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Two of the new CDIs issued yesterday provide very welcome guidance on what the Corp Fin Staff views as an acceptable process for verifying “accredited investor” status in a Rule 506(c) offering, which could make these “general solicitation” offerings much more usable. Specifically, the Staff added questions 256.35 and 256.36.

CDI 256.35 clarifies that the list of verification methods in Rule 506(c)(2)(ii) is “non-exclusive and non-mandatory.” The CDI cites back to the Commission’s 2020 adopting release for the exempt offering simplification rules, as well as the 2013 Reg D updates for a discussion of what will qualify as reasonable steps to verify that purchasers are accredited. This is a facts & circumstances analysis – the CDI and the 2013 release say that these factors are among those that the issuer should consider:

– the nature of the purchaser and the type of accredited investor that the purchaser claims to be;

– the amount and type of information that the issuer has about the purchaser; and

– the nature of the offering, such as the manner in which the purchaser was solicited to participate in the offering, and the terms of the offering, such as a minimum investment amount.

CDI 256.36 addresses how minimum investment amounts can factor into the “reasonable steps to verify” requirement. This new CDI is based on a Latham & Watkins no-action letter that also was issued yesterday, which goes into more detail about relevant conditions that – when they accompany a minimum investment amount – would increase the likelihood that a purchaser is accredited and evidence reasonable steps to verify. Here’s the incoming letter with background on the interpretive request – and here’s an excerpt from the Staff’s response:

We agree that a high minimum investment amount is a relevant factor in verifying accredited investor status. As you note, the Commission stated that “if the terms of the offering require a high minimum investment amount and a purchaser is able to meet those terms, then the likelihood of that purchaser satisfying the definition of accredited investor may be sufficiently high such that, absent any facts that indicate that the purchaser is not an accredited investor, it may be reasonable for the issuer to take fewer steps to verify or, in certain cases, no additional steps to verify accredited investor status other than to confirm that the purchaser’s cash investment is not being financed by a third party.” Securities Act Release No. 9415 (July 10, 2013).

We also note your representation that the minimum investment amount would be accompanied by written representations, from the purchaser, as to: (1) their accreditation (under Rule 501(a)(5) or (a)(6) if they are a natural person, or under Rule 501(a)(3), (7), (8), (9) or (12) if they are a legal entity), and (2) the fact that the purchaser’s minimum investment amount (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of each of the purchaser’s equity owners) is not financed in whole or in part by any third party for the specific purpose of making the particular investment in the issuer.

In addition, we note your representation that the issuer would have no actual knowledge of any facts that indicate: that any purchaser is not an accredited investor; or that the minimum investment amount of any purchaser (and, for purchasers that are legal entities accredited solely from the accredited investor status of all of their equity owners, the minimum investment amount of any such equity owner) is financed in whole or in part by any third-party for the specific purpose of making the particular investment in the issuer.

Latham gives more color in this memo – and we’ll be posting more resources in our “Regulation D” Practice Area.

– Liz Dunshee