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New No-Action Letter Resolves Key Uncertainty Around 506(c) Offerings
Background:
- On March 12, 2025, the SEC’s Division of Corporation Finance issued a No-Action Letter addressing a key uncertainty in Rule 506(c), which permits general solicitation for private offerings, provided the issuer verifies that all purchasers are accredited.
- Previously, the SEC had not clearly defined the steps required to verify accredited investor status, leaving issuers uncertain about compliance. This No-Action Letter provides some clarity, stating that a high minimum investment amount, coupled with investor representations, may serve as a reasonable basis for verification.
- This new clarity could significantly increase the use of 506(c) in private fund offerings.
- Of note is the speed of approval — the incoming letter was dated on March 6th 2025 and the No-Action relief was issued on March 12th 2025.
Verification Steps:
The No-Action Letter outlines three key components for verifying investor eligibility under Rule 506(c):
- Lack of Red Flags – No evidence or circumstances suggesting that the investor’s representations may be false.
- Investor Representations – Written statements from the investor confirming both their accredited status and that their minimum investment was not financed by third parties.
- High Minimum Investment – A substantial investment threshold that serves as an indicator of accreditation.
While the No-Action Letter recognizes that each transaction may present unique circumstances, the incoming letter outlines specific scenarios that fund managers can leverage when conducting a Rule 506(c) offering:
- Natural Persons: Minimum investment of $200,000
- Entities Accredited by Total Assets: Minimum investment of $1,000,000
- Entities Accredited Solely by the Accredited Investor Status of Their Equity Owners: Minimum investment of either $1,000,000 or $200,000 per equity owner, if the entity has fewer than five natural person owners.