Corp Fin Breathes New Life into 506(c)
On March 12, 2025, the U.S. Securities and Exchange Commission’s Division of Corporation Finance issued a no-action letter providing a new safe harbor for Rule 506(c) offerings, which may enable broader public outreach and advertising efforts by fund sponsors and other private issuers of securities.
Background
In 2012, as part of an overall economic stimulus effort, Congress directed the SEC to eliminate prohibitions on “general solicitation” in private placements of securities conducted under the registration exemption afforded by Regulation D under the Securities Act. The SEC’s response was Rule 506(c), adopted in 2013, which permits an issuer (including a private fund) conducting a private placement under Reg D to engage in general solicitation activities, so long as that issuer takes reasonable steps to verify that all ultimate investors in the offering are accredited investors.
While the SEC Staff provided several examples of reasonable verification measures in the adopting release, the industry perceived the objective examples to be overly burdensome and the subjective guidance to be too risky. As a result, 506(c) offerings remain rare in the private funds world.
New Guidance
The SEC Staff’s new guidance effectively provides a safe harbor on “reasonable steps” for accredited investor verification in a Rule 506(c) offering, if the following conditions are met:
- Each investor must represent that its investment is not being financed by a third party for the specific purpose of making the particular investment in the issuer (i.e., a “no borrowing rep”);
- The minimum required investor commitment equals or exceeds $1 million (or $200,000 for natural person investors); and
- The issuer (which would include a fund sponsor) has no actual knowledge that any purchaser (x) is not an accredited investor or (y) has financed the investment.
This concept is not wholly novel, as the adopting release discussed situations where a large minimum investment amount could be a proxy for adequate verification measures, but many fund sponsors and issuers were unwilling to accept the uncertainty resulting from the Commission’s decision not to provide any objective criteria.
However, issuers should still proceed carefully in adopting and using Rule 506(c). Public statements can become sources of liability on antifraud theories, so substantive pre-approvals and reviews of outreach efforts will need to be considered. Sponsors and issuers also need to remember that Rule 506(c) is only an exemption from the registration requirements of the Securities Act, and does not preempt any other laws or rules. Local private placement rules and advertisement restrictions in non-U.S. countries continue to apply, for example, as do advertisement and marketing requirements for self-regulatory organizations (and, potentially, the SEC’s own Marketing Rule).
Impact
The world has changed much since Rule 506(c) was adopted. Today’s fund sponsors and managers are engaging in public outreach at levels and in quantities undreamed of even five years ago. Social media postings, podcast appearances, livestreams, and volumes of “thought leadership” have become standard items in a manager’s toolkit, and we expect the pressure on private fund managers to maintain and curate a public profile to only accelerate.
This no-action letter addresses the concerns that many legal and compliance practitioners have with this new level of public outreach, as most private fund offering in the United States continue to rely on Rule 506(b) (which has traditionally stressed the “private” in a “private placement”). By providing objective comfort and a practical proxy for investor-specific verification, Corp Fin is breathing new life into Rule 506(c) and offering a valid option for managers and sponsors to engage in public outreach.