In the evolving landscape of private capital markets, the U.S. Securities and Exchange Commission (SEC) has provided issuers with the avenues of general solicitation; allowing them to reach an unlimited number of potential investors. Rule 506(c) of Regulation D permits issuers to publicly advertise offerings, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify their accredited status.
What Constitutes General Solicitation?
General solicitation encompasses public marketing strategies such as advertisements in newspapers, on television, or via unrestricted websites. While this broadens the pool of potential investors, it also imposes stringent compliance requirements to ensure that only accredited investors participate in the offering.
Defining an Accredited Investor
An accredited investor is defined under Rule 501(a) of Regulation D. For individuals, this typically means having a net worth exceeding $1,000,000 USD in assets/investments (excluding the value of the primary residence), or an annual income over $200,000 USD (or $300,000 USD combined with a spouse) for the last two years, with the expectation of the same income level in the current year. Entities may qualify based on assets exceeding $5,000,000 USD in assets/investments or if all its equity owners are accredited investors.
Verifying Accredited Investor Status
Under Rule 506(c), issuers must take “reasonable steps to verify” that each purchaser is an accredited investor. This requirement is more stringent than the “reasonable belief” standard under Rule 506(b)as the SEC requires issuers (or their representatives) to follow a non-exclusive list of verification methods which must, by law, be adhered to. These include:
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Reviewing IRS forms that report income, such as W-2s or 1040s or
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Examining bank statements, brokerage statements, and credit reports to assess net worth or
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Obtaining written confirmations from registered broker-dealers, investment advisers, licensed attorneys, or certified public accountants
These methods, while effective, can be intrusive and burdensome for both issuers and investors. But ultimately, they are required in order to be in compliance with the SEC federal laws.
SEC’s 2025 Guidance: A Simplified Approach
In March 2025, the SEC issued a no-action letter providing alternative methods for verifying accredited investor status under Rule 506(c). According to this guidance, issuers may consider the following as reasonable steps:
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For natural persons: A minimum investment of $200,000 USD.
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For legal entities: A minimum investment of $1,000,000 USD.
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Obtaining written representations from the investor confirming their accredited status and that the investment is not financed by a third party.
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Ensuring the issuer has no actual knowledge contradicting the investor’s accredited status.
This approach reduces the need for invasive financial documentation, streamlining the verification process while maintaining compliance.
Compliance Considerations
Issuers must remain vigilant in their compliance efforts:
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Form D Filing: A Form D must be filed with the SEC within 15 days after the first sale of securities.
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State Regulations: While federal law preempts many state regulations, issuers should be aware of state-specific notice filings and fees, often referred to as “blue sky” laws.
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Anti-Fraud Provisions: All offerings are subject to federal anti-fraud provisions, regardless of the exemption relied upon.
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International Considerations: Issuers targeting investors outside the U.S. must comply with the securities laws of those jurisdictions, which may have different requirements regarding general solicitation.
The SEC’s recent guidance offers issuers a more practical framework for verifying accredited investors in offerings involving general solicitation. By leveraging high minimum investment thresholds and obtaining appropriate representations, issuers can balance the benefits of broader outreach with the necessity of regulatory compliance. Nonetheless, each offering’s unique circumstances warrant careful consideration, and issuers are encouraged to consult with legal and compliance professionals to navigate the complexities of securities regulations effectively.
