Understanding Rule 506(c) and What it Means for Issuers and Investors

An article by Winstead gives insight into understanding Rule 506(c) which allows issuers to advertise their private securities offerings without registering as an “Investment Company” under the Investment Company Act.

According to the article, investments under Rule 506(c) are restricted to verified “accredited investors” as defined by Regulation D. Issuers must take “reasonable steps” to ensure purchasers are accredited investors, using methods such as:

• Reviewing financial documents like tax returns or bank statements to verify income or net worth.
• Obtaining written confirmation from a registered broker-dealer, SEC-registered investment adviser, licensed attorney, or CPA affirming the investor’s accredited status.
• Using third-party verification services, such as credit reporting agencies.
• Requesting a signed statement from the investor confirming their accredited status, provided another verification method has been used within the last five years.

The specific verification method will depend on the offering’s circumstances, and issuers must maintain thorough records of the methods used for each purchaser. These steps are crucial to comply with Rule 506(c) and ensure that only qualified investors participate in the offering.