Why Rule 506(c) Hedge Funds Are Gaining Momentum

Introduction

On March 12, 2025, the SEC's Division of Corporate Finance issued a pivotal no‑action letter offering clear guidance on acceptable methods to verify accredited‑investor status under Rule 506(c) of Regulation D. This letter presents an alternative path that has ignited a surge in the formation of 506(c) funds, as issuers seek streamlined access to general solicitation with reduced verification burdens.

What Changed?

Rule 506(c), introduced under the JOBS Act, allows issuers to publicly advertise private offerings—but only if they take “reasonable steps” to verify that all purchasers are accredited investors. Historically, this meant collecting income tax returns, bank or brokerage statements, third‑party confirmations, and more—procedures that many fund managers deemed overly burdensome.

The no‑action letter confirms that issuers may reasonably satisfy verification by adhering to these simplified conditions:

• High Minimum Investment: At least $200,000 for natural persons and $1 million for legal entities (including entities accredited by total assets or equity owners).

• Written Representation: Investors must affirm their accredited status and certify the investment isn’t financed by a third party.

• No Actual Knowledge to the Contrary: The issuer must not be aware of facts suggesting the investor is not accredited or reliant on third-party financing.

Thus, the minimum investment method becomes a practical verification approach—simpler and much more scalable.

The Impact: 506(c) Funds Are on the Rise

The SEC’s no-action letter has created a powerful tailwind for the growth of 506(c) funds by removing one of the biggest friction points in accredited-investor verification. Fund managers can now publicly advertise their offerings—whether through online platforms, media placements, or investor events—without the heavy administrative burden previously associated with collecting sensitive financial documentation. By incorporating self-certification and higher investment thresholds directly into subscription documents, issuers can streamline operations while still maintaining investor safeguards. This shift offers a strategic advantage, enabling funds to unify their marketing efforts across multiple products, expand their reach to a broader audience of accredited investors, and transition more cost-effectively from the traditionally restrictive 506(b) framework to the more flexible 506(c) structure.