• On March 12, 2025, the SEC Staff issued interpretive guidance confirming that the following minimum investment thresholds can satisfy “accredited investor” verification requirements for Rule 506(c) offerings:
• $1,000,000 for entity investors and
• $200,000 for natural person investors.
• This much-needed guidance should increase a fund’s ability to raise additional capital from investors that, to date, many fund sponsors had difficulty accessing due to onerous verification standards that they and fund intermediaries were reluctant to employ.
• The interpretive guidance also confirms that investment minimums are not the only methods that may be used to satisfy Rule 506(c); issuers may continue to use other reasonable methods.

EXECUTIVE SUMMARY

On March 12, 2025, the Division of Corporation Finance (the “Division”) of the Securities and Exchange Commission (the “SEC”) in an interpretive letter (the “506(c) Letter”) provided a more streamlined method for issuers, including private funds and registered funds, to raise capital in the private markets. The 506(c) Letter confirmed that a fund issuer using general solicitation to offer securities (meaning the issuer can use public means to advertise the offering) could satisfy the “reasonable steps” requirement to verify an investor’s “accredited investor” status by reference to a minimum investment amount.

This much-needed guidance should increase a fund’s ability to raise additional capital from investors that, to date, many fund sponsors had difficulty accessing due to onerous verification standards that they and fund intermediaries (e.g., fund platforms, placement agents and bank-sponsored feeder funds) were reluctant to employ. Notably, the 506(c) Letter confirms that investment minimums are not the only methods that may be used to satisfy Rule 506(c); issuers may continue to use other reasonable methods.

While this alert focuses on implications for private and registered funds, we note that the 506(c) Letter is not limited to fund issuers.

Rule 506(c) and the Rule 506(c) Letter

Generally, Rule 506(c) permits general solicitation so long as all investors in the offering are accredited investors and the issuer takes reasonable steps to verify the accredited investor status of the investors. Rule 506(c) includes a list of non-exclusive methods to satisfy the verification requirement, although many fund sponsors and intermediaries have found compliance with those requirements difficult to operationalize, particularly for retail or natural person investors. The 506(c) Letter provides an alternative verification method for both entity and natural person investors with minimal additional documentation, which can be met by private funds and registered funds if:

• The offering requires or the investor invests a minimum investment amount of at least $1,000,000 for an entity investor or $200,000 for a natural person investor, in each case inclusive of binding commitments;

• An entity investor accredited solely on a “look-through basis” (i.e., based on the accredited investor status of all of its equity owners, such as certain feeder funds) must agree to invest a minimum of $1,000,000, or $200,000 for each of the look‑through entity’s equity owners if all of the look-through entity’s equity owners number fewer than five natural persons;

• The fund receives a written representation from the investor (which can be provided in a subscription agreement, a standalone document, an affirmative written electronic communication from the investor, or any other written means as the issuer reasonably determines under the circumstances of the offering):

• that the investor is an “accredited investor” as defined in Rule 501;

• for look-through entities, each of its equity owners has a minimum investment obligation to the look-through entity (inclusive of binding commitments) of at least $200,000 for natural persons and $1,000,000 for legal entities;

• that the investment amount is not financed by a third party for the specific purpose of investing in the offering;

• for look-through entities, the minimum investment amount of the look-through entity and each of its equity owners is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer; and

• The fund has no actual knowledge of any facts that indicate that the investor’s representations above are otherwise inaccurate.

Issues to Consider

Many private funds relying on Section 3(c)(7) of the Investment Company Act of 1940, as amended (the “Investment Company Act”), already require investment minimums higher than those reflected in the 506(c) Letter, which could make the prospect of relying on Rule 506(c) more appealing to private funds due to the ability to more freely market their interests and avoid foot-faults for public statements made at conferences or on firm websites. Funds relying on Section 3(c)(1) of the Investment Company Act or another exception thereunder may more universally welcome the new verification options, although such funds should nonetheless pay close attention to investor qualification requirements in addition to Rule 506, such as the “qualified client” standard under the Investment Advisers Act of 1940, as amended, so as to be able to charge performance fees to such funds.

Any “switch” to Rule 506(c) should be analyzed broadly, as the rule does not relieve an issuer or its affiliates from general antifraud requirements applicable to any offering of securities. U.S. 3(c)(7) funds (and 3(c)(1) funds) that make global offerings should also consider the effect of a “general solicitation” under Rule 506(c) on a foreign jurisdiction’s offering requirements. A U.S. 3(c)(7) or 3(c)(1) fund’s use of Rule 506(c), however, should alleviate any tension between the offering standards imposed by Section 3(c)(7) and the standard permitted by Regulation S under the Securities Act.

Certain funds registered under the Investment Company Act, and certain funds that elect to be regulated as business development companies (“BDCs”) under the Investment Company Act, choose to make private offerings pursuant to Rule 506. Such registered funds and BDCs should also find the expanded verification procedures that the 506(c) Letter introduced helpful in accessing additional sources of retail capital.

This publication is for general information purposes only. It is not intended to provide, nor is it to be used as, a substitute for legal advice. In some jurisdictions it may be considered attorney advertising.