SEC Rule 506(c): The Compliance Checklist Every Fund Manager Needs
A plain-English breakdown of what 506(c) requires for accredited investor verification. No legalese. No fluff. Just the checklist your fund actually needs.
Jesse Prince
506(c) isn't complicated. But getting it wrong is expensive.
Rule 506(c) of Regulation D lets you generally solicit and advertise your offering to the public. That's the upside. The catch: every single investor must be verified as accredited through "reasonable steps." Not self-certified. Not checkbox-on-a-form. Actually verified.
The SEC has never published an exhaustive list of what counts as "reasonable steps". But between the rule text, staff guidance, and no-action letters, the framework is clear enough to build a reliable process around. Here's what that looks like.
The four verification paths
Path 1: Income verification.The investor earned more than $200K individually (or $300K jointly) in each of the two most recent years and reasonably expects the same this year. You verify by reviewing tax returns, W-2s, K-1s, or other IRS documents for the relevant years. The key phrase is "two most recent years" plus a forward expectation. One year isn't enough.
Path 2: Net worth verification. The investor has a net worth exceeding $1M, individually or jointly with a spouse, excluding the primary residence. You verify by reviewing bank statements, brokerage statements, tax assessments, and a credit report for liabilities. This path requires more documents but works well for investors whose income fluctuates.
Path 3: Professional certification. The investor holds a Series 7, Series 65, or Series 82 license in good standing. You verify by checking FINRA BrokerCheck or equivalent records. This is the fastest path when it applies.
Path 4: Third-party letter.A licensed attorney, CPA, registered investment advisor, or broker-dealer provides written confirmation that they've verified the investor's accredited status within the prior three months. The letter must identify the specific method used. A generic "this person is accredited" letter without methodology doesn't cut it.
What the SEC looks at in enforcement
The SEC has been clear that self-certification alone does not satisfy 506(c). An investor checking a box that says "I am accredited" is not verification. It's a representation. Those are different things, and the distinction matters when enforcement comes knocking.
What the SEC evaluates: Did you take reasonable steps based on the facts and circumstances? Did you review actual documentation? Did you maintain records of what you reviewed? The burden is on the issuer, not the investor.
Recent enforcement actions have targeted issuers who relied on questionnaires, verbal confirmations, or minimum investment thresholds as a proxy for verification. None of those hold up.
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Start Free TrialYour compliance checklist
Before the offering
- Choose a verification method (or provider) for each accreditation path
- Document your verification policy in writing
- Train anyone on your team who touches investor onboarding
- Confirm your process covers all four paths (income, net worth, professional cert, third-party letter)
During the raise
- Verify every investor before they fund. Don't accept capital first and verify later.
- Retain copies of all documents reviewed
- Issue a verification certificate or letter for each cleared investor
- Flag and escalate edge cases (expired documents, borderline numbers, inconsistent data)
- Never accept self-certification or minimum investment thresholds as a substitute for verification
After the close
- Store verification records for at least five years (longer is better)
- Be able to produce them on request for SEC examination
- Periodically audit your process for gaps or inconsistencies
Where automation fits
None of this requires manual document review. AI-powered platforms can now classify documents, extract the relevant figures, apply the SEC's criteria, and deliver a pass/fail result in minutes. The compliance standard doesn't change. The speed and cost of meeting it does.
The best verification process is the one investors actually complete. If your process is fast, clear, and painless, more investors finish it. That's not just a UX improvement. It's a compliance improvement, because a completed verification is a defensible one.