Understanding the SEC Staff’s New Rule 506(c) Minimum Investment Amount Guidance: Implications for Private Offerings

In March 2025, the Securities and Exchange Commission (SEC) staff issued new guidance on the verification requirements for the Rule 506(c) safe harbor exemption under the Securities Act of 1933. This guidance, outlined in Compliance and Disclosure Interpretations (CDIs 256.35 and 256.36), referring both to Securities Act Release No. 9415 and a related no-action letter (Latham & Watkins LLP, March 12, 2025), brings important clarity for issuers seeking to comply with the Rule 506(c) exemption and may have broader applications beyond this specific exemption.

What is Rule 506(c) and Why Does It Matter?

Rule 506(c) allows issuers to use general solicitation (e.g., advertising, public offerings) to find accredited investors for private offerings without triggering the registration requirements under the Securities Act of 1933. However, the rule imposes a significant verification requirement: issuers must take “reasonable steps” to verify that purchasers are accredited investors. This has often been viewed as a challenge for issuers, who must navigate this verification requirement in a way that is both efficient and minimally intrusive to investors.

New SEC Staff Guidance on Verification Steps

The SEC staff’s new guidance brings relief by clarifying what constitutes “reasonable steps” to verify accredited investor status. Specifically, the guidance confirms that verification is a specific to the particular facts and circumstances of each case, meaning there is no one-size-fits-all approach. However, one key takeaway is that a high minimum investment amount can play a critical role in the verification process.

For individual investors, a minimum investment amount of $200,000 and, for entities, a minimum investment amount of $1 million, can serve as a strong indicator of accreditation. CDI 256.36 still cautions that confirmation that the investment was not financed by a third party for the purpose of making the investment would be a reasonable verification even with a high minimum investment amount. In cases where these representations are verified and the issuer does not have actual knowledge indicating that the investor is not accredited, this combination of factors could be sufficient to meet the verification requirements under Rule 506(c).

Impact of High Minimum Investment Amounts

The SEC staff’s guidance affirms that a high minimum investment amount can be a sufficient verification tool. This is especially important for issuers, who have long struggled with the balance of using general solicitation to reach potential investors while meeting the burdensome verification requirement. By simply requiring a higher minimum investment, issuers can more easily demonstrate that their investors are accredited without needing to conduct extensive, intrusive background checks.

In practice, the guidance may streamline the process and reduce the compliance burden for issuers. For example, investors committing to a high minimum investment, along with appropriate representations, can effectively satisfy the verification requirement, provided there is no conflicting information that raises doubts about their accredited status.

Broader Implications Beyond Rule 506(c)

While the guidance primarily impacts issuers relying on Rule 506(c), it has broader applications in the context of private offerings and securities law. For instance, Rule 506(b) allows for an unlimited number of accredited investors to purchase securities without the same rigorous verification process required under Rule 506(c). If an issuer is able to meet the “reasonable steps” standard under Rule 506(c), it may also be able to meet the “reasonable belief” standard under Rule 506(b).

Furthermore, high minimum investment amounts or minimum denominations (in the case of debt securities) have traditionally been seen as relevant factors in determining the availability of other private offering exemptions, such as the statutory 4(a)(2) exemption and the so-called 4(1½) private resale exemption—an amalgam relying on Section 4(a)(1) and Section 4(a)(2), now codified with some changes at Section 4(a)(7). These exemptions rely on the idea that large investments or high minimums can help demonstrate an investor’s sophistication and financial capability to bear the associated risks of the investment. The SEC staff’s new guidance strengthens this notion, suggesting that high minimum investments can help issuers in demonstrating that the statutory exemptions apply.

Conclusion

The SEC’s new guidance regarding Rule 506(c) and the use of high minimum investment amounts in verifying accredited investor status marks an important development for private offerings. Issuers can now consider a high minimum investment threshold as a relevant factor in meeting the verification requirement, simplifying the process and reducing the need for intrusive background checks. Additionally, this guidance has broader implications for other private offering exemptions and may impact how issuers approach investor verification across a variety of contexts.

At the same time, while the guidance offers greater flexibility, it remains critical for issuers to stay informed about evolving regulatory expectations and ensure that their verification procedures align with the specific facts and circumstances of each offering. Davillier Law Group LLC is experienced in securities, private offerings, and the leveraging of capital to grow and expand your business in a complex regulatory and political environment. If you are considering a Rule 506(c) offering or are concerned about verification requirements in your investment offerings, schedule your consultation with Davillier Law Group today to see how we can help.