Unlocking Rule 506(c): SEC eases path for fund marketing

24 March 2025 | Americas | Articles

For years, private fund managers had to tiptoe around the SEC’s ban on general solicitation. Under the traditional Rule 506(b) safe harbor, you couldn’t publicly advertise an offering at all. Outreach was limited to investors with whom you had a pre-existing substantive relationship. That changed when Rule 506(c) arrived in 2013, allowing general solicitation if all buyers are accredited investors. Now, recent SEC guidance via a March 12, 2025 no-action letter is clarifying exactly where the lines are drawn on 506(c), answering some key questions that have long concerned private fund sponsors.

General solicitation vs. “pre-existing” contacts

The SEC’s new position makes clear that not every conversation with a stranger counts as forbidden general solicitation. For example, pitching at a regulated “demo day” event, or being introduced to a potential investor through a reputable angel network, can be done without violating the no-advertising rule. The determination is still very fact-specific; use too broad or impersonal an approach, and it’s likely to be deemed a general solicitation. This nod to modern fundraising practices gives issuers a bit more leeway to expand their circle beyond purely pre-existing contacts, so long as they stay within certain boundaries.

A new, simpler verification safe harbor

More importantly, the SEC has made it much easier to use Rule 506(c) when you do want to solicit openly. The no-action letter to Latham & Watkins blessed a new way for issuers to verify that all purchasers are accredited; without the usual heavy paperwork. Essentially, if an investor commits a sufficiently large minimum amount (e.g. at least $200k for an individual, or $1 million for an entity) and attests in writing that they’re accredited and are not borrowing funds to meet the minimum, the issuer can accept that as reasonable verification. This means fund sponsors can avoid asking investors for tax returns, bank statements or CPA letters in many cases, removing a major barrier that had discouraged use of 506(c).

With this change, the burdens of Rule 506(c) are greatly reduced, and the SEC expects far more private offerings to embrace 506(c)’s broad marketing potential going forward. In fact, sponsors already raising money quietly under 506(b) might want to keep this high-minimum investment method in their back pocket. If a deal is accidentally mentioned in public, they could quickly pivot the offering to 506(c) using this method and salvage their exemption.

Practical impact and risks for fund sponsors

From a compliance standpoint, this guidance is a green light for fund managers to cautiously broaden their investor outreach. If you plan to advertise or speak publicly about a fund, make sure you treat it as a 506(c) deal from the start. In practice, that means updating your subscription documents to include the new investor representations and setting a qualifying minimum investment, then following through to verify each purchaser’s accredited status under the streamlined rules. It’s also wise to coordinate with counsel on any cross-border marketing, since what’s allowed as “general solicitation” in the U.S. could violate private placement laws elsewhere.

The risk of getting it wrong remains serious: an improper solicitation could still jeopardize your offering, leading to potential SEC sanctions or investors demanding their money back. Done right, however, the SEC’s latest guidance offers a timely opportunity. By easing verification hurdles and clarifying gray areas, the SEC is nudging private funds to come out of the shadows. This empowers them to cast a wider net for capital without losing the legal protection of a private offering.

How can Bovill Newgate help you navigate Rule 506(c)?

If you’re a fund manager or investment adviser, our team can help you better align your business to regulatory compliance obligations. We offer ongoing support options to make sure your compliance function and organization is fully aware of the latest regulatory updates.

We can also help you identify challenges and pursue opportunities by conducting regulatory due diligence reviews, evaluations of your compliance environment, and provide your staff with customised training suited to your unique business needs.

If you would like to talk more about the points mentioned above, get in touch.