SEC Expands Guidance on Accredited Investor Verification for Regulation D Offerings

The staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance recently rendered important guidance on the concept of “solicitation” in the context of private placement transactions. Under the no-action letter submitted by Latham & Watkins (Mar. 12, 2025), issuers in solicited private placements can reasonably assume accredited investor status if the investor invests at least $200,000 (individuals) or $1 million (legal entities). This replaces the requirement that the issuer take reasonable steps to verify accredited status. These efforts can have a chilling effect on an offering, as previous guidance required the investor to divulge and produce documentation that proved accredited status, such as bank and brokerage statements, tax returns, K-1s and W-2s and verification letters from lawyers and accountants.

Background

The Jumpstart Our Business Startups Act of 2012 (JOBS Act) codified the ability to engage in general solicitation and general advertising in the context of private placements, which are offerings of securities to investors that are not registered with the SEC. These transactions previously could only be made in limited “word of mouth” circumstances and pursuant to prior business relationships the issuer had with the investor.

In the rules that followed from the JOBS Act, the SEC enabled private placements under the popular Regulation D Rule 506 to have two paths: 506(b), in which transactions can proceed with accredited and up to 35 non-accredited investors with whom the issuer has or “establishes” a preexisting business relationship, and 506(c), which allows for general solicitation and general advertising. In a 506(c) transaction, sales may only be made to accredited investors. Additionally, unlike 506(b), 506(c) requires the issuer to take reasonable steps to verify that the investor is indeed accredited.

No Action Letter

The Latham letter expands verification of accredited status by quoting Securities Act Release No. 9415 (July 10, 2013), specifically that, “if the terms of the 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.” The staff also noted that the high investment amount would be accompanied by written representations from the investor as to (i) accreditation pursuant to certain quantitative thresholds of Rule 501 and (ii) that the minimum investment amount is not financed in whole or part by any third party for the specific purpose of making the particular investment.

The staff also issued a companion Compliance and Disclosure Interpretation that “codifies” the Latham letter in the resource that most practitioners use in connection with Regulation D guidance.

Why it Matters

• This is the first major interpretive guidance on accredited verification since the JOBS Act rules were published. As silly as it sounds, high net worth, ultra-high net worth and institutional investors were still required to produce documentation at least once a year that proved that they were accredited. Moreover, if a verification service was used, information could not be more than 90 days old, causing four annual refreshes of accredited verification documentation.
• Setting a common sense minimum investment level where verification is not required allows for the vast majority of private equity, venture capital, hedge fund and other private credit fund formation to be more streamlined and not delayed by an investor having to obtain burdensome or sensitive documentation.
• The issuer may only use investment amounts as a proxy for verification if the issuer has no reason to believe the investor is otherwise not accredited and that the investment is not being financed. For example, if an investor divulges that he has lost his job and, therefore, does not expect to reach the $200,000 income requirement for the current year and does not qualify under the $1 million net worth requirement or one of the other qualifications (e.g., Series 7 brokerage exam passed), the Latham minimum investment amount would not be sufficient for an issuer to rely on accredited status.

What Comes Next?

Issuers should prioritize adapting their processes to comply with the regulatory updates. Should you have any questions about the foregoing, please do not hesitate to contact any of the Manatt professionals with whom you work.

Rule 506 is the most expansive of the Regulation D rules, as it allows for the private placement of securities to an unlimited number of accredited investors regardless of state residence and up to 35 non-accredited investors. Non-accredited investors must be provided with extensive financial and business disclosures which are not required to be delivered to accredited investors. Note that a private placement could create a “go public” filing obligation under the Securities Exchange Act of 1934 if an issuer has more than 2,000 “non-exempt” investors at fiscal year-end. Examples of exemptions for this rule are shares issued in a Regulation CF crowdfunding transaction and certain Regulation A offerings.

See CD&I 256.36: Question 256.36

Question: An issuer is conducting a Rule 506(c) offering where each accredited investor is required to make a high minimum investment in cash.

Do the terms of the offering, in particular the minimum investment amounts, satisfy the reasonable steps to verify requirement of Rule 506(c)(2)(ii) for purchasers meeting the minimum investment amount? The issuer has no actual knowledge of any facts indicating that any purchaser is not an accredited investor and the issuer has confirmed with each purchaser that its investment is not being financed in whole or part with funds from a third party.

Answer: Whether the issuer has taken reasonable steps to verify that a purchaser is an accredited investor is an objective determination by the issuer (or those acting on its behalf), in the context of the particular facts and circumstances. See Securities Act Release No. 9415 (July 10, 2013); and Question 256.35. Depending on the facts and circumstances, the issuer may be able to reasonably conclude that reasonable steps to verify have been taken when an offering requires a high minimum investment amount. As explained in Securities Act Release No. 9415 (July 10, 2013), “if the terms of the 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.” See also the Latham & Watkins LLP no-action letter (Mar. 12, 2025) issued by the Division; and Securities Act Release No. 10884 (Nov. 2, 2020). [March 12, 2025].