Part 3 of 7 in the Capital Raising Series | Veritas Global Law PLLC
For decades, the private securities market operated in the shadows—literally. Issuers seeking capital through private placements were prohibited from advertising their offerings to the general public. You could raise unlimited capital under Regulation D, but only from investors you already knew or could reach through private channels.
Rule 506(c), adopted in 2013 following the JOBS Act mandate, changed this paradigm. For the first time, issuers could openly market their securities offerings—through websites, social media, industry conferences, and traditional advertising—while maintaining federal preemption from state registration requirements. The catch: every investor must be accredited, and the issuer must take reasonable steps to verify that status.
The verification requirement has historically been the friction point that limited 506(c) adoption. Many issuers found the process burdensome and opted for 506(b)’s self-certification approach instead. But March 2025 SEC guidance introduced a significant simplification: issuers can now verify accredited status based on high minimum investment amounts, dramatically reducing compliance costs for certain offerings.
This article examines Rule 506(c) comprehensively—from the mechanics of general solicitation to the practical application of verification methods, including the new guidance that may make this exemption attractive for offerings that previously defaulted to 506(b).
The General Solicitation Permission: What It Unlocks
Under Rule 506(c), issuers may engage in general solicitation and general advertising when offering securities, provided all purchasers are accredited investors and the issuer takes reasonable steps to verify accredited status. This permission fundamentally expands how issuers can reach potential investors.
Permitted Marketing Activities
With 506(c), issuers can:
- Advertise online: Post offering information on company websites, investment platforms, social media, and digital advertising channels
- Use traditional media: Place advertisements in newspapers, magazines, radio, and television (though practical use is limited)
- Host public events: Present at conferences, seminars, and demo days open to the general public
- Engage in cold outreach: Contact potential investors without pre-existing relationships
- Partner with online platforms: List offerings on investment platforms that market to the general public
This permission makes 506(c) particularly valuable for issuers seeking to reach beyond their existing networks—early-stage companies without established investor relationships, fund managers launching new strategies, or any issuer wanting to efficiently access a broader pool of potential capital.
Anti-Fraud Requirements Still Apply
The permission to generally solicit does not diminish anti-fraud obligations. All marketing materials must be accurate and not misleading. Material information cannot be omitted. Projections and forward-looking statements must have a reasonable basis. Issuers should apply the same rigor to advertising materials as they would to any investor communication subject to securities law scrutiny.
Accredited Investors Only: No Exceptions
Unlike Rule 506(b), which permits up to 35 non-accredited investors meeting sophistication requirements, Rule 506(c) requires that all purchasers be accredited investors. There are no exceptions, no sophistication alternatives, and no numerical limits on how many accredited investors may participate.
The SEC’s accredited investor definition establishes the following qualification paths for natural persons:
Entity investors qualify as accredited through various paths including: ownership of assets exceeding $5 million (for certain trusts and employee benefit plans), status as a bank, insurance company, registered investment company, or business development company, or as an entity in which all equity owners are individually accredited investors.
The Verification Requirement: Taking Reasonable Steps
The distinguishing feature of Rule 506(c)—and historically its most significant compliance burden—is the requirement that issuers take “reasonable steps to verify” that each purchaser is an accredited investor. Unlike 506(b)’s self-certification approach, 506(c) requires the issuer to go beyond investor representations.
The Principles-Based Standard
Rule 506(c) establishes a principles-based verification requirement. What constitutes “reasonable steps” depends on the facts and circumstances, including:
- The nature of the purchaser and type of accredited investor category claimed
- The amount and type of information the issuer has about the purchaser
- The nature of the offering, including manner of solicitation and minimum investment amount
This flexibility is intentional—the SEC recognized that appropriate verification methods would vary across different offering contexts. But the flexibility also created uncertainty that made some issuers hesitant to rely on 506(c).
Traditional Verification Methods (Non-Exclusive Safe Harbors)
Rule 506(c) provides several non-exclusive methods that, if followed, satisfy the verification requirement:
For income-based qualification: Review IRS forms reporting income (W-2, 1099, K-1, tax returns) for the two most recent years, along with a written representation that the investor reasonably expects to meet the income threshold in the current year.
For net worth-based qualification: Review documentation of assets (bank statements, brokerage statements, appraisals) and liabilities (credit reports), dated within three months prior to purchase.
Third-party verification: Obtain written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA that has taken reasonable steps to verify accredited status within the prior three months.
Prior investor verification: For investors who previously invested in the issuer’s 506(c) offering and provided certification of continued accredited status, rely on prior verification if conducted within five years.
These safe harbors provide certainty but require collecting sensitive financial documents—tax returns, bank statements, credit reports—that many investors are reluctant to share. This friction limited 506(c) adoption, particularly for offerings with smaller check sizes where the verification burden was disproportionate to the investment amount.
March 2025 SEC Guidance: The High Minimum Investment Method
In March 2025, the SEC’s Division of Corporation Finance issued Compliance and Disclosure Interpretations (CDIs) that significantly expanded the verification options available under Rule 506(c). The new guidance establishes that issuers can satisfy the verification requirement based on high minimum investment amounts—without requiring traditional document review.
The New Safe Harbor Thresholds
Under CDI 256.35 and 256.36, issuers may rely on the following minimum investment amounts as a verification method:
Conditions for Using the Minimum Investment Method
The high minimum investment verification method requires satisfaction of several conditions:
- Cash investment: The minimum investment must be in cash. Investments funded by debt provided or arranged by the issuer or its affiliates don’t qualify.
- Written representation: The investor must provide a written representation that the investment is not funded by third-party financing arranged by the issuer.
- Written representation of accredited status: The investor must represent in writing that they qualify as an accredited investor.
- No contradictory information: The issuer must not have information suggesting the investor is not accredited, despite the representations made.
Why This Matters: Practical Implications
The minimum investment verification method fundamentally changes the cost-benefit analysis for many offerings:
Reduced friction: Investors meeting the threshold no longer need to share tax returns, bank statements, or credit reports. The investment amount itself, combined with representations, satisfies verification.
Lower issuer costs: Issuers can reduce or eliminate third-party verification service fees and the administrative burden of document collection and review.
Faster closings: Eliminating document collection accelerates the investment timeline—particularly valuable in competitive situations or time-sensitive raises.
Better investor experience: Sophisticated investors accustomed to writing large checks may appreciate not having to produce sensitive financial documentation.
For offerings with minimum investments at or above the threshold levels, the new guidance may tip the balance toward 506(c)—allowing general solicitation benefits without the traditional verification friction.
Bad Actor Disqualification Under Rule 506(c)
Like Rule 506(b), offerings under Rule 506(c) are subject to the bad actor disqualification provisions of Rule 506(d). The same covered persons and disqualifying events apply—criminal convictions, regulatory orders, SEC disciplinary actions, and other specified events can prevent reliance on the exemption.
Issuers must conduct bad actor inquiries covering all covered persons before commencing general solicitation. Discovering a disqualifying event after marketing an offering publicly creates particularly difficult remediation challenges—you cannot “un-ring” the general solicitation bell.
For a detailed discussion of bad actor provisions, including covered persons, disqualifying events, and inquiry procedures, see Part 2 of this series on Rule 506(b), which covers these requirements in depth.
Form D and State Filing Requirements
Rule 506(c) offerings require Form D filing with the SEC within 15 calendar days of the first sale—the same timeline as 506(b). The Form D must indicate reliance on Rule 506(c) rather than 506(b), and the SEC tracks these filings separately.
State notice filing requirements also apply, though the preemption from state registration remains. States cannot impose substantive registration requirements on 506(c) offerings, but they can require notice filings and fees. Issuers should track state requirements for each jurisdiction where they have investors.
When to Choose Rule 506(c)
Rule 506(c) is typically the right choice when:
- You need to reach new investors: If your existing network cannot provide sufficient capital, 506(c)’s general solicitation permission allows you to cast a wider net.
- You want to use online platforms: Investment platforms that market to the public typically operate under 506(c), requiring issuers to use this exemption to list offerings.
- Your minimum investment meets the new thresholds: If your offering already has a $200,000+ minimum for individuals or $1,000,000+ for entities, the simplified verification method eliminates much of the traditional 506(c) burden.
- You have access to third-party verification services: Several vendors now provide streamlined verification processes that reduce friction while satisfying the reasonable steps requirement.
- Your investors can easily demonstrate accredited status: Institutional investors and individuals with clear professional credentials (investment advisers, brokers, etc.) often have readily available documentation.
Common 506(c) Implementation Strategies
Tiered Verification Approach
Many issuers implement tiered verification based on investment amount:
- Investors at or above $200,000 (individuals) or $1,000,000 (entities): Use the minimum investment method with written representations
- Investors below the threshold: Require third-party verification through a service provider or attorney/CPA letter
- Repeat investors: Rely on prior verification within the five-year window, with updated representations
Third-Party Verification Services
Several vendors now offer accredited investor verification as a service. These platforms collect documentation from investors, review it against SEC requirements, and provide verification letters that issuers can rely upon. While these services add cost, they streamline the process and provide professional documentation that reduces issuer liability concerns.
Platform-Integrated Verification
Online investment platforms operating under 506(c) typically handle verification as part of their service. Issuers listing on these platforms can generally rely on the platform’s verification process, though they should understand the platform’s methodology and ensure it satisfies Rule 506(c) requirements.
Potential Pitfalls and How to Avoid Them
Mixing 506(b) and 506(c) investors: An offering cannot use 506(b) for some investors and 506(c) for others. Once you engage in general solicitation, the entire offering must comply with 506(c) requirements—including verification for all investors, even those from pre-existing relationships. Plan your approach before any marketing begins.
Relying solely on investor representations: Unlike 506(b), self-certification alone does not satisfy 506(c). Even a detailed questionnaire does not constitute reasonable verification steps unless it fits within the minimum investment method framework.
Overlooking the “no contradictory information” requirement: The minimum investment method requires that the issuer have no reason to believe the investor is not accredited. If you have information suggesting an investor may not qualify—regardless of their representations—you cannot rely on this method for that investor.
Inadequate documentation: Whatever verification method you use, maintain clear records. Document what steps were taken, what information was reviewed, and when verification occurred. This contemporaneous record is essential if questions arise later.
Looking Ahead
Rule 506(c) continues to evolve as the SEC provides additional guidance and as market practices develop. The March 2025 CDIs represent a significant step toward making verification more practical for offerings with substantial minimum investments.
The next article in this series examines Rule 504, which provides an alternative exemption for offerings up to $10 million with more flexible investor composition and state law considerations.
Take the Next Step
Determining whether Rule 506(c) fits your offering—and implementing the verification process efficiently—requires understanding both the regulatory requirements and the practical options available. The new minimum investment verification method has changed the calculus for many offerings.
Schedule a consultation with Veritas Global today. Our team can help you evaluate whether 506(c)’s general solicitation benefits outweigh the verification requirements for your specific situation, and implement a compliant verification process that minimizes friction for your investors.
This article is for informational purposes only and does not constitute legal advice. Securities regulations are complex and fact-specific; consult qualified counsel before structuring any offering.
