In response to a request for no-action submitted by the law firm Latham & Watkins on March 12, 2025 (No-Action Letter), the Securities and Exchange Commission (SEC) Division of Corporation Finance’s staff (Staff) provided new guidance on the concept of “solicitation” in connection with Regulation D private placement transactions. The Staff concluded that issuers conducting solicited private placements can reasonably assume that an offeree is an accredited investor if the person is (i) an individual who invests at least $200,000 or (ii) an entity that invests at least $1 million. The Staff also updated its Compliance and Disclosure Interpretations (C&DIs) (Question 256.36 at SEC.gov | Securities Act Rules) to adopt the guidance of the No-Action Letter (C&DIs comprise the SEC’s interpretations of the rules adopted under the Securities Act).
This new standard, based on the amount invested, eliminates the prior burdensome requirement that the issuer take reasonable steps to verify each investor’s accredited status by having the investor document its status by providing bank or brokerage statements, tax returns, Forms K-1 and W-2, and verification letters from lawyers and accountants. Before the Staff accepted the No-Action Letter, even high-net-worth and institutional investors were required to document their accredited investor status annually, and if the issuer relied on a third party to provide verification, the information needed to be updated/confirmed every 90 days.
The Jumpstart Our Business Startups Act of 2012 (JOBS Act), among other changes, enabled issuers engaging in private placements of their securities to implement general solicitation of investors and general advertising of the offering. The following year, the SEC promulgated rules to implement the JOBS Act by adding Rule 506(c) to Regulation D. That change allowed issuers relying on Regulation D’s “safe harbor” from securities registration to engage in general solicitation and general advertising, provided that sales were only made to accredited investors and the issuer took reasonable steps to verify that the investor is accredited.
The Staff agreed with Latham & Watkins’ contention that “a high minimum investment amount is a relevant factor in verifying accredited investor status.” The Staff’s response referenced Securities Act Release No. 9415 from July 10, 2013, in which the SEC stated that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.”
The Staff relied on the assertion in the No-Action Letter that the minimum investment amount would be accompanied by written representations, from each investor, as to: (i) its accreditation (under Rule 501(a)(5) or (a)(6) if they are a natural person, or under Rule 501(a)(3), (7), (8), (9) or (12) if they are a legal entity) and (ii) the fact that its minimum investment amount (and, for an entity that is accredited due to the accredited status of all of its equity owners, the minimum investment amount of each equity owner) is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer. Accordingly, if the issuer is aware that the prospective investor’s representations were false, and it will not qualify under applicable requirements (e.g., $200,000 income for the current year, $1 million net worth, or other qualification criteria), the issuer will not be able to rely on the minimum investment amounts in the No-Action Letter to verify accredited investor status.
Further, the Staff noted that the No-Action Letter stated the issuer would have no actual knowledge that (i) any purchaser is not an accredited investor or (ii) any purchaser’s minimum investment amount (or, in the case of an entity accredited solely based on the accredited status of all its equity owners, any such equity owner’s minimum investment amount) is financed, in whole or in part, by a third party for the specific purpose of making the investment in the issuer.
It is important to note that the Staff’s responses to no-action letters, while often referenced and relied upon by the public, do not carry the force of a rule, regulation, or official SEC statement. These responses are based solely on the representations made by the submitting party, and any differences in facts or circumstances could lead the SEC to a different conclusion. Also, the C&DIs are intended as general guidance and should not be relied on as definitive positions of the SEC.
Contact Lisa Klein, Lawrence Cohen, or a member of the Business Transactions practice with any questions on this important new guidance.