Rule 506(c) offered issuers a genuine trade: you may advertise your private offering publicly, and in exchange you must actually confirm that every buyer is accredited. The advertising freedom is the visible half. The verification obligation is the half that determines whether an offering’s exemption survives scrutiny.
The distinction matters because the consequence of getting it wrong is not a fine for sloppy paperwork — it is the potential loss of the exemption the entire offering depends on.
The two roads through Regulation D
Most private offerings rely on one of two rules within Regulation D, and the verification question is the sharpest difference between them.
Rule 506(b) prohibits general solicitation and advertising. In exchange, the issuer may generally rely on a reasonable belief that purchasers are accredited, supported by the representations investors make in the subscription agreement. Rule 506(b) also permits a limited number of non-accredited but sophisticated purchasers, subject to additional disclosure requirements — a flexibility 506(c) does not offer.
Rule 506(c) permits general solicitation and advertising. In exchange, every purchaser must be an accredited investor and the issuer must take reasonable steps to verify that status. Investor representations alone do not satisfy this.
That is the trade, and the choice between the two is covered further in 506(b) vs. 506(c).
What “reasonable steps” actually means
The standard is principles-based rather than a checklist. Whether steps are reasonable depends on the facts and circumstances — including the nature of the purchaser and the type of accredited investor they claim to be, the amount and type of information the issuer already has about them, and the nature of the offering itself, such as how investors were solicited and any minimum investment requirement.
The logic embedded in that framework is a sliding scale: the more an issuer already reliably knows about a purchaser, the less additional work is required. An institutional investor whose regulated status is publicly verifiable requires less than an individual who responded to an online advertisement.
The non-exclusive safe harbor methods
For natural persons, Rule 506(c) sets out specific methods that are deemed to satisfy the verification requirement. They are non-exclusive — an issuer may use another approach that is reasonable under the circumstances — but using one of them provides certainty. In summary:
Income. Reviewing IRS forms that report the person’s income for the two most recent years — such as returns, W-2s, or 1099s — together with a written representation from the person that they reasonably expect to reach the income level required for the current year.
Net worth. Reviewing documentation of assets and liabilities dated within the prior three months — for example, bank, brokerage, and other account statements on the asset side, together with a consumer credit report from a nationwide agency on the liability side — along with a written representation that all liabilities have been disclosed.
Third-party confirmation. Obtaining written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant that the person has taken reasonable steps to verify the purchaser’s accredited status within the prior three months and has determined that the purchaser is accredited.
Existing investors. A provision addressing persons who previously invested in the issuer’s offering as an accredited investor and remain investors, allowing a written certification at the time of the new sale.
For entities, the rule’s enumerated methods focus on natural persons, and issuers typically verify entity status through the entity’s own documentation — financial statements, organizational documents, regulatory registrations — under the general reasonableness standard.
The practical patterns
The third-party letter. Widely used, because it shifts document handling to a professional the investor already works with and keeps sensitive tax and asset records out of the issuer’s files. The letter must come from one of the specified professional categories, must state that reasonable steps were taken, and must be current. It is not a mere confirmation that the professional believes the client is wealthy.
Verification services. A market of vendors performs verification and issues confirmations. These are legitimate and efficient, with one caution: engaging a vendor does not transfer the issuer’s obligation. The issuer remains responsible, which means the arrangement should be documented and the evidence retained by the issuer — not left only in the vendor’s system, where it may be unavailable years later when it is needed.
Direct document review. Collecting tax and financial documents directly gives maximum control and creates a data protection problem in exchange: highly sensitive personal financial records now sit in the issuer’s environment, with retention, access control, and breach exposure to manage. Many issuers prefer the third-party route for exactly this reason.
High minimum investments. The SEC noted when it adopted Rule 506(c) that a high minimum investment could be relevant to what steps are reasonable. In March 2025, SEC staff went further in a no-action letter: an issuer can treat a sufficiently high minimum investment as reasonable steps to verify, without collecting financial documents, if conditions are met. Purchasers must commit to the minimum amounts the letter specifies (higher for entities than for individuals). They must give written representations that they are accredited and that the minimum was not financed by a third party for that specific investment. And the issuer must have no actual knowledge pointing the other way. This route suits offerings with large ticket sizes; it does nothing for smaller ones. A no-action letter reflects the staff’s position rather than a rule, so issuers should confirm the current amounts and conditions with counsel before relying on it.
Where issuers get into trouble
- Treating a subscription checkbox as verification. The most common error, and the one 506(c) was specifically drafted to preclude.
- Stale evidence. Verification obtained long before the sale, or documentation older than the rule’s stated windows.
- Accidental general solicitation. An offering intended to proceed under 506(b) is publicized — a public website page, a conference presentation, a media mention, an unrestricted webinar — and now looks like a 506(c) offering conducted without verification. Whether a communication constitutes general solicitation is fact-specific and is a question for counsel.
- Incomplete files. The verification happened but the evidence was not retained in a form that can be produced later. From an examiner’s perspective, undocumented verification is difficult to distinguish from none.
- Assuming an outdated definition. The accredited investor definition has been amended over time, including expansions beyond pure income and net worth tests. Working from a remembered version of the definition rather than the current rule text is a recurring source of error.
Operational build
For a fund running a 506(c) offering, the components are:
- A written verification policy stating which methods the offering will accept and the currency requirements for each.
- A defined intake step in onboarding where verification is confirmed before acceptance — not after funding.
- Retention of the evidence, or of the third-party confirmation, in the investor file with the subscription documents.
- A re-verification rule for follow-on investments.
- Coordination with Form D filing and the offering’s other compliance obligations, since the exemption relied on is stated there.
- Data protection controls proportionate to the sensitivity of what is collected, if documents are reviewed directly.
The rule rewards a boring, consistent process. The issuers that get into difficulty are rarely the ones that chose the wrong verification method; they are the ones that had no method at all.
This guide is educational and general; it is not legal advice. Rule 506(c) compliance is fact-specific and should be structured with qualified securities counsel.
Frequently Asked Questions
What does ’reasonable steps to verify’ mean under Rule 506(c)?
Rule 506(c) requires an issuer using general solicitation to take reasonable steps to verify that every purchaser is an accredited investor. The standard is principles-based and depends on the facts: the type of purchaser, the information the issuer has about them, and the terms of the offering. The rule also sets out a non-exclusive list of methods that are deemed to satisfy it for natural persons.
Is a self-certification checkbox enough for 506(c)?
No. Under Rule 506(c) a representation in the subscription agreement alone does not satisfy the verification requirement, which is the central practical difference from Rule 506(b). Under 506(b), where general solicitation is not used, issuers may generally rely on a reasonable belief supported by investor representations.
What are the safe harbor verification methods for individuals?
Rule 506(c) lists non-exclusive methods including review of IRS forms reporting income for the two most recent years together with a written representation about the current year, review of specified asset and liability documentation dated within the prior three months together with a credit report, and written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or certified public accountant. There is also a provision for previously verified existing investors.
How long does a verification last?
The rule’s net worth method relies on documentation dated within the prior three months, and third-party confirmations are typically dated. Many issuers treat verification as needing to be current at the time of sale and re-verify for later investments. The specific approach should be set with counsel rather than assumed.
Can a fund use a third-party verification service?
Yes, and many do. Using a service does not transfer the issuer’s obligation—the issuer remains responsible for having taken reasonable steps—so the arrangement should be documented and the evidence retained by the issuer rather than left solely with the vendor.
Sources
- Securities Act of 1933, Rule 506(c) under Regulation D, including the verification provisions of Rule 506(c)(2)(ii)
- Securities Act of 1933, Rule 501(a) (definition of accredited investor)
- SEC Division of Corporation Finance staff no-action letter on Rule 506(c) verification through minimum investment amounts (March 12, 2025)
- Securities Act of 1933, Rule 506(b) and Rule 502(c) (general solicitation)
