SEC Staff Takes Steps to Allow Funds to More Comfortably Fundraise Under Rule 506(c)

On March 12, 2025, staff from the Securities and Exchange Commission (SEC staff) issued new guidance regarding Rule 506(c) of Regulation D under the Securities Act of 1933 (Securities Act). We expect that such guidance will improve the compliance experience that fund sponsors encounter should they seek to rely upon Rule 506(c)’s greater permissibility of public statements.

Background

Rule 506(c) allows private funds to engage in general solicitation and general advertising if they take reasonable steps to verify the “accredited investor” status of their investors.

What has changed

In a new no action letter (NAL), the SEC staff expressed its view that a fund could satisfy the verification requirement by taking into account a specific minimum investment or binding commitment amount if certain conditions are met. The implication of the SEC’s guidance is that the more burdensome steps to “verify” accredited investor status that had been associated with Rule 506(c) may be bypassed by simple reference to the minimum investment or commitment amount. As a result, both registered investment advisers (RIAs) and exempt reporting advisers (ERAs) may turn to Rule 506(c) more confidently, and hence discuss their fundraising more freely, including on various social media platforms, at conferences and through meetings with new prospective investors – instead of clinging to Rule 506(b) and its well-known obligation not to generally solicit or generally advertise.

Rule 506

As many managers know, sales of fund interests need to be registered under the Securities Act unless they qualify for an exemption. (See Securities Laws Fundamentals for Venture Capital Fund Managers.) Rule 506 provides two nonexclusive safe harbor exemptions for private offerings. First, Rule 506(b) exempts offerings that do not involve any general solicitation or general advertising if all purchasers are accredited investors (although up to 35 nonaccredited investors may be admitted if the issuer is willing to prepare and disclose information that goes far beyond what private funds typically share). Second, Rule 506(c) exempts offerings that involve general solicitation or general advertising, provided that the issuer takes “reasonable steps to verify” that purchasers are accredited investors. Unlike Rule 506(b), which generally allows issuers to rely on a purchaser’s self-certification of its accredited investor status, Rule 506(c) requires issuers to make an objective determination of a purchaser’s accredited status based on the applicable facts and circumstances.

Accredited investors include (among others):

• A natural person with individual income greater than $200,000 in each of the two most recent years, or joint income with that person’s spouse or spousal equivalent greater than $300,000 in each of those years, and who has a reasonable expectation of reaching the same income level in the current year.
• A natural person whose individual net worth, or joint net worth with that person’s spouse or spousal equivalent, is greater than $1 million (after accounting for certain calculations with respect to that person’s primary residence).
• An entity not formed for the purpose of acquiring the securities offered, with total assets greater than $5 million.
• A trust with total assets greater than $5 million, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person.
• An entity in which all of the equity owners are accredited investors (look-through entity).

Rule 506(c) provides a nonexclusive list of verification methods, which includes reviewing IRS forms, bank statements, brokerage statements, appraisal reports issued by independent third parties, or having investors provide a written confirmation of accredited investor status from their certified accountants. While the SEC had previously stated that minimum investment amounts could be a factor in determining accredited investor status, until now, there had not been a bright-line approach that funds, especially commitment-based funds (which do not require investors to fund their investments all at once), were able to rely on for using minimum amounts as a verification method. Therefore, most fund managers had viewed the “reasonable steps to verify” requirement as an unreasonable burden, both to them and to their investors.

SEC staff’s no action letter

In the NAL, the SEC staff expressed its view that an issuer could reasonably conclude that it had taken reasonable steps to verify an investor’s accredited investor status based on a high minimum investment amount under certain conditions. Specifically, an issuer doing the following, without taking additional steps, could reasonably conclude it had taken the requisite steps under Rule 506(c):

• Obtain written representations from the purchaser that both:
  • The purchaser is an accredited investor. (Note: The NAL excludes certain categories of accredited investors that are less commonly used.)
  • The purchaser’s minimum investment amount is not financed in whole or in part by a third party for the specific purpose of making the particular investment in the issuer.
• Require a minimum investment or binding commitment amount of at least $200,000 for natural persons and $1 million for entities.
• Have no actual knowledge of facts that would indicate the purchaser’s representations are untrue.

For a look-through entity, the written representations would need to provide that:

• The look-through entity is an accredited investor in which each of its equity owners is an accredited investor. (Note: The NAL excludes certain categories of accredited investors that are less commonly used.)
• Each of the look-through entity’s equity owners has a minimum investment or binding commitment obligation to the look-through entity of at least $200,000 for natural persons and $1 million for entities.
• The minimum investment amount of the look-through entity, and of each of the look-through entity’s equity owners, is not financed in whole or in part by a third party for the specific purpose of making the particular investment in the issuer.

In addition, a look-through entity must agree to make a minimum investment or binding commitment of at least $1 million – or, if the look-through entity has fewer than five natural persons, $200,000 for each of the look-through entity’s equity owners.

The conditions in the NAL would not preclude a purchaser from financing its investment in, or binding commitment to, an issuer so long as the minimum amounts are not financed for the specific purpose of making the particular investment in the issuer. So, for instance, borrowings to fund capital calls in excess of the minimum commitment amount would not be precluded, nor would a secured credit facility that had a purpose other than funding the investment or binding commitments that predated the commencement of the offering.

Potential impact

We expect that the most likely use case of the new guidance will come from firms that are already relying on Rule 506(c) or those whose fundraising activities easily draw public attention. Rule 506(c) is still a “private offering” under Regulation D, and the verification requirement is intended to limit the offering to sophisticated investors. Going forward, we expect more funds will be less constrained on social media, and firms’ legal and compliance departments will have a less worrisome attitude toward the public statements made by their firm’s individuals – i.e., sponsors can use Rule 506(c) with more confidence, knowing the verification process is not as onerous on their investors or their back offices as once perceived, and they won’t need to self-edit their public statements as vigorously to work to fit into the no general solicitation, no general advertisement rubric of Rule 506(b). But while there may be more funds mentioned on public websites, blogs, podcasts and interviews, and at industry events, we expect the new guidance will mostly be used as a fail-safe to comply with Rule 506 and not necessarily to engage in broad marketing efforts like paid advertisements, cold calling, or posting a fund’s offering documents on social media.

We remind our RIA clients to keep the SEC’s marketing rule in mind when engaging in marketing activities. (See Venture Capital Fund Managers’ Guide to Applying the Latest Marketing Rule Risk Alert and Last-Minute Checklist for Private Fund Managers Complying With Marketing Rule.) ERAs also should be mindful of the general antifraud provisions that apply to their activities. Finally, firms conducting concurrent offerings in the US and in non-US jurisdictions may want to reach out to their Cooley contacts to discuss potential implications of engaging in these activities.