If an issuer of a securities wishes to generally advertise their private offering of securities, they can do so under Rule 506(c) of Regulation D of the Securities Act of 1933, which would exempt the offeror from registration as an “Investment Company” under the Investment Company Act. Although offering securities under the 506(c) restriction allows the issuer of the securities not to register as an “Investment Company,” the issuer will still have to file a “Form D” with the SEC once the securities are sold, notify each state in which the securities have been sold with what are called “Blue Sky” filings, and provide certain other disclosures to prospective investors.

If an offeror wishes to offer under Rule 506(c), the offeror must only take in investments from verified “accredited investors” as such term is defined in Regulation D of the Securities Act of 1933. In connection with this, the offeror must also take “reasonable steps” that the purchasers of the securities in the offering were accredited investors. In order to satisfy the “reasonable steps” standard, Rule 506(c) lays out a non-exhaustive list of steps an offeror can make to verify the accredited investor status of a purchaser. Some of these methods include:

  1. Reviewing documentation, such as tax returns, bank statements, or brokerage statements, to verify the investor’s income or net worth.
  2. Obtaining written confirmation from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney, or a certified public accountant (CPA) that the investor meets the accredited investor standards.
  3. Using a third-party verification service, such as a credit reporting agency, to verify the investor’s accredited investor status.
  4. Asking the investor to provide a signed statement or certification confirming that they are an accredited investor, so long as the offeror has used another method of verification to determine the purchaser’s accredited investor status within the last five years.

Ultimately, the specific method used to verify accredited investor status will depend on the circumstances of the offering. Issuers of securities under Rule 506(c) should make sure they are keeping diligent records of the verification method they use for each purchaser of securities in their private offering.