Business and International Tax Blog

On March 12, 2025, the U.S. Securities and Exchange Commission (“SEC”) issued guidance via a no-action letter that significantly eases the path for private equity sponsors to use general solicitation in private offerings. Through a no-action letter, the SEC confirmed that sponsors relying on Rule 506(c) of Regulation D can now satisfy investor verification requirements with far less documentation, provided they set a sufficiently high minimum investment threshold and obtain basic written confirmations from investors.

For middle market sponsors, this development presents a practical opportunity to tap into broader pools of capital without the administrative burden that has historically made Rule 506(c) unattractive.

What Is Rule 506(c) and Why Has It Been Underused?

Rule 506(c), introduced in 2013, allows private companies to market securities offerings publicly to “accredited investors” (as defined by the SEC) including via websites or social media, through email campaigns, or at events without the need to register the offering with the SEC. This offers clear advantages for fundraising, but utilization of Rule 506(c) has traditionally come with burdensome compliance requirements.

Pursuant to Rule 506(c), sponsors are required to take “reasonable steps” to verify each investor status as an accredited investor. Traditionally, taking “reasonable steps” to verify an investor’s status meant collecting and reviewing investor tax returns, brokerage or bank statements, or relying on letters from attorneys, CPAs, or investment professionals. For middle market sponsors, especially those raising capital from high-net-worth individuals, family offices, or pooled investment vehicles, these requirements were time-consuming, intrusive for investors, and often not worth the upside of publicly marketing an offering.

What’s Changed?

The SEC’s new guidance issued through a “no-action letter” now offers sponsors a simpler alternative to verify that an investor is accredited. Under the new guidance, sponsors can satisfy the accredited investor verification requirement by:

• Setting a minimum investment amount of $200,000 for individuals and $1 million for entities (including binding capital commitments),
• Obtaining written representations from investors that:
• They are accredited investors as defined by the SEC, and
• The funds used are not borrowed from a third party specifically to make the investment; and

• The sponsor having no actual knowledge contradicting the investor’s representations.

According to the SEC’s no-action letter, this approach is now considered a “reasonable step” under Rule 506(c), meaning sponsors no longer need to request tax returns, asset documentation, or third-party letters when the above conditions are met.

Why This Matters for Middle Market Sponsors

For middle market sponsors who utilize private placements of securities for fundraising, the SEC guidance grants greater freedom. Rule 506(c) is now much more viable for:

• Marketing fund offerings more broadly,
• Streamlining subscription workflows, and
• Avoiding friction with potential investors over invasive document requests.

Compliance Still Matters

Even with this new flexibility, sponsors must still:

• Comply with state filing requirements, which can impose penalties for late notice filings;
• Navigate non-U.S. marketing laws, such as the EU’s AIFMD, which may restrict or regulate public fund promotions;

• Maintain good faith processes and monitor investor representations carefully.

Bottom Line

The SEC’s updated stance makes Rule 506(c) offerings a far more practical tool for middle market private equity sponsors. With fewer verification hurdles, private equity sponsors can now take better advantage of general solicitation to reach a broader investor base while keeping fundraising efficient and compliant.

Sponsors should be aware that guidance originates from a SEC no-action letter, which is not a formal, binding interpretation of the SEC. Nonetheless the SEC can ordinarily be expected to respect the guidance absent differing fact, but a court is not required to rely on, or defer to, the letter. 

Contacts:

If you have any questions or would like any additional information on this issue, please contact Greg J. Henson at greg.henson@chamberlainlaw.com or 713.356.1240.

Disclaimer: This client alert does not constitute legal advice, does not create an attorney-client relationship, and is intended for informational purposes only.