The introduction of Rule 506(c) under Regulation D marked a watershed moment for private capital markets. For the first time, issuers could engage in general solicitation to reach a broader pool of potential investors — but this expanded freedom came with a critical obligation: verifying that each participating investor qualifies as accredited. Understanding and executing this verification process is not merely a best practice — it is a legal shield against SEC enforcement actions.
The Regulatory Landscape of General Solicitation
Before the 2013 amendments prompted by the JOBS Act, issuers conducting private placements were prohibited from publicly advertising their offerings. Rule 506(c) changed that dynamic by permitting general solicitation, provided two conditions are met. First, all purchasers in the offering must be accredited investors. Second, the issuer must take “reasonable steps” to verify each investor’s accredited status. Failure on either count can strip an offering of its exemption, exposing the issuer to rescission rights, civil liability, and regulatory scrutiny.
What “Reasonable Steps” Actually Require
The SEC deliberately avoided prescribing a single verification method, instead adopting a principles-based framework. Under this framework, what constitutes reasonable steps depends on the totality of the circumstances, including the nature of the purchaser, the type of accredited investor category claimed, and the amount and type of information the issuer has about the investor.
The Commission did, however, outline several non-exclusive safe harbor methods for verifying natural persons. These include reviewing tax returns or W-2 forms to confirm income thresholds, obtaining written confirmation from a registered broker-dealer, licensed attorney, certified public accountant, or registered investment adviser that the professional has taken reasonable steps to verify the investor’s status, and reviewing bank or brokerage statements to confirm net worth requirements.
Issuers that rely solely on investor self-certification, such as a simple checkbox on a subscription agreement, operate in a gray area the SEC has cautioned against, particularly in offerings involving broad general solicitation campaigns.
Why Verification Is a Compliance Imperative
The consequences of inadequate verification extend well beyond a single offering. If the SEC determines that an issuer failed to take reasonable steps, the entire 506(c) exemption may be deemed invalid. This can trigger the requirement to register the offering retroactively, open the door to investor lawsuits seeking rescission, result in disqualification from future Regulation D exemptions, and invite formal enforcement proceedings.
In an era of heightened regulatory attention toward private markets, the SEC has signaled its willingness to scrutinize verification practices closely — particularly when general solicitation channels such as social media, online platforms, and mass communications are involved.
Building a Defensible Verification Process
Issuers seeking to minimize regulatory risk should establish a consistent, documented verification process that goes beyond mere self-reporting. Engaging qualified third-party professionals to conduct or confirm verifications adds a valuable layer of independence and credibility. Maintaining thorough records of every verification step taken creates an audit trail that can serve as compelling evidence of good-faith compliance should questions arise.
Ultimately, the “reasonable steps” requirement is not an obstacle to capital formation — it is a framework designed to preserve market integrity while enabling issuers to access capital through general solicitation. Issuers who invest in robust verification infrastructure position themselves not only to satisfy regulators but also to build lasting trust with sophisticated investors in an increasingly competitive fundraising environment.
