SEC permits Rule 506(c) accredited investor verification with self-certification
The US Securities and Exchange Commission (SEC) has published no-action guidance providing clarity to issuers relying on Rule 506(c) of Regulation D – an exempt offering pathway that permits issuers to publicly advertise an offering provided they take reasonable steps to verify investor accreditation.
This guidance clarifies that issuers relying on Rule 506(c) can satisfy the verification requirement through self-certification if the investor meets certain investment minimums (ie, $200,000 for natural persons and $1 million for entities).
Some issuers in the past have been reticent to use Rule 506(c) because of the perceived burdensome steps associated with the verification requirements. Given the new guidance, many private fund sponsors may wish to reconsider general solicitation or public marketing of their funds.
Under this new guidance, what can an issuer do to determine it has taken reasonable steps to verify a purchaser’s accredited status?
The issuer can:
- Obtain written representations that (a) the purchaser is an accredited investor and (b) the purchaser's minimum investment is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer, and
- Require minimum investment amounts of at least $200,000 for natural persons and $1 million for legal entities.
Such verification may not be viewed as reasonable if the issuer has 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.
Note that this guidance clarifies one way an issuer may verify a purchaser’s accredited status. Rule 506(c) includes a non-exclusive list of other methods that an issuer may use to satisfy the verification requirement (eg, written confirmation from certain professionals or reviewing specific types of documentation), but some issuers have found investors resistant to issuers’ requests for additional verification information.
Can I switch exempt offering types mid-offering?
If an issuer currently relies on Rule 506(b), it can change mid-offering to Rule 506(c) if desired, but will generally need to (1) file an amended Form D with the SEC (or file an initial Form D, as applicable), (2) satisfy the verification requirement for all new investors, and (3) review offering materials for any necessary updates (ie, removal of representations regarding no general solicitation). Keep in mind that, if an issuer later decides to switch back to a private offering under Rule 506(b), it will require a cooling-off period before accepting investors without the additional verification.
As the SEC reminded issuers through recent enforcement actions, an issuer relying on Rule 506(c) must file a notice of their offering with the SEC using Form D.
Are there any other considerations?
While private fund issuers relying on Rule 506(c) may widely distribute marketing materials to potential investors, such materials must comply with the Rule 206(4)-1 under the Investment Advisers Act of 1940, as amended (the Marketing Rule), if managed by an SEC-registered investment adviser. For example, if materials include hypothetical performance (eg, target returns, projections, composite returns across funds), the adviser must follow their internal policies and procedures designed to ensure such performance is relevant to the likely financial situation and investment objectives of the intended audience. See our related client alert, “SEC brings first Marketing Rule enforcement action: Key takeaways for advisers,” for additional information.
Questions?
If you have any question or would like additional information, please contact the authors or your DLA Piper relationship attorney.
