The United States Securities and Exchange Commission’s (SECs) Regulation D, Rule 506(c) exemption allows issuers to publicly advertise their securities offerings, provided that all purchasers are verified as accredited investors and the issuer takes “reasonable steps” to verify this status before accepting any funds.
When investors are using Self-Directed IRAs (SDIRAs) to participate in the offering, the SEC expects issuers to focus on verifying the beneficial owner of the IRA, not just the IRA as a legal entity.
How to Verify a Self-Directed IRA Investor
To meet the “reasonable steps” requirement under Rule 506(c), issuers must verify that the beneficial owner of the IRA qualifies as an accredited investor, even though the IRA entity is making the investment.
1. Determine Which Test Applies
The individual may qualify as accredited based on:
- Income: $200,000 (or $300,000 with a spouse/spousal equivalent) in each of the past two years, with a reasonable expectation of the same this year.
- Net Worth: Exceeds $1 million, excluding the value of their primary residence.
2. Use a Safe Harbor or Third-Party Verification
Issuers can use the SEC’s safe harbor methods or third-party verification approaches:
- Income-based safe harbor: Review IRS Forms (W-2, 1099, 1040) and a written statement from the investor.
- Net worth-based safe harbor: Examine bank/brokerage statements, appraisals, and liabilities (e.g., credit report), along with a written statement.
- Third-party verification letter: Obtain a letter from a qualified professional—licensed attorney, CPA, registered investment advisor (RIA), or broker-dealer—stating the individual was verified as accredited within the last 90 days.
This is applicable to SDIRA investors, as the focus remains on the individual’s qualifications, not the IRA’s.
3. Document the Relationship Between the IRA and the Investor
Issuers should retain records showing:
- The IRA is controlled by the investor
- The verified individual is the beneficial owner
- The investment is being made through the IRA for that investor’s benefit
Such documentation typically includes IRA account statements, custodian forms, and signed subscription agreements.
SEC No-Action Relief: When Verification May Be Bypassed
In March 2025, the SEC issued a No-Action Letter granting limited relief from the investor verification requirement in certain circumstances. This allows issuers to forgo formal verification of accredited investor status in a Rule 506(c) offering if the following conditions are met:
- The investor self-certifies as accredited,
- The investor is investing $200,000 or more as an individual, or $1 million or more as a legal entity,
- The investor represents in writing that their investment amount is not financed in whole or in part by any third party, and
- The issuer has no knowledge that the investor is not accredited
(See: SEC No‑Action Letter to Latham & Watkins LLP, March 12, 2025, available at: https://www.sec.gov/rules-regulations/no-action-interpretive- exemptive-letters/division-corporation-finance-no-action/latham-watkins-503c-031225)
Application to Self-Directed IRA Investors
A Self-Directed IRA is a custodial or trust account established by an individual for retirement investment purposes. Although the IRA account itself is typically considered a legal entity, the individual account holder is the beneficial owner. This creates unique considerations when applying the No-Action relief.
Here’s how the No-Action Letter applies to SDIRA investors:
- If the IRA invests $1 million or more, it qualifies under the entity threshold for the No-Action Letter exemption, and the issuer may accept self-certification instead of verifying accredited status—assuming all other conditions are met.
- If the IRA investment is less than $1 million, the exemption may still apply if the investment is solely for the benefit of the individual, and that individual:
- Personally signs the subscription documents
- Certifies that they meet the $200,000 accredited investor threshold as a natural person
- Provides the required written representation that no third-party financing was used
This interpretation aligns with longstanding SEC practice that looks through SDIRA entities to the individual’s qualifications under Rule 506(c). Although the No-Action Letter does not specifically address SDIRAs, it would be inconsistent with other SEC guidance to disqualify a SDIRA investment simply because it is made through a legal entity, if it is solely for the benefit of a qualified natural person.
Best Practices for Issuers
- Don’t rely on the No-Action Letter for SDIRA investors unless the investment meets the applicable threshold and all other conditions are clearly satisfied.
- If the IRA investment is less than $1 million, rely on the individual’s accredited status only if the IRA is used solely for their benefit, and they meet all requirements for an individual accredited investor.
- Verify the individual investor’s income or net worth as the beneficial owner of the IRA.
- Obtain a third-party letter whenever possible to simplify compliance.
- Keep documentation linking the IRA investment to the verified individual investor.
- Ensure all verification steps are completed within 90 days of the investment.
Conclusion
While the SEC’s No-Action Letter offers some relief from investor verification in limited high-dollar investments, Self-Directed IRA investors may still qualify under the individual threshold if the investment is made solely for their benefit and all required representations are met. Issuers must focus on the beneficial owner’s qualifications, not just the legal structure of the IRA, and maintain clear records to document compliance.
