A short phrase for a long process

“Due diligence” sounds technical, but the idea is simple: before you commit money, you find out whether what you have been told is true, and whether the people involved can be trusted with your investment. In public markets, regulators, auditors and analysts do much of that work for you. In private offerings, much more of it falls to you.

Most investors were never taught how to do it. The good news is that you don’t need to become an expert. You need to know what to check, where to look, and when to ask for proof.

Check three things in every offering

1. The issuer: is it who it says it is?

Confirm the company exists and is in good standing in the state where it was formed. Find out who runs it, who owns it, and who is being paid to raise money for it. Search those names for past regulatory actions or disqualifications.

2. The offering: is it set up properly?

Most private offerings rely on an exemption such as Rule 506(b) or 506(c) and file a Form D with the SEC. Check that the filing exists and matches what you are being told: the exemption, the amount being raised, and the people named. Read the offering documents, especially the risks, the fees, and how and when you can get your money out.

3. The money: who controls it?

Ask where your money goes when you invest, whose name is on the account, and who can move it. Look for a dedicated account for the offering, a third-party administrator or outside accountant, and a cap table kept by someone other than the sponsor alone. Ask how often you will receive updates, and what they will include.

Questions to ask before you invest

• Which exemption is this offering using, and when was the Form D filed?
• Who are the directors, officers and managing members, and who is being paid to find investors?
• Where will my money be held, and who can move it?
• Who keeps the books and the cap table? Is a third party involved?
• How often will I receive updates, and what will they show?
• What happens if I want my money back early?
• What has already been verified, by whom, and when?

Watch for pressure, not just problems

Urgency is a warning sign on its own. “Limited spots,” “closing Friday” and “guaranteed returns” are designed to stop you asking questions. A sponsor who is doing things the right way will be glad you asked, and will be able to show you.

Claims, facts and dates

Every offering tells a story, and every story is optimistic. A claim becomes a fact when it is verified. And because facts change after you invest, a verification is only as good as the last time it was performed. When you review an offering, ask not only “was this checked?” but “when, by whom, and when will it be checked again?”

This guide is for education only and is not legal, tax or investment advice.

Two paths under Rule 506

Most private offerings in the United States rely on Rule 506 of Regulation D. It lets an issuer raise an unlimited amount of money without registering the offering with the SEC, as long as it follows the conditions of the rule. There are two versions, and the biggest difference between them is whether you can advertise.

Why 506(c) changed the market

Rule 506(c) took effect in September 2013, after the JOBS Act. For the first time, private offerings could advertise to the public. That opened private capital to far more investors, and it also made the market louder. Investors now see many more offerings, through many more channels, often with very little to tell them apart.

What “reasonable steps” means under 506(c)

Under 506(c), a check-the-box questionnaire is not enough. The issuer has to take reasonable steps to verify each investor’s status, based on the facts of the offering and the investor. Common methods include reviewing tax returns or W-2s to confirm income, reviewing recent statements and a credit report to confirm net worth, or relying on a recent written confirmation from a CPA, attorney, registered broker-dealer or SEC-registered investment adviser.

In March 2025, SEC staff said in a no-action letter that an issuer could reasonably conclude it took reasonable steps when the offering requires a minimum investment of at least $200,000 for an individual or $1,000,000 for an entity (a binding commitment paid in installments counts), the investor states in writing that it is accredited and that the minimum is not financed, in whole or in part, by a third party for this investment, and the issuer has no actual knowledge to the contrary. This is a staff view, not a rule, and it depends on its stated facts. Talk with your counsel about which approach fits your offering.

This guide is for education only and is not legal, tax or investment advice. It summarizes the rules and does not cover every condition.

One person can cost an offering its exemption

Rule 506(d), often called the bad actor rule, took effect in September 2013. It applies to every Rule 506 offering, both 506(b) and 506(c). If any Covered Person has a disqualifying event, the offering cannot rely on Rule 506. For an issuer, that can mean losing the exemption the whole raise depends on.

Who counts as a Covered Person

• The issuer, its predecessors and affiliated issuers
• Directors, executive officers, and other officers participating in the offering
• General partners and managing members
• Beneficial owners of 20% or more of the issuer’s voting equity, calculated by voting power
• Promoters connected with the issuer in any capacity at the time of the sale
• For pooled investment funds, the investment manager, its general partner or managing member, and their directors, executive officers and other officers participating in the offering
• Anyone paid, directly or indirectly, to solicit investors, and their general partners, managing members, directors, executive officers and participating officers

That last group matters. A placement agent or broker-dealer paid to find investors is itself a Covered Person, along with its own leadership.

What counts as a disqualifying event

The rule lists specific events. Some count only within a look-back period; others count for as long as they are in effect at the time of sale. In summary, they include:

• Certain criminal convictions connected with securities, false SEC filings, or the business of a broker, dealer, investment adviser or similar firm
• Certain court injunctions and restraining orders
• Final orders of state securities, banking and insurance regulators and certain federal regulators that bar the person at the time of sale, or that rest on fraud and were entered within the last 10 years
• SEC disciplinary orders and certain SEC cease-and-desist orders
• Suspension or expulsion from a self-regulatory organization such as FINRA
• SEC stop orders and orders suspending a Regulation A exemption
• U.S. Postal Service false representation orders

Events before September 23, 2013 do not disqualify an offering, but those that would otherwise have disqualified it must be described in writing to each purchaser a reasonable time before the sale (Rule 506(e)). The SEC can grant a waiver for good cause, and no disqualification follows where the court or regulator advises in writing that it should not.

What “reasonable care” means

The rule includes an exception for an issuer that did not know, and despite exercising reasonable care could not have known, that a disqualification existed. Reasonable care is a factual inquiry. In practice it usually means asking each Covered Person to complete a questionnaire or certification, checking public databases and records, and keeping evidence of what you checked and when.

Timing matters. The question is whether a disqualification exists at the time of each sale. In a continuous or long-running offering, people join and leave, and new events can occur. A check done once at launch can go stale while still looking current.

This guide is for education only and is not legal advice. It summarizes Rule 506(d) and does not list every condition or look-back period; review the rule with your counsel.

Accredited investor

A person or entity that meets SEC tests to invest in certain private offerings. For individuals, that generally means income over $200,000 ($300,000 with a spouse or spousal equivalent) in each of the last two years with a reasonable expectation of the same this year, net worth over $1 million, alone or jointly, excluding a primary residence, or holding a Series 7, 65 or 82 license in good standing.

Active Verification

InvestSecure.org’s approach of re-verifying facts that can change, on a schedule that fits each fact, and showing the date of every check.

Bad actor rule

Rule 506(d). Rule 506 is not available for a sale if any Covered Person has a disqualifying event at the time of that sale, unless an exception applies.

Begins later

A status on an InvestSecure record: nothing to check yet. The point says when it begins.

Cap table

The record of who owns what in a company or offering, and how much.

Core 12

The twelve points InvestSecure verifies for every offering, in four groups: who is behind the fund, whether it was set up properly, who holds the money and keeps the books, and what happens after an investor invests.

Covered Person

Anyone whose disqualifying event can disqualify an offering under Rule 506(d): the issuer, its predecessors and affiliated issuers; its directors, executive officers and other officers participating in the offering; its general partners and managing members; beneficial owners of 20% or more of its voting equity; promoters; investment managers of pooled funds; and anyone paid to solicit investors, together with the general partners, managing members and participating officers of those managers and solicitors.

Disqualifying event

An event listed in Rule 506(d), such as certain criminal convictions, court injunctions, regulatory orders or SRO expulsions, within its look-back period or while it is in effect.

Due diligence

Everything an investor does to decide whether an opportunity deserves serious consideration.

Form D

The notice an issuer files with the SEC, generally within 15 days after the first sale in a Regulation D offering. Filings are public on the SEC’s EDGAR database.

Form 1-A

The offering statement filed with the SEC for an offering under Regulation A.

General solicitation

Advertising or broadly marketing an offering, for example on public websites, in ads or at open seminars. Allowed under Rule 506(c), not under Rule 506(b).

Issuer

The company or fund offering securities to investors.

Not verified yet

A status on an InvestSecure record: we could not confirm the point yet, or we are waiting for a document. The point says what is missing and when we asked for it.

Regulation D

The SEC rules that let companies raise capital without registering the offering, including Rules 504 and 506.

Rule 506(b)

A Regulation D exemption with no limit on the amount raised and no general solicitation; allows up to 35 non-accredited, sophisticated purchasers in any 90-day period.

Rule 506(c)

A Regulation D exemption that allows general solicitation; every investor must be accredited, and the issuer must take reasonable steps to verify it.

Stated by the issuer

A point only the issuer states. The record shows it as the issuer’s statement, never as verified.

Status

What an InvestSecure record shows for each point as of its latest review: Verified, Begins later or Not verified yet.

Verified

A point InvestSecure confirmed as of its latest review: matched to the official record or confirmed in place. The record shows how.

Definitions are simplified for education and are not legal advice.

Why a short list works

A sponsor call moves quickly, and most of it is about the opportunity: the property, the strategy, the target return. The questions below are about the offering itself. They take a few minutes, and the answers tell you where to look next. Write the answers down, with the date, and ask for the document behind each one.

1. Who is behind the fund?

• What is the fund’s exact legal name, and in which state was it formed?
• Who are the managers, directors and officers, and who owns 20% or more?
• Is anyone being paid to find investors? Who?
• Have any of these people or firms been the subject of a regulatory action or a court order about securities?

You can check the legal name and the people named on the Form D yourself, on the SEC’s EDGAR system, and brokers and firms on FINRA BrokerCheck.

2. Was this fund set up properly?

• Which exemption does the offering use: Rule 506(b), Rule 506(c), or another?
• When was the Form D filed, and has it been amended?
• Has a notice been filed in my state, if my state asks for one?
• How will you confirm that I am an accredited investor, if the offering requires it?

3. Who holds the money and keeps the books?

• Where does my money go when I invest: an escrow or offering account held by an outside firm, or the issuer’s own account?
• Whose name is on that account, and who can move money out of it?
• Who keeps the investor records and the register of who owns what: an outside administrator, a firm connected to the sponsor, or the sponsor itself?
• Will my investment be recorded against the units I receive, and will I see that record?

4. What happens after I invest?

• Will I have my own login to an investor portal, or will documents arrive by shared link or email?
• How often will I receive a statement of my own account, and a report on the fund?
• When will my tax documents (K-1) arrive each year?
• If distributions are planned, how often, and how will I see what was paid?
• Who answers investor questions, and at which email address?

Ask for the proof, and the date

Every answer above can be shown: a filing, an account letter, a portal login, a sample statement. When a sponsor says something has been checked, ask who checked it, against which source, and on what date. A fact is only as good as the last time it was checked.

This guide is for education only and is not legal, tax or investment advice.

The top of the record

The record opens with the fund’s legal name, exactly as it appears on its Form D and state filings. Companies can carry near-identical names, so check that this is the name of the fund you are looking at. Beside it you will find:

• The record’s status, shown as a badge.
• Reviewed as of: the date of the latest review. Every result on the record is as of that review, or of the date shown on the point itself.
• Next scheduled review: when the record is due to be reviewed again.
• Standard: the written method the review follows, for example IS-STD 2.3.

Four questions, twelve points

The points are grouped under four questions an investor asks about any private offering:

• Who is behind the fund? The fund’s identity, the people the issuer names as Covered Persons, and the bad actor check on them.
• Was this fund set up properly? The offering type, the Form D and state notices, and the issuer’s process for confirming investors.
• Who holds the money and keeps the books? Where subscription money is paid, who administers the fund, and whether investments tie to the units issued.
• What happens after I invest? Portal access, investor reports, statements and tax documents, and a dedicated address for questions.

What each point shows

Each point carries a short result line and a status. Open the point to see more:

• In plain words: the result, without jargon.
• Badges: a badge shows only when that claim is verified. No badge means not verified yet.
• Result, source, method and date: the result first, then the source, the method (the section of the Standard it follows) and the date. The evidence stays on file with InvestSecure; the record does not list it.
• What this point checks: what the point covers, and what it does not.

The statuses

Some facts only the issuer can state. The record shows them as stated by the issuer, never as verified.

Badges you may see

Some points carry more than one badge, one for each claim. An issuer may also choose Additional Verifications, facts beyond the twelve points; they show in their own section after the twelve points, never numbered among them, and follow the same rule: it shows only when verified, with its source and date.

What a record is not

A record is not a rating, a recommendation, an endorsement or investment advice, and it draws no legal conclusion about the offering. It does not measure how an investment will perform. A Form D or state notice is a notice filing, not an approval: neither the SEC nor any state approves a Rule 506 offering, and a filing is not a finding that the offering qualifies for its exemption. Read the record alongside the offering documents, and talk with your own advisers before you invest.

This guide is for education only and is not legal, tax or investment advice.

Why the line exists

Private offerings skip SEC registration, and with it the disclosure a registered offering must give. The SEC describes accredited investors as those whose financial sophistication and ability to bear the risk of loss make those protections unnecessary. The tests below are how the rule draws that line.

Individuals

A person generally qualifies if any one of these is true at the time of the sale:

• Income: more than $200,000 in each of the two most recent years, or more than $300,000 together with a spouse or spousal equivalent, with a reasonable expectation of the same level this year.
• Net worth: more than $1 million, alone or with a spouse or spousal equivalent, not counting the primary residence. Debt secured by the home follows special rules: it is generally left out up to the home’s value, but an increase in that debt in the 60 days before the sale (unless it came from buying the home), or any amount above the home’s value, counts as a liability.
• Professional licenses: holding a Series 7, Series 65 or Series 82 license in good standing.
• Role: being a director, executive officer or general partner of the issuer, or of its general partner; or a “knowledgeable employee” of the issuer, where the issuer is a fund that relies on the section 3(c)(1) or 3(c)(7) exclusion from the Investment Company Act.

Entities

Entities qualify in several ways. Among them:

• Banks, registered broker-dealers, registered investment advisers, insurance companies, registered investment companies and certain other regulated institutions.
• Corporations, partnerships, limited liability companies, business trusts and 501(c)(3) organizations with total assets over $5 million, not formed specifically to buy the securities offered.
• Trusts with total assets over $5 million, not formed specifically to buy the securities offered, whose purchase is directed by a sophisticated person.
• Any entity in which every equity owner is an accredited investor.
• Other entities owning investments over $5 million, not formed specifically to buy the securities offered.
• Family offices with over $5 million in assets under management, and their family clients, under the rule’s conditions.

506(b) and 506(c): two different duties

What “reasonable steps” can look like

Under Rule 506(c), the SEC has said, whether steps are reasonable is an objective judgment the issuer makes on the facts: the kind of investor, the information it already has, how the investor was found, and the terms of the offering, such as a minimum investment. The rule lists methods that are treated as reasonable steps for individuals, as long as the issuer does not know the person is not accredited:

• Income: reviewing IRS forms that report income for the two most recent years, such as a W-2, 1099, K-1 or Form 1040, plus the investor’s written statement that they expect the same level this year.
• Net worth: reviewing documents dated within the prior three months: for assets, bank or brokerage statements, certificates of deposit, tax assessments or third-party appraisal reports; for liabilities, a credit report from at least one nationwide consumer reporting agency; plus the investor’s written statement that all liabilities needed to work out net worth have been disclosed.
• Written confirmation: a letter from a registered broker-dealer, an SEC-registered investment adviser, a licensed attorney or a CPA stating that they took reasonable steps within the prior three months and determined that the investor is accredited.

These methods are examples, not the only way. In March 2025, SEC staff said in a no-action letter that an issuer could reasonably conclude it took reasonable steps when the offering requires a minimum investment of at least $200,000 for an individual or $1,000,000 for an entity (a binding commitment paid in installments counts), the investor states in writing that it is accredited and that the minimum is not financed, in whole or in part, by a third party for this investment, and the issuer has no actual knowledge to the contrary. This is a staff view, not a rule, and it depends on its stated facts.

If you are asked to verify

• Ask which method the issuer uses, and who will see your documents.
• Send documents only through the secure channel the issuer or its verifier names, never by ordinary email.
• A letter from your own CPA, attorney, registered broker-dealer or SEC-registered investment adviser can often take the place of sharing statements with each issuer.
• Expect to be asked again for another issuer’s offering: a confirmation is tied to a point in time. An issuer that has already verified you may, for five years from that verification, accept your written statement at the time of a new sale, as long as it knows nothing to the contrary.

This guide is for education only and is not legal, tax or investment advice. It summarizes Rules 501(a), 506(b) and 506(c) and does not cover every condition; review the rules with your counsel.