SEC Staff Issues Bright Line Guidance for Minimum Investment Amount in Offerings to Verify Accredited Investor Status under Rule 506(c) of Regulation D

April 14, 2025

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On March 12, 2025, staff of the Office of Small Business Policy of the Division of Corporation Finance (the “SEC Staff”) of the Securities and Exchange Commission (the “SEC”) issued interpretive guidance in the form of a no-action letter (the “No-Action Letter”) that provides a brightline test for satisfying minimum investment amount offering standards as a means of verifying accredited investor status as required by Rule 506(c) of Regulation D.1

Rule 506(c) was adopted in 2013 and permits an issuer to engage in general solicitation or general advertising, provided that it (i) makes sales only to accredited investors, (ii) takes reasonable steps to verify that the purchasers are accredited investors and (iii) otherwise complies with the applicable requirements of Regulation D.  The SEC indicated that issuers must determine what constitutes reasonable steps to verify accredited investor status on a case-by-case basis using a “principles-based” or facts and circumstances approach.

In the No-Action Letter, the SEC staff agreed that an issuer will have taken reasonable steps to verify a purchaser’s accredited investor status if the issuer:

  • obtains written representations2 that:
    • the purchaser is an accredited investor; and
    • the purchaser’s minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer;3 and
  • requires minimum investment amounts of at least $200,000 for natural persons and at least $1 million for legal entities;4 and
  • has no actual knowledge of any facts that indicate that any purchaser is not an accredited investor or that any purchaser’s minimum investment amount was financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.

For an entity purchaser that is accredited solely because all of its equity owners are themselves accredited investors,5 the issuer must meet the requirements described above and must also satisfy an additional look-through standard that requires the issuer to obtain written representations that each of the purchaser’s equity owners is an accredited investor and has a minimum investment obligation to the purchaser of at least $200,000 for natural persons and $1,000,000 for legal entities and the entity purchaser enters into an agreement to make a minimum investment of at least $1,000,000 or $200,000 for each of the purchaser’s equity owners if all of the purchaser’s equity owners are fewer than five natural persons. As applicable to the entity purchaser in the issuer’s offering, such owners must similarly represent that they have not obtained third-party financing of their minimum investment in the entity purchaser. Finally, the issuer must have no actual knowledge that any such owner is not an accredited investor or has obtained third-party financing of their minimum investment in the purchaser.

The guidance provided by the No-Action Letter is non-exclusive. Thus, in a Rule 506(c) offering that establishes a No-Action Letter-compliant minimum investment amount for the offering, an issuer would be able to waive the minimum investment amount requirement for a purchaser as long as the issuer otherwise takes reasonable steps to verify the accredited investor status of such purchaser. The remaining purchasers in such an offering would still be deemed verified accredited investors as long as they each subscribed for at least the offering’s stated minimum investment amount, provided appropriate representations, and the issuer lacked actual knowledge of facts contradicting such representations, all in accordance with the No-Action Letter guidance.

Bright Line Minimum Investment Amount Guidance Needed Since the 2013 Adoption of Rule 506(c).

In adopting Rule 506(c) in 2013, the SEC stated that “if the terms of the [Rule 506(c)] offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” 6

Prior to the No-Action Letter, the SEC had provided little substantive guidance as to how issuers may satisfy the verification requirement beyond a “non-exclusive and non-mandatory” list of examples and allowed issuers to apply the reasonableness standard in their determinations.  Without SEC guidance on what it meant by “a high minimum investment amount” few issuers relying on Rule 506(c) were comfortable adopting verification policies reliant solely on minimum investment amounts where the presence of a single unaccredited investor could result in rescission rights for all investors in the offering.

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Issuers relying of Rule 506(c) should consider applying a minimum investment amount and seeking the ancillary representations consistent with the requirements described in the No-Action Letter.  If a minimum investment amount of $200,000 for natural persons and $1 million for entities is feasible for an issuer, compliance costs associated with accredited investor verification should be greatly reduced compared to prior practices under Rule 506(c).

If you have any questions regarding Rule 506(c) offerings and the application and implementation of the No-Action Letter’s minimum investment amount, please contact your Investment Management Group attorney at Seward & Kissel LLP.

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1 Latham & Waktins LLP, SEC No-Action Letter (Mar. 12, 2025), which may be found at https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225. The request letter sent to the SEC Staff may be found at https://www.sec.gov/files/corpfin/no-action/latham-watkins506c-031225-incoming.pdf.

2 The purchaser’s written representations may be contained in a standalone document, in a subscription agreement for the offering, in an affirmative written electronic communication from the purchaser, or any other written means as the issuer shall reasonably determine under the circumstances of the offering.

3 Regarding the prohibition on third-party financing of their investments, the SEC staff agreed in the No-Action Letter that a purchaser would not be precluded from providing the necessary representation that its minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer if the purchaser obtains capital through one or more (1) financing programs, including a secured credit facility, that has other purposes than solely making the particular investment in the issuer, (2) binding commitments or financing to the purchaser that predate the commencement of the offering under Rule 506(c), and/or (3) financing transactions conducted by the purchaser in which the purchaser, as an issuer, has satisfied the conditions applicable to an issuer under the No-Action Letter. In addition, the requirement regarding the lack of financing in respect of the purchaser’s minimum investment amount would apply solely to the funds applied or committed to the minimum investment amount but not to any greater investment amount made or committed by a purchaser or by an equity owner of a purchaser.

4 The required minimum investment amount would include cash or other value tendered to the issuer by the purchaser. The minimum would also include investment amounts made pursuant to a binding commitment to invest a minimum amount in one or more installments, as and when called by the issuer.

5 See Rule 501(a)(8) of Regulation D.

6 Securities Act Release No. 33-9415, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings (July 10, 2013) at 28 (“Adopting Release”), which may be found at https://www.sec.gov/files/rules/final/2013/33-9415.pdf.

 

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