On 12 March 2025, the US Securities and Exchange Commission (SEC) staff issued a no-action letter that provides private fund sponsors with a concrete, streamlined approach to relying on Rule 506(c),¹ based on minimum investment amounts and investor representations. This guidance has the potential to unlock Rule 506(c)’s advantages for private fund sponsors more than a decade after its passage. 

Background on Rule 506(c)

Implemented in 2013 pursuant to the Jumpstart Our Business Startups Act, Rule 506(c) provides an alternative to the traditional prohibition on general solicitation in private offerings. Specifically, Rule 506(c) permits issuers to engage in general solicitation and advertising when selling securities, provided they take “reasonable steps” to verify that all purchasers are accredited investors. While enacted in order to give issuers the opportunity to increase their fundraising abilities through marketing to a public audience, Rule 506(c) has been only sparingly used over the last decade. This past November, SEC Commissioner Hester Peirce commented that issuers had “raised around $169 billion annually under Rule 506(c) compared to $2.7 trillion under 506(b), which does not permit general solicitation.”²

The “reasonable steps” verification requirement has presented operational challenges for many issuers. Prior methods qualifying as “reasonable steps” included reviewing tax returns, bank statements, or obtaining verification letters from professionals such as lawyers or accountants. Because of the additional administrative burdens imposed by these verification methods, Rule 506(c) has not been widely utilized, despite its potential to access a much wider audience for capital raising.

The Alternative Verification Method

The no-action letter provides a far less labor-intensive approach to satisfying Rule 506(c)’s verification requirements by streamlining the process issuers must follow to verify an investor’s accredited investor status. Specifically, the SEC mandates that an issuer relying on the no-action letter: 

• Impose minimum investment amounts of US$200,000 for individuals and US$1 million for legal entities;³ 
• Receive written, self-certified representations from an investor that they are an accredited investor and that their investment is not financed by a third party for the specific purpose of making the particular investment;⁴ and
• Have no actual knowledge of facts contrary to the two above bullets. 

This test for determining whether an issuer has taken reasonable steps to verify accredited investor status is objective and depends on the specific facts and circumstances of each investor and transaction.  

Practical Considerations for Private Fund Sponsors and Other Issuers 

What are the practical implications for private fund sponsors now that the SEC has loosened the verification restrictions? Will private fund sponsors now jump into the fray and begin to advertise on social media, at sporting events, and elsewhere? There remain a number of considerations notwithstanding the less burdensome verification process. The SEC’s no-action letter addressed only this aspect of using Rule 506(c). The Marketing Rule (defined below), antifraud provisions, and other provisions of the Investment Advisers Act of 1940 the (Advisers Act) of course remain in full force and effect. Private fund sponsors considering an offering under Rule 506(c) will need to not only comply with the Advisers Act’s requirements, but be prepared to do so in front of a much wider investor and regulator audience.

Private fund sponsors considering Rule 506(c) offerings should note several additional considerations:

Update Policies and Procedures

Managers should adopt policies and procedures to accommodate Rule 506(c) offerings.

Marketing Rule

Registered investment advisers must continue to consider Rule 206(4)-1⁵ under the Advisers Act the (Marketing Rule) when marketing their funds. While advisers may widely distribute marketing materials, such materials must comply with the Marketing Rule. For example, under the Marketing Rule, advisers are generally prohibited from including hypothetical performance, such as performance targets and projected returns, in advertisements to the general public.⁶

Switching Exemptions

Managers that want to change to a Rule 506(c) offering should file an updated Form D with the SEC and review offering materials for any necessary updates (e.g., remove representations regarding no general solicitation from subscription agreements and other documents).

What Is Next for Private Fund Sponsors and Rule 506(c)?

The easing of the investor verification process under Rule 506(c) will undoubtedly renew interest in pursuing this alternative path to capital raising. It is no secret that the fundraising environment over the last several years has been challenging, particularly for mid-market and emerging manager sponsors. For those managers, there are good reasons to explore general solicitation under Rule 506(c), bearing in mind the need to comply with the SEC’s recent guidance on verification and the requirements of the Advisers Act. Time will tell whether the SEC’s no-action letter will actually open the floodgates of advertising for private fund sponsors. Watch this space for further insights as the industry’s approach to using Rule 506(c) unfolds.

Footnotes