SEC Staff No-Action Letter on Exempt Offerings with General Solicitation Under Rule 506(c)

Executive Summary

On March 12, 2025, the Division of Corporation Finance (the “Division”) of the U.S. Securities and Exchange Commission (the “SEC”) provided new guidance, via a no-action letter, on Rule 506(c) of Regulation D under the Securities Act of 1933 (the “Securities Act”).

Historically, most issuers conducting exempt securities offerings under Regulation D – including the vast majority of private funds – have done so in reliance on Rule 506(b), which prohibits the use of any “general solicitation or general advertising” in connection with the offering. This has been the case despite the availability, since 2013, of an alternative, Rule 506(c), which permits issuers to engage in general solicitation provided that the issuer and its agents take “reasonable steps to verify” the “accredited investor” status of purchasers in the offering. The vast majority of private fund sponsors and placement agents have chosen not to rely on Rule 506(c) due to (1) the administrative burdens associated with verifying accredited investor status under a non-exclusive list of verification methods expressly permitted under the rule, and (2) the perceived risk that using other, non-specified methods to verify accredited investor status could be challenged, potentially calling into question the validity of the issuer’s offering. 

In the new guidance, the Division confirms its view that an issuer conducting a securities offering under Rule 506(c) can reasonably conclude that a purchaser of securities in the offering is an “accredited investor” through a combination of minimum investment amounts and investor self-certifications. Through its clear expression of the Division’s view, the guidance provides an important new path for private funds and other issuers to rely on Rule 506(c), opening the door to more open communication about private fund offerings without the constraints of Rule 506(b)’s prohibition against general solicitation.

Background

Regulation D is a safe harbor rule under Section 4(a)(2) of the Securities Act, which exempts from registration under the Act transactions by an issuer not involving a “public offering.” Under Rule 506(b), an issuer can generally sell securities to an unlimited number of “accredited investors” – a category which broadly includes, among others, individuals whose net worth (together or jointly with a spouse or spousal equivalent) exceeds $1,000,000 or whose income exceeds $200,000 in each of the two most recent years (or $300,000 including a spouse or spousal equivalent), as well as entities with assets in excess of $5,000,000 that were not formed for the specific purpose of acquiring the securities offered. To rely on Rule 506(b), the issuer and its agents are prohibited from engaging in any “general solicitation or general advertising” in connection with the offer and sale of securities. 

Under Title II of the JOBS Act of 2012, Congress created a new Regulation D exemption, Rule 506(c), which became effective in September 2013. Under Rule 506(c), general solicitation and advertising are permitted, provided that the issuer takes “reasonable steps to verify” that any purchasers of securities in the offering are accredited investors. At the behest of commenters on the SEC’s initial proposal of Rule 506(c), the final rule included a list of “non-exclusive and non-mandatory” methods that an issuer could use to verify an investor’s accredited status, such as reviewing tax forms for the prior two years; reviewing recent bank, brokerage and other financial statements and credit reports; or obtaining written confirmation from a broker-dealer, investment adviser, attorney or accountant as to the investor’s qualification.  

However, since Rule 506(c) was adopted, only a small fraction of issuers conducting offerings under Regulation D have chosen Rule 506(c). While the SEC emphasized in Rule 506(c) and the adopting release that the verification methods specified in the rule were non-exclusive and non-mandatory, many issuers and their financial intermediaries have been reluctant to deviate from those methods out of concern that doing so could result in second-guessing as to whether any alternative method was “reasonable.” At the same time, however, issuers and intermediaries have also found the specified verification methods to be too burdensome and intrusive to justify abandoning their traditional private offering practices under Rule 506(b) in order to take advantage of the increased flexibility to communicate publicly under Rule 506(c).

New Guidance

Under the new guidance, the Division has confirmed its view that an issuer could reasonably conclude that it has taken reasonable steps to verify the accredited investor status of an investor in a Rule 506(c) offering if:

• There is a minimum investment amount (including binding capital commitments) of:
  • for natural persons, at least $200,000;
  • for legal entities not formed for the purpose of making the investment, at least $1 million; or
  • for legal entities that are formed for the purpose of making the investment or otherwise are accredited investors solely based on the accredited investor status of their equity owners, $1 million, or $200,000 for each of the purchaser’s equity owners if all of the equity owners are fewer than five natural persons; and
• The purchaser provides written representations that:
  • they are an accredited investor;
  • the minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) 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 has no actual knowledge of any facts that indicate that any purchaser is not an accredited investor, or that the minimum investment amount of any purchaser (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of any such equity owner) is financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.

Analysis

The prohibition against general solicitation under Rule 506(b) has historically constrained the ability of private fund sponsors to communicate publicly during active fundraising periods. For sponsors that manage continuously offered funds (e.g., open-end hedge funds) or are regularly bringing new funds to market, the difficulty of maintaining the line between public-facing communications that relate to fundraising (and are thus prohibited by Rule 506(b)) and those that relate to other aspects of the firm has led many firms to highly restrict most public communications about their business. This has become increasingly difficult with the growth of social media and other internet-based communication platforms that are more fluid and difficult to control than traditional media.

To date, a relatively small number of private fund sponsors have opted to use Rule 506(c) for their fund offerings. In some cases, the investor base of these firms is primarily or exclusively institutional investors, meaning that the requirement to undertake incremental verification steps has been relatively easy. However, Rule 506(c) has proven particularly challenging for firms who seek access to high-net-worth (HNW) investors through private bank, wealth management and retail distribution channels. Banks, placement agents and other financial intermediaries have largely resisted undertaking additional steps to verify the accredited investor status of their investors, whether as direct investors in funds or as investors in dedicated feeder funds.

By providing an express statement that an issuer (or its agents) could reasonably conclude that it has taken reasonable steps to verify the accredited status of investors in Rule 506(c) offerings based primarily on minimum purchase amounts, the Division has opened the door to a much easier path for private fund offerings to be conducted without the constraints of the prohibition on general solicitation. We expect many more sponsors will consider conducting future offerings under Rule 506(c), and that those currently in the market raising funds under Rule 506(b) will quickly consider converting the offering to Rule 506(c). 

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