Rule 506(c)

Where it came from

The JOBS Act, signed on April 5, 2012, directed the SEC to lift the ban on general solicitation for Rule 506 offerings sold only to accredited investors. The SEC adopted Rule 506(c), which took effect on September 23, 2013. The original exemption became Rule 506(b).

The requirements

• No dollar limit.
• Every purchaser must be accredited. No non-accredited investors, however sophisticated.
• Reasonable steps to verify each purchaser’s status. A checked box on a questionnaire isn’t enough.
• Form D, with the Rule 506(c) box checked, within 15 calendar days after the first sale.
• No bad actors, restricted securities and state notice filings, as with Rule 506(b).

How to verify

Verification is principles-based. Consider who the purchaser is, what information you have about them and how you found them. The rule lists methods that count for individuals:

• Income: review IRS forms reporting income for the two most recent years, such as W-2s, 1099s, K-1s or Form 1040, and get a written statement that the investor expects to qualify this year.
• Net worth: review account statements, appraisals or tax assessments dated within the past three months, plus a credit report from a nationwide consumer reporting agency for liabilities, and a written statement that all liabilities were disclosed.
• Third-party letter: written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney or CPA that they verified the investor’s status within the past three months.
• Previously verified investors: if you verified an investor within the past five years, a written statement at the time of sale that they still qualify is enough, unless you know otherwise.

The March 2025 minimum investment guidance

On March 12, 2025, SEC staff confirmed that a high minimum investment can support verification. An issuer can reasonably conclude it has verified a purchaser when:

• the purchaser’s investment, or binding commitment in the case of a fund, is at least $200,000 for an individual or $1 million for an entity;
• the purchaser states in writing that it is accredited and that the minimum isn’t financed by a third party for the purpose of making this investment; and
• the issuer has no actual knowledge to the contrary.

The guidance covers individuals who qualify by income or net worth and specified entity categories. Special rules apply to entities that qualify only because all of their owners are accredited, so check those with your attorney.

Advertising tips

• Keep every ad consistent with the PPM, and don’t promise returns.
• Include cautionary language: the offering is for accredited investors only, involves risk and is made only through the PPM.
• Remember that state regulators see public ads too, and keep copies of what you publish.
• Don’t pay unregistered promoters a percentage of what they raise.