March 17, 2025
What happened?
The SEC recently issued a no-action letter with guidance on what constitutes “reasonable steps” to verify that a purchaser is an accredited investor. Backers hope this will be a boon to the private funds market, which has been reluctant to rely on the 506(c) exemption, which requires firms to take reasonable steps to ensure investors are accredited.
In a new no-action letter addressed to lawyers at Latham & Watkins, Jeb Byrne, the chief of small business policy at the SEC’s division of corporation finance said the commission staffers “agree that a high minimum investment amount is a relevant factor in verifying accredited investor status” and that, so long as a fund manager has “no actual knowledge that a putative accredited investor doesn’t meet the standards’ wealth thresholds and that the investment isn’t “being financed in whole or in part by any third-party,” then a fund manager “could reasonably conclude that it has taken reasonable steps to verify that purchasers of securities sold in an offering under rule 506(c) of Regulation D are accredited investors.”
This no action letter adds more certainty to 506(c), whose sole purpose is to open the private market more broadly.
What does this mean for me?
Rule 506(c) permits issuers to make general solicitations, including public statements, without registering the fund, provided that the issuer takes reasonable steps to verify that the purchasers are accredited investors. The rule also provides a safe harbor. Its safe harbors allow issuers to verify investor accredited status by one of three methods[1]:
Issuers have been reluctant to claim 506(c) exemptions without meeting the onerous safe harbor requirements.
Firms that elect to claim 506(c) should continue to be mindful of Blue Sky filing obligations. Additionally, if an adviser plans to market the fund outside of the United States, the adviser should review additional requirements that may apply with legal counsel.
