Rule 506(c) Offerings Let Loose: SEC’s New Guidance Smooths Path for Fundraising
March 20, 2025
Key Takeaways:
- The SEC’s March 12, 2025, no-action letter clarifies Rule 506(c) accredited investor verification requirements, opening the door for more expansive marketing efforts during fundraising.
- See below for the specific guidelines on reasonable steps issuers must take to verify accredited investors.
- For sponsors that are currently fundraising and relying on Rule 506(b), the sponsor can pivot to Rule 506(c).
- For sponsors planning a new fundraise, the sponsor can choose to rely on Rule 506(c) from the outset and can advertise from the beginning of the fund launch.
- Even with Rule 506(c) “unleashed,” a sponsor must comply with blue sky regulations, foreign restrictions on international placements and other regulatory requirements.
Key Contacts:
Partner, CFDB
Partner, CFDB
jkalmanides@crokefairchild.com
Associate, CFDB
bblankenship@crokefairchild.com
On March 12, 2025, in response to a request for interpretative guidance from Latham & Watkins, dated March 6, 2025, the Securities and Exchange Commission (“SEC”) Division of Corporate Finance issued a no-action letter (the no-action letter and request from Latham & Watkins, together, the “Letter”) setting forth clear requirements for an issuer of securities relying on Rule 506(c) of Regulation D for a private placement. The Letter marks an important shift in the current landscape for issuers of all kinds of securities, including private fund interests. In relying on Rule 506(c) for securities offerings, private funds can cast a wider net for prospective investors, potentially yielding additional commitments and facilitating a more expedited fundraise.
The following is a discussion of the Letter and its potential impact on private funds and fundraising.
Background on Rule 506(c)
In 2013, the SEC adopted Rule 506(c) to allow issuers to raise capital under Regulation D using general solicitation and advertising, which is otherwise prohibited under the industry’s preferred exemption, Rule 506(d) of Regulation D. In order to rely on Rule 506(c), issuers are required to take “reasonable steps” to verify that all purchasers in the offering are accredited investors, while also ensuring that the other conditions of Regulation D are satisfied. Unhelpfully, in the adopting release for Rule 506(c), the SEC included only a non-exhaustive list of methods that issuers could use to verify the accredited investor status of natural persons, none of which were mandatory, thereby practically foreclosing widespread reliance on Rule 506(c), as the industry largely interpreted the requirement to verify each purchaser’s accredited investor status to mean that invasive due diligence (e.g., in the form of extensive representations and warranties, the provision of personal bank account statements, and/or confirmations from a purchaser’s financial advisors or bankers) was required. Taken together with the costs associated with this kind of involved verification process and the risks of noncompliance, Rule 506(c) became disfavored, with a majority of issuers continuing to make offerings in reliance on Rule 506(b). However, the Letter eliminates the uncertainty surrounding Rule 506(c)’s verification requirements, such that issuers may now feel comfortable relying on Rule 506(c) in certain situations, opening the door for more expansive marketing efforts during fundraising.
Accredited Investor Verification Guidance
The Letter provides a bright line rule for accredited investor verification, stating that an issuer will have taken reasonable steps for verification if (1) the purchaser commits the minimum investment amount, (2) the purchaser makes certain representations regarding (a) its accredited investor status and (b) that the minimum investment amount is not financed in any part by a third party for the specific purpose of making the investment in the issuer, and (3) the issuer does not have actual knowledge of any facts that indicate the purchaser’s representations are untrue. The minimum investment amount is as follows:
- For natural persons, $200,000;
- For legal entities accredited by total assets, $1,000,000; and
- For legal entities that are accredited solely because all equity owners are accredited investors, $1,000,000 in the aggregate or $200,000 for each equity owner if fewer than five natural persons.
The minimum investment amount can include uncalled capital commitments and does not have to be fully funded at the time of the sale of securities. Additionally, the restriction that the minimum investment amount cannot be financed by a third party for the specific purpose of making the investment applies only to the minimum investment amount and not any investment amount above the minimum, so additional invested amounts can be financed for the specific purpose of investing in the issuer. These clarifications permit private funds and funds of funds to invest in Rule 506(c) offerings as well as raise capital through such offerings.
CFDB Recommendations for Private Fund Sponsors Utilizing Rule 506(c)
We anticipate that many sponsors looking to raise capital for a private fund will consider relying on Rule 506(c) now that its requirements have been streamlined. For sponsors that are currently fundraising and relying on Rule 506(b), the sponsor can pivot to Rule 506(c). The two offerings will not be integrated, so advertising and soliciting under Rule 506(c) will not taint the previous Rule 506(b) offering, consistent with previous SEC guidance. For sponsors planning a new fundraise, the sponsor can choose to rely on Rule 506(c) from the outset and can advertise in newspapers, magazines, internet posts, social media, or other forms of media from the beginning of the fund launch. In either case, a sponsor may decide to rely on Rule 506(c) to upsize the offering amount and/or attract a new investor base.
Private fund sponsors with minimum commitment amounts in excess of the minimum investment amounts will be able to rely on Rule 506(c) without taking any extra steps to verify accredited investor status other than the required representations. Sponsors that accept commitments below the minimum investment amounts will be able to accept investors with commitments above the minimum without additional verification steps and will have to take additional verification steps only with respect to the investors with commitments below the minimum.
Even with Rule 506(c) “unleashed,” a sponsor must comply with blue sky regulations, foreign restrictions on international placements, and other regulatory requirements. CFDB is available to assist with the fundraising process and will work with clients to determine what actions, if any, need to be taken to ensure compliance with the applicable regulatory frameworks, whether in reliance on Rule 506(c) or otherwise.
Questions? Please get in touch with Brantley Hawkins, Jennifer Kalmanides, Brooke Blankenship, or another member of the Private Funds & Investment Management team.