Private offerings conducted under Rule 506(b) can be an efficient way to raise capital, but the exemption’s benefits come with a non-negotiable requirement: issuers must be able to substantiate compliance. In practice, that substantiation lives (or fails) in the quality of the investor file. Accurate, consistent documentation is not just “good housekeeping”—it is the primary evidentiary record that the offering met exemption conditions and that investor eligibility and disclosures were handled correctly.
What documentation should an issuer maintain?
A well-constructed investor record typically includes:
• Offering-level records
◦ Private placement memorandum (if used), term sheet, and any supplements
◦ Copies of all investor communications and marketing materials (including emails, decks, and webinars)
◦ Policies and procedures showing controls around solicitation, suitability, and record retention
◦ Form D support (drafts, filing confirmation, and internal calculations used to complete it)
• Investor eligibility and suitability
◦ Executed subscription agreement and signature pages
◦ Investor questionnaire capturing accredited status (or, if applicable, sophistication) and investment intent
◦ Evidence supporting the issuer’s “reasonable belief” in investor representations when facts warrant deeper diligence
◦ Entity documents (e.g., formation documents, authorization, signatory authority) and beneficial ownership details where relevant
• Disclosure and delivery
◦ Delivery logs showing what was provided, when, and in what version (especially important if any non-accredited investors participate)
◦ Written risk acknowledgments and confirmation of receipt for material updates
• Funds flow and transaction records
◦ AML/KYC materials consistent with the issuer’s risk profile, including sanctions screening where appropriate
◦ Capital call notices, wire confirmations, and reconciliation records
◦ Cap table updates and issuance documentation
Why it matters: the real compliance risks
The largest risk is not a minor paperwork error—it is the inability to prove compliance if challenged. Poor documentation can undermine the issuer’s position on core exemption elements, including the absence of general solicitation, investor qualification, and adequacy of disclosure. If regulators or investors question the offering, incomplete files can contribute to outcomes such as rescission demands, enforcement scrutiny, state “blue sky” complications, delays in future financings, and reputational harm. Even when an issuer acted in good faith, a thin record can make that good faith difficult to demonstrate.
How to keep documentation accurate and defensible
Strong practices are operational as much as legal:
• Use standardized intake workflows and checklists to reduce variability across investors.
• Implement version control for offering documents and track delivery/acknowledgment.
• Maintain secure, centralized storage with audit trails and role-based access.
• Perform periodic internal reviews (spot checks before close, and post-close audits).
• Escalate to enhanced diligence when investor responses are incomplete, inconsistent, or risk indicators appear.
Ultimately, Rule 506(b) compliance is only as durable as the documentation behind it. Robust investor records help issuers demonstrate a disciplined process, reduce avoidable disputes, and support smoother future capital formation.
