Rule 506(c) of Regulation D allows companies to use general solicitation and general advertising to raise capital without registering the offering under the Securities Act. But that flexibility comes with a critical condition: every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify each purchaser’s accredited investor status.
For issuers, the key distinction is that Rule 506(c) requires more than a signed accredited investor questionnaire. Verification is an independent condition of the exemption. The SEC’s current guidance also confirms that issuers can use a flexible, facts-and-circumstances approach and, in appropriate cases, may rely heavily on a high minimum cash investment as part of the verification analysis.
What Is Rule 506(c)?
Rule 506(c) is a private offering exemption under Regulation D. It permits an issuer to broadly solicit and generally advertise an offering, provided that all purchasers are accredited investors, the issuer takes reasonable steps to verify their accredited investor status, and the other applicable requirements of Regulation D are satisfied.
There is no federal cap on the amount an issuer may raise under Rule 506(c). Securities sold under the exemption are restricted securities, Rule 506 bad actor disqualification provisions apply, and the issuer generally must file Form D with the SEC within 15 days after the first sale.
Rule 506(c) Verification Is Different From Investor Self-Certification
A purchaser’s representation that the purchaser is accredited can be part of the process, but the issuer must separately satisfy Rule 506(c)’s reasonable-steps-to-verify requirement. SEC staff has emphasized that the verification requirement is independent of the requirement that all purchasers actually be accredited investors.
That means an offering does not automatically satisfy Rule 506(c) merely because every purchaser ultimately turns out to be accredited. The issuer should be able to show what verification steps were taken and why those steps were reasonable under the circumstances.
Who Qualifies as an Accredited Investor?
Rule 501(a) contains multiple accredited investor categories for individuals and entities. Common individual categories include the income and net-worth tests, certain professional certifications and licenses, and certain directors, executive officers, and general partners of the issuer.
- Net worth: more than $1 million individually or jointly with a spouse or spousal equivalent, excluding the value of the primary residence, subject to the rule’s liability provisions.
- Income: individual income above $200,000, or joint income above $300,000 with a spouse or spousal equivalent, in each of the two most recent years, with a reasonable expectation of reaching the applicable level in the current year.
- Professional credentials: holders in good standing of certain SEC-designated securities licenses, including Series 7, Series 65, and Series 82 licenses.
- Issuer insiders: certain directors, executive officers, and general partners of the issuer or of a general partner of the issuer.
Entities may qualify under several categories based on status, assets, investments, or ownership. Because the applicable verification method depends on the category claimed, issuers should identify the specific Rule 501(a) category for each purchaser before deciding how to verify status.
What Are Reasonable Steps to Verify Accredited Investor Status?
The SEC uses a principles-based standard. Whether the issuer has taken reasonable steps is an objective determination based on the facts and circumstances of the purchaser and transaction.
Current SEC staff guidance identifies several interconnected factors that can affect the amount of verification needed:
- The nature of the purchaser and the accredited investor category the purchaser claims to satisfy.
- The amount and type of information the issuer already has about the purchaser.
- The manner in which the purchaser was solicited.
- The terms of the offering, including the size of any minimum investment.
In practical terms, the more information an issuer has indicating that a purchaser is likely to be accredited, the fewer additional steps may be necessary. Conversely, when the surrounding circumstances create uncertainty, additional verification may be appropriate.
SEC Verification Methods for Natural Persons
Rule 506(c) includes specific non-exclusive methods that an issuer may use to verify natural persons. These methods are not mandatory; an issuer may instead use a principles-based method when reasonable under the circumstances.
1. Income Verification
An issuer may review specified IRS forms reporting the purchaser’s income for the two most recent years and obtain a written representation that the purchaser reasonably expects to reach the required income level in the current year. Relevant documents may include Forms W-2, Forms 1099, Schedule K-1s, and filed Forms 1040.
2. Net-Worth Verification
An issuer may review specified documentation concerning assets and liabilities. Asset documentation may include bank statements, brokerage statements, certificates of deposit, tax assessments, and appraisal reports from independent third parties. The listed net-worth verification method also involves reviewing a consumer report from a nationwide consumer reporting agency and obtaining the required written representation from the purchaser.
When relying on this specific non-exclusive method, the relevant documentation generally must be dated within the prior three months of the sale. If documents fall outside that period, the issuer may need to use a principles-based verification analysis instead.
3. Third-Party Verification
An issuer may obtain written confirmation from certain qualified third parties that they took reasonable steps to verify the purchaser’s accredited investor status within the applicable period and determined that the purchaser is accredited. Qualifying third parties include registered broker-dealers, SEC-registered investment advisers, licensed attorneys, and certified public accountants.
4. Prior Verification of Existing Investors
Rule 506(c) also permits reliance on certain prior verifications for a limited period when the issuer obtains a written representation that the purchaser continues to qualify and the issuer is not aware of information to the contrary. Issuers with repeat investors should preserve verification records so later offerings can be evaluated efficiently.
The 2025 SEC Rule 506(c) Minimum Investment Guidance
On March 12, 2025, the SEC Division of Corporation Finance issued a no-action letter addressing whether high minimum cash investments, combined with specified representations and conditions, could satisfy Rule 506(c)’s reasonable verification requirement. The staff agreed that a high minimum investment amount is a relevant verification factor and concluded that the issuer described in the request could reasonably determine that it had taken reasonable steps based on the particular facts presented.
The staff’s position was incorporated into the SEC’s current Corporation Finance Interpretations. The guidance emphasizes that a high minimum investment may, depending on the facts, reduce or even eliminate the need for additional verification steps other than confirming that the purchaser’s cash investment is not being financed by a third party for the investment.
What Were the Minimum Investment Amounts?
The March 2025 request described minimum cash investments of at least $200,000 for natural persons and at least $1 million for legal entities, together with purchaser representations and additional conditions. For certain entities relying on the accredited status of all equity owners, the framework also addressed minimum investment amounts attributable to those owners.
These figures should not be treated as new accredited investor thresholds or automatic safe harbors. The SEC staff response was expressly based on the facts and representations in the request and stated that different facts or conditions could lead to a different conclusion.
Why the Source of Investment Funds Matters
When an issuer relies on a substantial minimum investment as part of a principles-based verification method, the source of the investment funds becomes important. The SEC’s guidance focuses on confirming that the purchaser’s cash investment is not financed in whole or in part by a third party for the specific purpose of making the investment.
The reason is practical: a purchaser’s ability to fund a large investment with its own resources can provide information relevant to the likelihood that the purchaser satisfies an accredited investor category. That inference becomes weaker when another person supplies the money for the investment.
Can Different Investors Be Verified in Different Ways?
Yes. Current SEC staff guidance confirms that an issuer may use different verification methods for different investors in the same Rule 506(c) offering. One investor might be verified through a third-party letter, another through income documentation, and another through a principles-based approach involving a substantial minimum investment.
This flexibility can be particularly useful in offerings involving both individuals and institutional purchasers because different accredited investor categories naturally call for different evidence.
What If the Investor Is Accredited but the Issuer Did Not Verify?
The issuer cannot rely on the fact that the investor happened to be accredited as a substitute for verification. SEC staff has stated that the reasonable verification requirement is separate and independent from the requirement that all purchasers be accredited investors.
For issuers using general solicitation, this makes contemporaneous documentation especially important. The verification process should occur as part of the subscription and closing process rather than being reconstructed after the sale.
What If Verification Was Reasonable but the Investor Was Not Actually Accredited?
SEC staff has also addressed the opposite situation. If an issuer took reasonable steps to verify the purchaser and formed a reasonable belief at the time of sale that the purchaser was accredited, the issuer does not necessarily lose the Rule 506(c) exemption solely because it is later discovered that the purchaser did not actually satisfy an accredited investor category, assuming the other requirements of Rule 506(c) were met.
Common Rule 506(c) Accredited Investor Verification Mistakes
Relying Only on a Checked Box
An accredited investor questionnaire is useful, but an unsupported representation may not be enough to satisfy Rule 506(c)’s verification requirement.
Treating the Listed SEC Methods as Mandatory
The specific verification methods in the rule are non-exclusive and non-mandatory. Issuers may apply the principles-based reasonableness standard directly to the circumstances of the purchaser and offering.
Treating the 2025 Guidance as an Automatic Safe Harbor
The $200,000 and $1 million minimum investment amounts appeared in a specific no-action request with accompanying representations and conditions. They do not create a universal rule that a purchaser investing those amounts is automatically verified or automatically accredited.
Using Stale Net-Worth Documents
If an issuer elects to rely on the specific net-worth verification method in Rule 506(c), documents that must be dated within the prior three months must satisfy that timing requirement as of the sale.
Ignoring Contrary Information
An issuer should not disregard information suggesting that a purchaser may not qualify or that the stated minimum investment is financed by a third party. Contrary information can require additional verification.
Failing to Keep a Verification Record
The issuer should maintain records showing the method used, the information reviewed, any third-party confirmation obtained, relevant purchaser representations, and the basis for the issuer’s conclusion.
Rule 506(c) Accredited Investor Verification Checklist
- Identify the specific Rule 501(a) accredited investor category claimed by each purchaser.
- Determine whether a listed verification method or a principles-based method is appropriate.
- Obtain the required documents, written representations, or third-party confirmation.
- Consider how the purchaser was solicited and what information the issuer already has.
- If relying on a high minimum investment, confirm the investment amount and address third-party financing.
- Investigate facts that appear inconsistent with the purchaser’s claimed accredited status.
- Complete the verification analysis by the time of sale.
- Maintain records documenting the verification process and conclusion.
- Confirm that the offering also satisfies Form D, bad actor, state notice, and other Regulation D requirements.
Frequently Asked Questions About Rule 506(c) Verification
Can an investor simply sign an accredited investor questionnaire?
A questionnaire can be part of the process, but the issuer must still take reasonable steps to verify accredited investor status. The adequacy of the overall process depends on the facts and circumstances.
Does Rule 506(c) require tax returns?
No. The rule provides non-exclusive verification methods, and an issuer may use a principles-based method when reasonable. Tax information is one possible route for verifying income.
Can a lawyer or CPA verify accredited investor status?
Yes. Written confirmation from a licensed attorney or certified public accountant is among the specified non-exclusive third-party verification methods. Registered broker-dealers and SEC-registered investment advisers are also included.
Can a high minimum investment satisfy Rule 506(c) verification?
Potentially. SEC staff guidance recognizes a high minimum cash investment as an important factor and, depending on the surrounding facts, it may support a conclusion that reasonable steps have been taken.
Is $200,000 the new accredited investor threshold?
No. The $200,000 figure comes from the minimum-investment framework described in the 2025 no-action request. It did not amend Rule 501(a) or replace the accredited investor definition.
Can an issuer use different verification methods for different investors?
Yes. SEC staff guidance confirms that different reasonable verification methods may be used for different purchasers in the same Rule 506(c) offering.
Does Rule 506(c) permit general solicitation?
Yes. Rule 506(c) permits general solicitation and general advertising if all purchasers are accredited investors, reasonable verification steps are taken, and the other applicable Regulation D requirements are satisfied.
Rule 506(c) Verification Should Be Planned Before Solicitation Begins
Rule 506(c) gives issuers substantially more freedom to market a private placement than Rule 506(b), but accredited investor verification should not be treated as an administrative step after investors have already committed. The verification process should be designed before subscriptions are accepted and coordinated with the issuer’s offering documents, investor questionnaire, subscription agreement, closing procedures, and recordkeeping.
The SEC’s current principles-based approach gives issuers meaningful flexibility, including the ability to consider substantial minimum investments. That flexibility works best when the issuer can demonstrate a consistent, documented process tailored to the type of purchaser and the facts of the transaction.
This article is provided for informational purposes only and does not constitute legal advice. Securities laws and their application depend on the particular facts and circumstances of each offering.
Need Assistance With a Rule 506(c) Offering?
SecuritiesLawyer101 assists issuers with Rule 506(c) offerings, accredited investor verification procedures, Regulation D compliance, private placement memoranda, subscription agreements, investor questionnaires, Form D filings, and state securities notice requirements.
Establishing the appropriate verification procedure before an offering is marketed or subscriptions are accepted can help reduce compliance problems that may jeopardize reliance on the Rule 506(c) exemption.
To speak with a Securities Attorney, please contact Brenda Hamilton at 200 E Palmetto Rd, Suite 103, Boca Raton, Florida, (561) 416-8956, or by email at [email protected].
Hamilton & Associates | Securities Attorneys
Brenda Hamilton, Securities Attorney
200 E Palmetto Rd, Suite 103
Boca Raton, Florida 33432
Telephone: (561) 416-8956
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