SEC issues new guidance on verifying accredited investors for Regulation D offerings
The recent guidance issued by the staff of the Securities and Exchange Commission (SEC) Division of Corporation Finance has shed light on the interpretation of the term “solicitation” in private placement transactions. Latham & Watkins submitted a no-action letter on March 12, 2025, which stated that in solicited private placements, investors who commit at least $200,000 (individuals) or $1 million (legal entities) can be presumed to be accredited investors. This new approach eliminates the previous burden of verifying an investor’s accredited status, which often required the disclosure of sensitive financial information such as bank statements, tax returns, and verification letters from professionals like lawyers and accountants.
The Jumpstart Our Business Startups Act of 2012 (JOBS Act) paved the way for general solicitation and advertising in private placements, which were previously limited to “word of mouth” referrals and established business relationships. Regulation D Rule 506 offers two paths for private placements: 506(b), which allows transactions with accredited investors and up to 35 non-accredited investors with whom the issuer has a prior or established business relationship, and 506(c), which permits general solicitation but only allows sales to accredited investors. Unlike 506(b), 506(c) mandates that issuers take reasonable steps to verify an investor’s accredited status.
The no-action letter issued by Latham relies on Securities Act Release No. 9415, which expounds on the concept that a high minimum investment amount can serve as a reliable indicator of an investor’s accredited status. If an investor meets this minimum threshold and affirms in writing that their investment is not financed by a third party, the issuer may forego extensive verification procedures. This pragmatic approach eliminates the need for frequent documentation and ensures a more streamlined process for private equity, venture capital, hedge fund, and private credit fund formations.
Issuers must be proactive in aligning their procedures with the updated regulatory guidelines. By simplifying the verification process for accredited investors, the SEC’s guidance facilitates a more efficient and less burdensome system for private placement transactions. It is crucial for issuers to adapt swiftly to these regulatory changes to ensure compliance and avoid unnecessary delays in fundraising efforts. If further clarification is needed, it is recommended to reach out to legal professionals familiar with evolving regulations in this area.
Regulation D Rule 506 is the most flexible of the regulations, allowing the private placement of securities to an unlimited number of accredited investors, regardless of state residency, and up to 35 non-accredited investors. Non-accredited investors must receive comprehensive financial and business disclosures that accredited investors are not required to receive. Notably, exceeding 2,000 “non-exempt” investors in a private placement may trigger a public filing obligation under the Securities Exchange Act of 1934. Exceptions to this rule include shares issued in Regulation CF crowdfunding transactions and certain Regulation A offerings.
In conclusion, the recent guidance from the SEC marks a significant shift in the verification process for accredited investors in private placements. By prioritizing compliance with these updates and seeking expert advice when needed, issuers can navigate the evolving regulatory landscape and streamline their fundraising processes effectively.