Accredited Investor Verification: The 506(c) 'Reasonable Steps' Rule

Why 506(c) requires verification at all

The logic is a trade. Rule 506(b) prohibits general solicitation — you can't advertise — but in exchange lets investors self-certify their accredited status. Rule 506(c) flips both terms: it permits general solicitation (you can market the deal on a website, social media, at events) but requires the sponsor to verify accreditation because, once you're advertising to the public, the SEC won't rely on an honor-system box-check from strangers responding to an ad.

Under 506(c), every purchaser must be a verified accredited investor — there's no allowance for non-accredited investors at all (unlike 506(b), which permits up to 35 sophisticated non-accredited investors). So verification isn't a formality; it's a condition of the exemption working.

What 'reasonable steps to verify' actually means

The SEC provides both a principles-based standard and a list of specific 'safe harbor' methods that are deemed sufficient. A sponsor can use a safe-harbor method or a reasonable principles-based approach:

The third-party letter method is the one most sponsors prefer in practice, because it avoids the sponsor having to collect and store investors' sensitive financial documents directly. A licensed professional (or a verification service that uses them) reviews the investor's financials and issues a confirmation letter the sponsor keeps on file as evidence of reasonable steps.

Why self-certification fails — and what that means operationally

A common and dangerous mistake is for a sponsor to run a 506(c) deal — advertising it publicly — but only collect a self-certified accreditation questionnaire, the way they would under 506(b). That combination is fatal: you've used general solicitation (only allowed under 506(c)) without meeting 506(c)'s verification requirement, so neither exemption is satisfied and the offering may be an unregistered, non-exempt securities sale.

• If you advertise the deal at all — website, email blast to non-relationships, social media, a public webinar — you're in 506(c) territory and must verify.
• A signed questionnaire alone is self-certification, which is insufficient under 506(c).
• Verification must occur before or at the time of sale, and you must retain documentation proving you took reasonable steps.
• The penalty for getting it wrong can include loss of the exemption, rescission rights for investors, and regulatory exposure — which is why most sponsors outsource verification to a specialized service.

The operational takeaway is to decide your exemption before you market, and align your process to it. If you want to advertise, commit to 506(c) and build verification into your subscription flow. If you'd rather rely on self-certification, stay in 506(b) and don't advertise. The error that catches sponsors is doing 506(c) marketing with 506(b) paperwork.

How sponsors verify in practice

Most sponsors handle verification through one of two routes, both designed to protect investor privacy and create a clean compliance record:

1. Third-party verification service: investors complete the service's process (uploading documents or having their CPA/attorney confirm), and the service issues a verification letter to the sponsor. This keeps sensitive financials out of the sponsor's hands.
2. Professional letter: the investor's own CPA, attorney, broker-dealer, or RIA writes a letter confirming accreditation, which the sponsor retains.

Either way, the sponsor keeps the verification evidence on file alongside the subscription documents, typically retaining it for the life of the offering and beyond. Verification is a solved problem — the infrastructure exists and is inexpensive relative to a raise — so the real job is simply knowing it's required, building it into your process, and never letting a publicly-marketed deal close on self-certification alone. As always, confirm your specific approach with securities counsel; this is educational information, not legal advice.