March 2025
Background
It is very common for companies to offer potential investors stock or other securities of the company in order to raise capital necessary to execute their business plans. As a general rule, an offering of securities by a company must be registered with the Securities and Exchange Commission (“SEC”) unless an exemption from the registration requirement is available. Since a registered offering is simply not practical for most privately-held companies, there are a number of exemptions available. The most commonly relied upon exemptions are those spelled out in Regulation D (“Reg D”) under the Securities Act of 1933 (the “Securities Act”).
While there are several exemptions available under Reg D, perhaps the one most commonly relied upon is Rule 506. The Rule 506 exemption does not permit a general solicitation of investors (e.g., general advertising, posting notices on the company website, radio or TV ads, etc.), with the exception of Rule 506(c), which historically has not been widely used.
The reason Rule 506(c) has not been widely used was the general lack of guidance on how accredited investor status was to be verified. Rule 506(c) did provide a non-exclusive list of information that could be used for verification, but these included federal income tax returns, bank and brokerage account statements, and other materials containing personally identifiable information, which many investors would be reluctant to provide and which the companies were reluctant to request.
SEC No-Action Letter
In May 2025, the SEC issued a no-action letter spelling out a more objective means of verifying accredited investor status. There are three basic components:
- Minimum Investment Size. Issuers may now rely upon minimum investment size to verify accredited investor status. Those minimums are $200,000 for investors who are natural persons and $1 million for legal entities.
- Written Representations. Issuers must get written representations confirming that the potential investor is accredited and is not financing its investment via a third party.
- Actual Knowledge. Issuers must have no actual knowledge that the potential investor is not accredited or is financing its investment via a third party.
Because the no-action letter provides objective steps to verify accredited investor status without the need to request the type of backup materials previously required for safe reliance on Rule 506(c), we are likely to see more large offerings using general solicitation of accredited Investors and a bit less reliance on Rule 506(b), which prohibits general solicitation.
If we can provide any additional information, please contact Bill Miller at wmiller@bizlawma.com.
This memorandum is intended to provide general information of potential interest to clients and others. It does not constitute legal advice. The receipt of this memorandum by any party who is not a current client of the Business Law Group does not create an attorney-client relationship between the recipient and the firm. Under certain circumstances, this memorandum may constitute advertising under the Rules of the Massachusetts Supreme Judicial Court and the bar associations of other states.