a broader audience. Rule 506(c) under the Securities Act of 1933 provides issuers a path to raise capital in an exempt offering while utilizing “general solicitation”. The ability to broadcast the offering to a wider audience can present obvious benefits, but in order to utilize this tool, the offering must be made only to accredited investors. Unlike Rule 506(b) offerings, one of the keystone requirements for an offering to comply with the Rule 506(c) safe harbor is that the issuer take “reasonable steps to verify” the investor’s accredited investor status. Commonly cited ways for the issuer to take such reasonable steps include requiring investors to submit tax returns or bank/brokerage statements or employ a third-party verification service. Such measures can deter certain investors from participating in 506(c) offerings, can add costs to the issuer’s fundraising efforts, and may otherwise create inefficiencies in the capital raising process.
Development:
Following a law firm’s request for interpretive guidance, the Division of Corporation Finance (“Division”) issued two updates to its Compliance and Disclosure Interpretations (“C&DIs”). Both of the updated C&DIs focus on the fact that the verification requirement is tied to a reasonableness standard. But one of the updated C&DIs specifies that the reasonable verification requirement may be satisfied, with fewer additional verification steps or even no additional verification steps, where the issuer has: (1) established a “high” minimum investment amount; (2) the subject investor has met the high minimum; (3) the investor has self-certified accredited investor status and that the funds used to make the investment are not financed by a third-party; and (4) the issuer isn’t aware of any facts that indicate the investor is not an accredited investor.
The updated C&DIs reference language from prior SEC releases, including the Adopting Release for Rule 506(c) as support for the new guidance. But the new guidance is significant in that it gives issuers another path to compliance when raising capital via broader marketing efforts without utilizing the most common accredited investor verification methods.
Application:
Despite the clarity, some important key questions remain open – what investment amount is sufficiently high to support a 506(c) issuer’s reliance on an investor’s self-certification? Although the Division did not specify dollar thresholds, we note that the letter requesting the guidance referenced a $200,000 minimum for individuals and $1,000,000 for entities. However, these figures should not be seen as clear benchmarks.
Further, the issue of “third-party financing” will likely require careful consideration by issuers. For example, what should the issuer do if a minor child of a wealthy investor claims to be using their own funds to make a $300,000 investment? Must additional verification measures be taken?
Finally, how does this verification method combine with other verification methods in a single offering? Might an issuer accept lower investment amounts from investors that provide additional verification materials in the same offering in which it accepts self-certified accredited investors at higher minimums? Although it doesn’t strictly check box (1) set forth above, the application of the reasonableness standard would suggest the answer is “yes.”
In sum, issuers and their counsel should treat the new guidance as clear support for a logical solution to the 506(c) accredited investor verification requirement. However, they should diligently document their reasoning as to the sufficiency of the investment amount and the degree to which they rely on the investor’s self-certifications in certain circumstances.