General Solicitation at a Lower Cost: SEC No-Action Letter Eases Accredited Investor Verification for Rule 506(c)

On March 12, 2025, the Division of Corporation Finance of the U.S. Securities and Exchange Commission (“SEC”) issued a no-action letter (the “No-Action Letter”) which clarifies that issuers may generally rely on certain minimum investment levels — principally $200,000 for natural persons and $1 million for legal entities — and related investor representations to verify accredited investor status while engaging in a general solicitation offering of non-registered securities under Rule 506(c) of Regulation D (“General Solicitation Offerings”).¹ This new effective safe harbor for General Solicitation Offerings may enable more extensive public engagement and marketing efforts by private issuers of securities, such as private funds and startups.

Background

Under Rule 506(c) of Regulation D (“Reg D”), an issuer (including a private fund) may conduct a General Solicitation Offering² as long as the issuer had taken “reasonable steps” to verify that all ultimate purchasers in the offering are accredited investors and the various other conditions under Reg D were satisfied. Such “reasonable steps” generally required an issuer engaging in a General Solicitation Offering to confirm, based on factors other than investor self-certification, that purchasers meet specified wealth thresholds. Outside of the No-Action Letter, an issuer will be deemed to have satisfied the “reasonable steps” requirement in a General Solicitation Offering if it uses certain specified methods that mainly involve the review of additional investor documentation or obtaining supplemental written confirmations from an investor’s external advisers. By contrast, an issuer relying on Rule 506(b) of Reg D may not generally solicit its securities offerings (i.e., by and large relying on pre-existing relationships); however, such issuers may rely on self-certification to verify a purchaser’s accredited investor status (as opposed to the additional “reasonable steps” required by Rule 506(c) to verify a purchaser’s accredited investor status).

Notwithstanding the availability of Rule 506(c), issuers (especially private funds) predominantly relied on Rule 506(b) due to the burdensome process involved in verifying accredited investors status, such as obtaining IRS forms, bank or brokerage statements, and credit reports. While some private fund sponsors have been willing to undertake these additional steps (or engage third parties to do so), the additional burdens and complexities have mostly been perceived to have a chilling effect on the use of General Solicitation Offerings by private funds and other issuers.

Aside from compliance costs associated with the verification process, private fund sponsors also had concerns regarding the deterrent effect on potential investors who are averse to providing sensitive financial documents and information.³ In particular, private fund sponsors often found the verification requirements to be a barrier to General Solicitation Offerings to high-net-worth bank feeder vehicles and clients of intermediaries, such as placement agents and registered investment advisers. In addition, there were distinct complexities introduced for a private issuer when engaging in a General Solicitation Offering, such as state “blue sky” compliance and offshore marketing, which are not eliminated by this recent relief, as discussed further below.

Summary of the No-Action Letter

Under the No-Action Letter, a private issuer can conclude that it has taken “reasonable steps” to verify the accredited investor status if the following conditions are met:

1. Minimum Investment. The minimum required investment (which includes binding capital commitments) equals or exceeds $1 million for legal entities,⁴ or $200,000 for natural person investors;

2. Written Representations. Each investor must provide written representations that:

• It is an accredited investor; and
• Its minimum investment amount is not being financed by a third party for the specific purpose of making the particular investment in the issuer (i.e., a “no borrowing rep”);⁵ and

3. No Contrary Knowledge. The private issuer has no actual knowledge that any investor (x) is not an accredited investor or (y) has financed the minimum investment amount, whether in whole or in part, by a third party, for the specific purpose of making that particular investment.

What does this mean?

The Positive

• The No-Action Letter offers a more well-defined and practicable safe harbor for issuers exploring a General Solicitation Offering. Accordingly, the relief may encourage private issuers to more comfortably engage in General Solicitation Offerings and direct their marketing efforts to more public platforms and communication channels (including via the internet).
• Such clarity could have significant impact on the financial calculus of private issuers, such as private fund sponsors, in determining whether the increased compliance costs from a General Solicitation Offering outweigh the gains from such offering method.
• In addition, the No-Action Letter relief could lower the compliance costs and level the playing field for emerging private fund sponsors or first-time founders who lack deep and broad pre-existing relationships with accredited investors.

Other Considerations

Notwithstanding the positive potential impact of the No-Action Letter, it is not a panacea for the practical drawbacks and limitations of Rule 506(c) for private fund sponsors and other private issuers, including the below considerations:

• While offerings under Rule 506(b) or Rule 506(c) both require the issuer to comply with state “blue sky” requirements (which include notice filings, corresponding fee payments and late filing fees), states typically avail more exemptions from “blue sky” requirements to Rule 506(b) offerings and not to General Solicitation Offerings. Thus, issuers must be more diligent with “blue sky” compliance for General Solicitation Offerings.
• Relying on Rule 506(c) for general solicitation activities could complicate marketing activities in many non-U.S. jurisdictions that do not permit general solicitation. For example, the Alternative Investment Fund Managers Directive regulates the marketing of funds in the European Economic Area and general advertising may impact a private fund manager’s ability to comply with the relevant rules or rely on exemptions for reverse solicitation.
• • Further, a private fund manager relying on Regulation S (“Reg S”) for offshore offerings of its offshore fund (which prohibits any “directed selling efforts” into the U.S.) would have to ensure its public communications and solicitation efforts for its onshore fund are limited to the U.S. which could present logistical and technical burdens.
• Reg D is a safe harbor under Section 4(a)(2) of the Securities Act of 1933, which provides for an exemption from registration of securities offerings so long as the offering does not involve a “public offering.” A private issuer that accidentally violates a requirement under Reg D while relying on Rule 506(b) will often fall back on Section 4(a)(2) to maintain its exemption from registration. This option would not be similarly available for a General Solicitation Offering because Section 4(a)(2) prohibits general solicitation.
• Private issuers may not rely on both Rule 506(b) and Rule 506(c) which may materially increase the onboarding administrative and compliance burden for the life of the issuer, such as a private fund. In addition, where a private fund sponsor has a Rule 506(b) private fund and a Rule 506(c) private fund, it must take caution to ensure that any public advertising for the Rule 506(c) private fund does not taint the Rule 506(b) private fund.
• Any public marketing efforts by registered investment advisers would continue to be subject to the “Marketing Rule” restrictions under the Investment Advisers Act of 1940. Public statements can also become sources of liability under various antifraud theories, and any private issuer – whether private fund sponsor or startup founder – is well-advised to avoid being perceived in hindsight as targeting unqualified or vulnerable investors. Accordingly, the relief does not wholly eliminate the compliance costs of substantive pre-approvals and reviews of general solicitation efforts.
• Finally, the No-Action Letter is a SEC staff interpretive letter, which is not a formal, binding interpretation by the SEC. Accordingly, a court is not required to rely on, or defer to, the No-Action Letter. In addition, the No-Action Letter does not relieve issuers from compliance with regulations imposed by other agencies, such as the Commodity Futures Trading Commission, which also governs private placements by many private funds.

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Please contact your Kleinberg Kaplan attorney if you have any questions regarding the No-Action Letter or General Solicitation Offerings more generally.

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¹ Coincident with issuing the No-Action Letter, the SEC staff also updated CDI 256.35 addressing the “reasonable steps” an issuer should take before relying on Rule 506(c), which now align with the No-Action Letter.

² General solicitation may include advertising an offering, posting about an offering online, speaking publicly about the offering, including with the media or at conferences (such as certain pitch events).

³ Further, there was perceived uncertainty under the Adopting Release by the SEC on Rule 506(c) because the reasonableness of steps taken to verify if an investor is an accredited investor required a multi-factorial assessment, including factors such as the nature of the investor and type of accredited investor that the investor claims to be, the amount and type of information that the issuer has about the investor, the nature of the offering, the manner in which the investor was solicited to participate in the offering, the terms of the offering (e.g., the minimum investment amount, if any).

⁴ For entities that are accredited solely due to the accredited investor status of each of the entity’s equity owners, the minimum investment amount is $1 million, or $200,000 for each of the entity’s equity owners if the entity has fewer than five natural person owners. For example, an entity owned by four natural persons would need to invest a minimum of $800,000.

⁵ This requirement only applies to the amount applied or committed to the minimum investment amount, but not to any greater investment amount made or committed by the investor. In addition, for entities that are accredited solely due to the accredited investor status of each of the entity’s equity owners, each equity owner needs to make the “no borrowing rep”.