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On March 12, 2025, the U.S. Securities and Exchange Commission (SEC) issued two new Compliance and Disclosure Interpretations (C&DIs) and a no-action letter in response to a request from Latham & Watkins LLP, clarifying the verification process for accredited investors under Rule 506(c) of Regulation D. This guidance significantly reduces the burden on fund managers by removing the need for third-party verification under certain conditions.
This policy shift could have major implications for private fund managers who raise capital under Rule 506(c), which permits general solicitation and advertising of private securities offerings to accredited investors. Below, we’ll break down what has changed, what this means for fund managers, and how they can leverage this new flexibility.
Under Rule 506(c) of Regulation D, issuers are allowed to engage in general solicitation and advertising when offering securities, provided that:
Previously, fund managers often relied on third-party verification services—such as a letter from a licensed attorney, CPA, registered broker-dealer, or investment advisor—to confirm an investor’s accreditation status. This was seen as a burden by many fund managers, as it added friction to the fundraising process and increased costs.
The SEC’s new guidance removes this requirement in certain cases, allowing issuers to rely on alternative verification methods.
The SEC’s letter outlines specific conditions under which fund managers and other issuers can verify accredited investor status without using third-party verification:
Issuers can assume an investor is accredited if the minimum investment amount is set at a level that only accredited investors are likely to meet. The SEC provided the following guidelines:
The SEC has recognized that high minimum investment amounts can serve as a relevant factor in the verification process.
Investors must provide a written representation confirming that they meet the accredited investor qualifications. Additionally, they must confirm that they are not borrowing money from a third party specifically for the investment.
This self-certification method is intended to provide another layer of assurance that investors meet the qualifications.
The fund manager or issuer must not have any actual knowledge suggesting that the investor is not accredited or that their investment is being financed in a way that would invalidate their accredited status.
If there are any red flags (such as an investor questioning their own accreditation or inconsistencies in documentation), fund managers may still need to conduct further due diligence.
The SEC’s guidance introduces greater flexibility for fund managers relying on Rule 506(c) to raise capital. Here’s how this shift might impact private fund managers:
By eliminating the third-party verification requirement in certain cases, fund managers can speed up investor onboarding. Instead of waiting for an attorney or CPA to sign off on an investor’s accreditation, fund managers can rely on high investment thresholds and investor self-certification.
Third-party verification often requires hiring accountants, lawyers, or broker-dealers to review financial records, creating additional expenses. Removing this step can lower costs associated with investor verification, benefiting both fund managers and LPs.
This change allows fund managers to interact more directly with investors instead of relying on intermediaries for verification. It also simplifies investor relations, as fund managers can avoid some of the friction associated with requiring external verification.
While the SEC’s guidance provides a more flexible approach, fund managers should still exercise caution. The burden of ensuring compliance still rests with the issuer. If an investor later turns out not to be accredited, fund managers could face regulatory scrutiny.
To mitigate this risk, fund managers should ensure compliance with other applicable regulatory considerations, including state “blue sky” laws and relevant advertising restrictions, and
While the SEC’s recent guidance makes 506(c) more flexible, some fund managers may still prefer to raise capital under Rule 506(b) due to the following reasons:
506(b) allows up to 35 non-accredited but sophisticated investors, in addition to accredited investors.
If a fund manager has long-standing relationships with investors who do not meet the accredited investor definition but have the financial knowledge to assess risks, 506(b) remains the better option.
Under 506(b), investors self-certify their accredited status—no additional verification is required from the issuer.
Even with the SEC’s new no-action relief reducing verification burdens under 506(c), some managers may still prefer 506(b) to avoid any compliance risk tied to investor verification.
506(b) prohibits general solicitation, meaning fund managers must raise capital only from investors with whom they have a pre-existing, substantive relationship.
This helps maintain an exclusive, controlled fundraising process and avoids the public exposure that comes with advertising a 506(c) offering.
Many private fund managers have historically used 506(b) and already have investor networks accustomed to this framework.
Changing to 506(c) could require operational adjustments in investor onboarding, marketing, and compliance procedures.
For fund managers who want broad investor outreach and easier fundraising, 506(c) is now much more attractive—especially given the new SEC guidance on verification. But for those who prioritize privacy, investor flexibility, and a simpler process, 506(b) still has strong advantages.
Yes, a fund manager currently conducting a 506(b) offering can switch mid-offering to 506(c). However, doing so requires careful regulatory compliance, including the following steps:
If the issuer has already filed a Form D under 506(b), it must file an amended Form D reflecting the switch to 506(c). If no Form D has been filed yet, the issuer must ensure it submits the appropriate initial filing.
Any new investors entering the offering after switching to 506(c) must meet the enhanced verification requirements (including self-certification with high minimum investment thresholds or third-party verification if needed).
Investors who subscribed before the switch under 506(b) are not required to undergo additional verification, but proper record-keeping is essential to distinguish between pre- and post-switch investors.
The issuer must review and update offering documents and investor materials to remove any representations stating that no general solicitation is occurring—since 506(c) permits general solicitation and advertising.
If an issuer later decides to switch back to 506(b), it will typically need to pause fundraising for a "cooling-off" period before accepting investors again. This helps demonstrate that no general solicitation was conducted during the 506(b) phase of the offering.
To make the most of this regulatory change while minimizing risk, fund managers should consider the following best practices:
The SEC’s guidance provides a more practical and streamlined approach to investor verification under Rule 506(c). By allowing fund managers to rely on high investment thresholds and self-certifications, this policy shift reduces administrative burdens, lowers costs, and speeds up the fundraising process.
However, fund managers must remain diligent in ensuring compliance, as the ultimate responsibility for verifying accredited investor status still lies with the issuer.
At Vector AIS, we help fund managers ensure smooth investor onboarding. If you have questions about how these changes may impact your fund's operations, contact us today to learn more.
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