When raising capital through private placements, issuers often rely on Regulation D exemptions,specifically Rule 506(b) and Rule 506(c), to avoid SEC registration. While these exemptions offer flexibility, they also require careful adherence to investor verification protocols, especially under Rule 506(c), where general solicitation is permitted. Ensuring compliance with SEC expectations can be complex, but a well-structured checklist helps minimize risk, streamline processes, and maintain transparency.
Below is a concise, actionable compliance checklist designed to guide issuers through the accredited investor verification process under Regulation D.
1. Determine Offering Type: Rule 506(b) vs. Rule 506(c)
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Rule 506(b): No general solicitation; self-certification via investor questionnaire is typically sufficient.
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Rule 506(c): General solicitation allowed; issuers must take “reasonable steps” to verify accredited investor status.
→ Action: Clearly identify which exemption applies to your offering before initiating marketing or investor onboarding.
2. Understand Accredited Investor Criteria
The SEC defines accredited investors as individuals or entities meeting at least one of the following:
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Income over $200,000 USD individually or $300,000 USD when combined with a spouse or spousal equivalent (past two years, with expectation to continue)
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Net worth over $1 million (excluding primary residence)
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An entity with assets over $5 million USD or composed of accredited owners
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Holders of Series 7, 65, or 82 licenses
→ Action: Educate internal teams and investors on these eligibility standards.
3. Select a Verification Method (for Rule 506(c))
The SEC outlines four non-exclusive methods:
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Income: Review IRS forms (W-2, 1099, K-1, tax returns)
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Net Worth: Review bank statements, brokerage statements, and credit reports
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Third-Party Letter: From licensed attorney, CPA, investment adviser, or broker-dealer
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Existing Investor Method: Reasonable belief formed before Rule 506(c) use
→ Action: Choose method(s) appropriate to your investor base and offering structure.
4. Implement Secure Document Collection & Review
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Use encrypted portals or secure file transfer for document uploads.
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Ensure collected documents are current (typically no older than 90 days).
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Maintain a written policy for handling and retaining verification records.
→ Action: Build a digital workflow that prioritizes investor privacy and audit-readiness.
5. Maintain Detailed Records
The SEC requires issuers to demonstrate compliance upon request.
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Document verification method used for each investor
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Keep copies of documents or third-party letters
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Timestamp and log staff reviews
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Retain evidence for at least five years
→ Action: Establish a secure, organized compliance file per investor.
6. Train Internal Teams
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Educate your compliance and investor relations teams on Regulation D requirements.
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Define roles for who performs reviews and who handles investor communications.
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Periodically update procedures based on SEC guidance or enforcement trends.
→ Action: Conduct regular compliance training to avoid procedural gaps.
7. Monitor for Regulatory Updates
Regulation D evolves as market practices and SEC enforcement priorities shift. Keep abreast of rule changes or interpretations that may affect what constitutes “reasonable steps.”
→ Action: Subscribe to official guidance updates or engage legal/compliance professionals for periodic reviews.
Final Thoughts
Investor verification under Regulation D,particularly Rule 506(c), requires more than basic due diligence. A proactive, checklist-based approach ensures that issuers not only meet SEC expectations but also build investor trust through professionalism and process integrity. Implementing these practices can significantly reduce the risk of non-compliance and contribute to a smoother capital-raising experience.
