Regulation D Rule 506(b) remains one of the most popular exemptions for raising private capital in the U.S., allowing issuers to raise unlimited funds from accredited investors and up to 35 sophisticated non-accredited investors without registering the offering with the SEC. A key element in these offerings is verifying who qualifies as an “accredited investor”—a critical distinction that determines disclosure requirements, solicitation restrictions, and liability exposure.

While Rule 506(c) mandates rigorous third-party verification of accredited status, Rule 506(b) permits a more flexible route: self-certification. But this flexibility comes with regulatory and practical considerations that both issuers and investors must understand.

1. Who Qualifies as an Accredited Investor?
Under Rule 501 of Regulation D, an individual is considered an accredited investor if they meet at least one of the following criteria:

• Income Test: Earned income exceeding $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the two most recent years, with a reasonable expectation of reaching the same income level in the current year.
• Net Worth Test: Net worth (individually or jointly with spouse/spousal equivalent) exceeding $1 million, excluding the value of the primary residence.
• Professional Certifications: Holding certain FINRA licenses (e.g., Series 7, 65, or 82).
• Knowledgeable Employees of private funds (for investments in those funds).
• Entity Tests: Certain entities with assets exceeding $5 million or in which all equity owners are accredited investors.

2. What is Self-Certification?
In a Rule 506(b) offering, issuers do not need to obtain third-party verification of an investor’s accredited status. Instead, they can rely on investor representations provided via a subscription agreement or investor questionnaire, commonly known as self-certification.

This self-certification typically includes:

• A signed statement confirming income or net worth threshold
• Disclosure of the basis for qualification (e.g., income, net assets, licenses)
• A declaration that the information is true and correct
• Issuers must retain these certifications in their records in case of regulatory scrutiny.

3. Why Self-Certification is Permitted in Rule 506(b)
The rationale behind this flexibility is tied to the private and non-public nature of Rule 506(b) offerings. Since general solicitation is prohibited, issuers are presumed to have a pre-existing, substantive relationship with investors—thus reducing the risk of fraud or uninformed participation. This contrasts with Rule 506(c), where open advertising increases the need for verification rigor.

However, while self-certification is allowed, it doesn’t absolve issuers of their duty to ensure that the information provided is not misleading or materially false.

4. Best Practices for Self-Certification
To remain compliant and reduce risk, issuers should:

• Use robust investor questionnaires that clearly explain the accreditation criteria and ask for specific details.
• Include acknowledgment clauses that misrepresentations may lead to rescission rights or legal liability.
• Ensure documents are signed and dated by the investor before funds are accepted.
• Avoid accepting incomplete forms or vague answers without follow-up.
• Keep records securely stored in case of future audits or regulatory inquiries.

Some issuers also conduct light-touch verification, such as requesting tax returns or bank statements voluntarily, particularly for higher-risk offerings or institutional mandates.

5. Risks of Improper Self-Certification
If a non-accredited investor is incorrectly treated as accredited and does not receive required disclosures:

• The issuer could lose the Reg D exemption, triggering enforcement action.
• Investors may be entitled to rescission (refund of their investment).
• There could be reputational damage and civil liability.
• Thus, even though self-certification is convenient, it must be handled diligently and in good faith.

6. Special Considerations for Non-Accredited Investors in Rule 506(b)
Up to 35 non-accredited but sophisticated investors may participate in a 506(b) offering. However, this triggers:

• Extensive disclosure obligations similar to a public offering (e.g., audited financials, detailed risk factors).
• A requirement to assess the investor’s financial literacy, often via interviews or documented experience.
• More legal complexity, which is why most issuers prefer to limit participation to accredited investors only.

7. Conclusion
Rule 506(b)’s allowance of accredited investor self-certification provides issuers with valuable flexibility—but also carries responsibility. It’s not a rubber stamp. Issuers must implement structured procedures to document and retain investor qualifications, mitigate risk, and ensure compliance with SEC rules.

As private markets continue to grow, especially with the rise of fintech platforms and broader investor participation, transparent and well-managed self-certification protocols will be essential for sustaining investor confidence and avoiding regulatory pitfalls.

Legal Disclaimer: This article is for informational purposes only and does not constitute legal advice. Issuers should consult with a securities attorney before conducting a Reg D offering.

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