In March of 2025, the SEC clarified its stance regarding Regulation D Rule 506(c) verification requirements. See: The SEC Issues Game-Changing Update for Reg D Rule 506(c)
This clarification has led several sponsors who offer their private securities under Regulation D Rule 506(b) to rethink their choice of exemption. Many issuers who rely on Rule 506(b) have chosen it for the ability to admit up to thirty-five non-accredited investors, but many have also chosen it because they struggle with the accredited investor verification process required under Rule 506(c). For more information about the differences between Rule 506(b) and Rule 506(c), see: How to Choose the Right Exemption for Your Capital Raise. This hesitation is understandable, particularly with private investors who value their privacy.
Since 2025, Rule 506(c) offerings have certainly surged in popularity because of this SEC guidance. But for existing evergreen funds and other private funds conducting continuous offerings, this opens a can of worms regarding the logistical issues involved in transitioning or converting from Rule 506(b) to Rule 506(c). Thankfully, the SEC provided guidance in 2014 on how to manage this type of Regulation D exemption transition.
The key steps are as follows:
- Prepare to verify any accredited investor admitted after the adoption of Regulation D Rule 506(c) (September 2014), subject to the updated SEC guidance on accredited investor verification.
- Ensure non-accredited investors are no longer able to make new investments in the offering. A more conservative approach would also dictate stripping them of any reinvestment rights, as those could be perceived as acquiring additional securities under Regulation D.
Now, this is an oversimplification because the details are where the complications arise. Not all entities are created equal from an accredited investor standpoint under Rule 506(c).
For example, non-profits and trusts can present unique challenges from an accredited investor verification perspective. Non-profits cannot rely on the “look-through” test commonly used for business entities because they do not have owners or shareholders. For this reason, the $5,000,000 asset threshold must be used to qualify as an accredited investor. Trusts present their own unique issues under the accredited investor definition.
Outside of certain revocable and irrevocable trust fact patterns, trusts typically must also meet the $5,000,000 asset threshold to qualify as accredited investors for purposes of Rule 506(c). Certain revocable trusts may qualify, but only within very narrow fact patterns.
This is where the Rule 506(c) accredited investor safe harbor, using third-party verification letters, can provide meaningful assistance. The challenge, however, is often more practical than legal. For investors below the $200,000 individual income threshold or the $1,000,000 entity net worth threshold, or for these unique fact patterns involving trusts and non-profits, the verification letter serves as a backup mechanism to help ensure compliance with Rule 506(c) accredited investor verification requirements.
From there, the final steps in making the 506(b) to 506(c) transition include:
- Amending your offering documents to comply with the necessary Regulation D disclosures
- Amending your Form D and applicable Blue Sky filings, and
- Notifying investors regarding the change of exemption under Regulation D
If you are considering transitioning your private fund or private securities offering from Rule 506(b) to Rule 506(c), or want to better understand the accredited investor verification requirements under Regulation D, feel free to contact Fortra’s Corporate & Securities Division.
