SEC Issues New Guidance on Rule 506(c) for Accredited Investor Verification

The U.S. Securities and Exchange Commission (SEC) has issued interpretive guidance via a no-action letter clarifying that under Rule 506(c) of Regulation D, accredited investor verification can be achieved through investor self-certification, provided the investment meets specified minimum amounts.

For context, Rule 506(c) allows companies like private funds to broadly solicit and generally advertise offering. To qualify, they may only sell to accredited investors and verify their status. The SEC’s new guidance eases the verification process by allowing self-certification for accredited investors who meet high minimum investment thresholds, reducing administrative burdens while maintaining compliance.

Key Points from the SEC Guidance:

1. Self-certification for high minimum investments:Investors can self-certify their accredited status for investments of at least $200,000 for individual investors or $1 million for entities, including binding capital commitments.
2. Reduced verification burden:This guidance lessens the need for private funds to use complex verification methods like IRS forms, bank statements or verification letters from professionals.
3. Written representations:Issuers must obtain written confirmation from investors on their accredited status and self-financing of their investment.
4. Issuer’s knowledge:Issuers should not have any knowledge contradicting an investor’s accredited status or self-financed investment.

Impacts on Private Offerings and Investor Access

While the previous stringent verification requirements limited Rule 506(c) offerings, the new guidance is expected to boost its use, especially among private fund sponsors and high-net-worth investors.

As an overview, this guidance is based on the SEC’s no-action letter response, confirming that high-minimum investment amounts, written representations and issuer knowledge are reasonable steps for verifying accredited investor status under Rule 506(c) of Regulation D. It’s important to note that the SEC’s views are based on specific representations and may vary with different facts or conditions.

Private funds should consider this when reviewing and implementing internal procedures and policies for investor due diligence. The new guidance could reduce some of the time and cost associated with verifying accredited investor status.

Weaver’s dedicated Investment Adviser Compliance practice supports advisers in navigating the evolving regulatory landscape. Let us help ensure your compliance program remains effective and adaptable with support for your policy review, testing, monitoring, communication and training. Contact us today.

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