How does 506(c) verification work?

Under Rule 506(c), you may promote your offering publicly, which can reach beyond your network. Every investor must be accredited, and you must take reasonable steps to verify that before accepting their money. People you know who are not accredited cannot invest in a 506(c) offering.

Verification is about the investor's status at the time of sale. You decide how to verify each investor, and you keep a record of what you reviewed and why it was enough.

When the SEC adopted 506(c) in 2013, it described verification as an objective judgment based on the particular facts of each purchaser and each transaction. It named three things to weigh: the kind of investor and the category they claim; how much information you already have about them; and the nature of the offering, including how you found the investor and the offering's terms, such as a minimum investment.

The logic runs both ways. The more likely it is that someone is accredited, the fewer steps you need. Someone who answered a broad social media ad may need more than a long-standing contact whose finances you already know well.

If you use this approach, write a short note for each investor: the category claimed, what you reviewed and its date, any representations, any red flags and how you resolved them. If you cannot write a convincing note, you have not finished.

Rule 506(c)(2)(ii) lists methods that are treated as reasonable steps for individuals. You may use them, but you do not have to.

Income: review IRS forms reporting income for the two most recent years, plus a written statement that the investor expects to reach the level this year.

Net worth: review asset statements dated within the prior three months and a consumer credit report, plus a written statement that all liabilities have been disclosed.

Professional confirmation: a written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a CPA that they took reasonable steps within the prior three months and found the investor accredited.

Earlier verification: if you verified the same person within the last five years, a written statement at the time of sale that they still qualify, with nothing to the contrary.

Legacy holders: a narrow method for certain investors from the issuer's pre-2013 506(b) offerings.

Each method fails if you know facts showing the investor is not accredited. Entities are verified under the principles-based approach. You may use different methods for different investors in the same offering.

On March 12, 2025, the SEC's Division of Corporation Finance responded to a request from the law firm Latham & Watkins. This is SEC staff guidance: a staff position given in response to a specific request, not a rule, and staff can change it.

The staff agreed that an issuer could reasonably conclude it had taken reasonable steps when three things are true. First, the investor meets a high minimum investment. The request the staff agreed with described minimums of $200,000 for natural persons and $1,000,000 for legal entities, with a per-owner alternative for some entities owned entirely by a small number of accredited individuals. Second, the investor gives written representations that they are accredited and that the minimum investment is not financed in whole or in part by a third party for the specific purpose of making the investment. Third, the issuer has no actual knowledge of facts pointing the other way.

Entities have variations on these terms. Read the letter and the request together, and confirm the guidance is still in effect when you rely on it.

Investors often ask why you need anything from them. A plain way to put it: "If you invest in a 506(c) offering, the issuer must take reasonable steps to verify your status. This can involve documents, a letter from a CPA, attorney, registered broker-dealer or SEC-registered investment adviser, or other methods the issuer's counsel approves."

Many investors prefer a letter from their own professional, so you never see their tax returns. Third-party verification services also exist. They can do the review, but the legal duty stays with the issuer.

Which verification methods you offer, and how you document them, is a decision for you and your own securities attorney. This article is education, not legal advice. Primary sources: the SEC staff letter of March 12, 2025, https://www.sec.gov/rules-regulations/no-action-interpretive-exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225; the incoming request, https://www.sec.gov/files/corpfin/no-action/latham-watkins506c-031225-incoming.pdf; and the rule, 17 CFR 230.506, https://www.law.cornell.edu/cfr/text/17/230.506.