Accredited Investor Verification Under Rule 506(c): A Practical Guide for U.S. Fund Managers

The Rule That Nobody Used

Rule 506(c) has been available to U.S. issuers since 2013. In exchange for one significant concession, the ability to publicly advertise a private offering, it imposed one significant condition: the issuer must take reasonable steps to verify that every purchaser is an accredited investor.

For more than a decade, the overwhelming majority of private fund sponsors declined the trade. They stayed with Rule 506(b), which permits no general solicitation but allows issuers to rely on investor self-certification. The reasoning was straightforward and, at the time, correct. Verification under 506(c) meant asking prospective limited partners for tax returns, brokerage statements, or letters from their accountants. Sophisticated investors found this intrusive. Placement agents found it commercially awkward. Sponsors concluded that public marketing was not worth the friction.

That calculation changed in March 2025, when the SEC's Division of Corporation Finance issued a no-action letter establishing what amounts to a bright-line path to satisfying the verification requirement. Combined with two new compliance and disclosure interpretations, the guidance made 506(c) viable for the first time for a large class of private funds.

This article covers what the guidance actually permits, where its boundaries are, how to document verification defensibly, and why the operational answer is not simply "collect a representation letter."

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The Underlying Framework

Before the mechanics, the structure. Regulation D provides safe harbors from the registration requirements of the Securities Act of 1933. Rule 506 is the workhorse, and it comes in two variants.

Rule 506(b) permits an issuer to sell to an unlimited number of accredited investors plus up to 35 non-accredited but sophisticated purchasers. It prohibits general solicitation and general advertising. Because there is no verification mandate, issuers customarily rely on investor questionnaires in which the investor self-certifies accredited status.

Rule 506(c) permits general solicitation: public websites, press interviews, conference presentations, social media, email campaigns to non-pre-existing relationships. In exchange, all purchasers must actually be accredited investors, and the issuer must take reasonable steps to verify that.

The distinction between "must be accredited" and "must be verified as accredited" is the whole game. Under 506(b), an issuer that reasonably believed a purchaser was accredited retains the exemption even if the belief turns out to be wrong. Under 506(c), if the issuer did not take reasonable verification steps, the exemption is unavailable regardless of whether the purchaser was in fact accredited.

Who counts as accredited

The definition, as amended in 2020, covers natural persons with individual income exceeding $200,000 in each of the two most recent years, or joint income with a spouse or spousal equivalent exceeding $300,000, with a reasonable expectation of the same in the current year. It also covers natural persons with net worth exceeding $1 million, individually or jointly, excluding the value of a primary residence.

The 2020 amendments added credential-based routes: holders of Series 7, Series 65, or Series 82 licenses in good standing qualify regardless of wealth. Knowledgeable employees of a private fund qualify with respect to that fund.

For entities, the thresholds include $5 million in assets for corporations, partnerships, LLCs, and trusts not formed for the specific purpose of the investment; family offices with $5 million under management; and entities in which all equity owners are themselves accredited.

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What the SEC's Guidance Actually Permits

The 2025 no-action letter addressed a specific question: can an issuer rely on a high minimum investment amount, coupled with investor representations, as a reasonable step to verify accredited status?

The staff said yes, subject to conditions.

The minimum investment threshold. At least $200,000 for natural persons. At least $1 million for legal entities. Critically, a binding capital commitment satisfies the threshold, the full amount need not be funded at closing. For private funds that call capital over time, this is what made the guidance usable, since most subscriptions are commitments rather than immediate transfers.

The written representations. The purchaser must represent in writing that it is an accredited investor, and that the minimum investment amount is not financed in whole or in part by any third party for the specific purpose of making that investment.

No actual knowledge to the contrary. The issuer must have no actual knowledge of any facts indicating that the purchaser is not accredited or that the investment was third-party financed for the purpose of making it.

The logic is the one the SEC articulated back in the 2013 adopting release: if an investor can write a $200,000 check, the probability that they meet the accreditation thresholds is high enough that additional verification adds little. The 2025 letter converted that reasoning from a general principle into an operable standard.

The financing representation deserves attention

The third-party financing condition is more nuanced than it first appears. Guidance indicates that a purchaser can still make the representation where capital comes from credit facilities established for other purposes, from pre-existing financings that predate the offering, or from the purchaser's own fundraising conducted in compliance with the same conditions.

The concern being addressed is a specific abuse: an unaccredited investor borrowing $200,000 for the express purpose of clearing the threshold. It is not intended to disqualify institutional investors who use subscription lines or funds-of-funds that raise their own capital.

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What the Guidance Did Not Change

Several practitioners read the no-action letter as making 506(c) frictionless. It did not.

The traditional verification methods remain available and still matter. Rule 506(c)(2)(ii) contains a non-exclusive list of methods deemed to satisfy the requirement: reviewing IRS forms for the two most recent years plus a written representation about the current year for income-based accreditation; reviewing bank statements, brokerage statements, or appraisal reports together with a consumer credit report for net-worth-based accreditation; obtaining written confirmation from a registered broker-dealer, registered investment adviser, licensed attorney, or certified public accountant; and, for existing investors who previously invested in the issuer's 506(b) offering, obtaining a re-certification.

For investors below the minimum thresholds (and many funds accept commitments below $200,000 from individuals) these methods are the only route.

Reasonableness remains an objective, facts-and-circumstances standard. The safe harbor is a floor, not a ceiling. An issuer with actual knowledge of red flags cannot hide behind a representation letter.

Bad actor disqualification still applies. Rule 506(d) disqualifies offerings where a covered person has a disqualifying event. This requires its own diligence on the issuer's principals, placement agents, and significant beneficial owners, and it is entirely separate from accreditation.

Form D filing obligations are unchanged, as are state notice filings and, where the fund is advised by a registered adviser, the full apparatus of the Advisers Act marketing rule. General solicitation under 506(c) means advertising, and advertising by a registered adviser is governed by Rule 206(4)-1: performance presentation requirements, testimonial and endorsement rules, and the prohibition on untrue or misleading statements.

AML and sanctions obligations are independent. Verifying that someone is wealthy is not the same as verifying that they are who they claim to be, or that they are not a sanctioned party. Accreditation verification answers a securities law question. It answers nothing about money laundering risk.

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The Documentation That Survives Scrutiny

The question that matters when the SEC examines a 506(c) offering is not "did you verify?" It is "show me."

A defensible verification file for each purchaser contains six elements.

The verification method used, explicitly identified. If you relied on the minimum investment safe harbor, say so. If you used a third-party confirmation letter, identify the confirming party and their qualification.

The evidence itself. The signed subscription agreement with the accreditation and financing representations. Where applicable, the confirming letter, the redacted financial statements, or the tax documentation reviewed.

The commitment amount, demonstrating that the threshold was met, with reference to the binding nature of the commitment if capital was not fully funded.

A negative-knowledge attestation. A dated record that the person conducting verification reviewed available information and identified nothing inconsistent with accredited status. This is the element most often missing, and it directly addresses the "no actual knowledge" condition.

Identity verification. Distinct from accreditation. Who is this person, and is the identity document authentic? A representation from an unverified identity is worth very little.

The date and the reviewer. Verification must occur before the sale. A file that cannot demonstrate sequencing is a file with a problem.

The re-verification question

Accredited status is determined at the time of sale. For a fund calling capital over several years against a single subscription, verification at initial subscription is generally sufficient for that commitment. But a subsequent investment (a new fund, an increased commitment, a co-investment vehicle) is a new sale requiring fresh verification.

Firms that treat verification as a one-time onboarding event rather than a per-transaction requirement accumulate exposure quietly. The practical answer is to tie verification to the subscription record rather than to the investor record.

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Operational Design for Funds Running 506(c)

A fund that decides to use general solicitation is making an operational commitment, not just a legal one.

Segregate the offerings. An issuer cannot conduct a 506(b) offering and a 506(c) offering simultaneously in a way that lets the general solicitation contaminate the 506(b) exemption. Sponsors running multiple vehicles need clear boundaries around which vehicle is being marketed publicly and to whom.

Build the subscription document correctly from the start. The accreditation representation, the financing representation, and the identity information all need to be captured in a single, structured intake. Retrofitting representations into an existing subscription package after the first closing creates inconsistent records across the investor base.

Automate the exception path. Most investors will clear the minimum investment threshold and require nothing further. A minority will not, and those require the traditional verification methods. The process needs to route them automatically rather than depending on someone noticing.

Layer AML on the same intake. The investor is already providing identity information for accreditation purposes. Running sanctions screening, PEP screening, adverse media, and, for entity investors, beneficial ownership resolution on the same data is marginal additional effort at onboarding and enormous additional effort if done later.

This is the argument for a unified onboarding layer rather than separate securities and AML workflows. The investor completes one process. The system produces two evidence files: one demonstrating accreditation verification for securities law purposes, one demonstrating identity verification and screening for AML purposes. Both are timestamped, both are complete, and neither requires a compliance officer to assemble it manually.

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Should Your Fund Use 506(c)?

The guidance made 506(c) viable. It did not make it universally advisable.

It makes sense when the fund's minimum commitment naturally exceeds the thresholds, public visibility has genuine fundraising value, the sponsor wants to build a public brand ahead of future vehicles, or the sponsor is raising from a dispersed base without pre-existing relationships.

It makes less sense when the fund raises from a small number of known institutional LPs, minimums are below the safe harbor thresholds and traditional verification would be required for most investors, the adviser's marketing infrastructure cannot support Advisers Act advertising compliance, or the sponsor operates in a jurisdiction with state-level restrictions that complicate public solicitation.

The honest assessment for many emerging managers is that 506(c) is now worth considering where it previously was not, particularly for first-time funds without an established LP network, where the ability to talk publicly about the strategy has real value.

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Conclusion: Verification Is an Evidence Problem

The 2025 guidance solved a commercial problem. It let sponsors market publicly without demanding tax returns from prospective investors. That is a meaningful improvement, and adoption of 506(c) has grown accordingly.

But it substituted one obligation for another. Instead of collecting financial documentation, the sponsor now has to demonstrate that it obtained the right representations, in the right form, before the sale, from an investor whose identity it verified, having identified no contradictory facts. That is a records problem, and records problems are where private fund sponsors most often fall short.

The funds handling this well built the discipline into their subscription process rather than bolting it on afterward. Structured intake. Automatic routing of investors who fall below the safe harbor. Identity verification and sanctions screening running on the same submission. A complete, dated evidence file generated for each subscription without anyone assembling it by hand.

Do that, and 506(c) is genuinely low-friction. Skip it, and the guidance has simply moved your exposure from one place to another.