The subscription agreement is the most legally consequential document an investor signs in a private securities offering — and it is also the document most likely to be treated as an afterthought. Investors often skim it. Issuers sometimes hand it off with a link and a note to sign here. Neither approach reflects what the document actually does.
In a private placement conducted under Section 4(a)(2) of the Securities Act or Regulation D, the subscription agreement is where the investor formally confirms their eligibility, their understanding of what they are buying, and a series of representations that the issuer will rely on to support the claimed exemption from SEC registration. Those representations are not boilerplate. They are the legal record that supports — or undermines — the issuer’s compliance position if the offering is ever scrutinized by regulators, challenged by an unhappy investor, or reviewed by acquirers, lenders, or successor counsel years down the road.
This post covers the full landscape of investor representations in private placement subscription agreements: why they exist, what each category of representation does, how the legal requirements differ based on the exemption being used, and what the most significant developments in this area — including the SEC’s March 2025 no-action letter on Rule 506(c) verification — mean for issuers and investors today. If you are preparing subscription documents for a new offering, reviewing existing documents before a re-opening, or helping investors understand what they are signing, this is the foundation.
1. Why Investor Representations Exist: The Legal Foundation
The Private Placement Framework and Why It Depends on Investor Representations
Under the Securities Act of 1933, every offer and sale of securities must either be registered with the SEC or fall within an exemption from registration. Private placements are conducted in reliance on one of those exemptions — most commonly Section 4(a)(2), which exempts transactions not involving a public offering, and the safe harbors provided by Regulation D, particularly Rule 506(b) and Rule 506(c).
Those exemptions are not self-executing. They depend on specific conditions being met at the time of sale. The issuer must be able to demonstrate that the offering was limited to eligible investors, that no general solicitation occurred (for most 506(b) offerings), that investors received adequate information, and that each purchaser met the applicable eligibility standard. None of those conditions can be confirmed without information from the investor. The subscription agreement is the mechanism for collecting and documenting that information.
This is why the investor representations in a subscription agreement are not simply paperwork. They are the factual foundation on which the exemption rests. An issuer whose subscription agreements contain inadequate or missing representations is an issuer that cannot fully document the basis for its claimed exemption — which creates both regulatory exposure and potential liability to investors who might later claim they never should have been admitted.
The Three Things Investor Representations Accomplish
Well-drafted investor representations accomplish three distinct things simultaneously:
- They document legal eligibility. The representations confirm that each investor meets the criteria required by the exemption being used — accredited status, sophistication, or both. Without this documentation, an issuer relying on Regulation D has no record supporting its compliance position if the SEC ever inquires.
- They allocate risk between the parties. If an investor later claims they did not understand the investment, the representations may directly contradict that position. If an investor misrepresents their accredited status and the issuer relies on that misrepresentation in good faith, the investor — not the issuer — bears primary responsibility for the resulting compliance problem.
- They create the factual record for future due diligence. When a company that has conducted private offerings seeks to go public, is acquired, or brings on institutional investors, the subscription agreements from prior rounds will be reviewed by counsel. A clean set of representations across a consistent investor base is a significant asset. Gaps, inconsistencies, or inadequate representations create problems that require legal remediation — sometimes expensive remediation — years after the original offering.
| 📌 The Subscription Agreement Is the Compliance Record Think of the subscription agreement as the contemporaneous legal record of why a particular investor was eligible to participate in a private offering. It is not a contract about investment terms — those are in the PPM and the governing documents. It is the document that proves, at the time of sale, that the investor met the legal requirements for the exemption and understood what they were buying. Issuers who treat the subscription agreement as a formality are taking on compliance risk that is invisible until it materializes — and it often materializes at the worst possible moment: during a regulatory inquiry, a fundraise that requires investor-base representations, or a dispute with an investor who claims the offering was not properly exempt. |
How Representations Connect to Anti-Fraud Standards
Even in exempt offerings, anti-fraud rules apply. Rule 10b-5 under the Securities Exchange Act and Section 17(a) of the Securities Act prohibit material misstatements and omissions in connection with the purchase or sale of securities, regardless of whether the offering is registered. That means the issuer cannot make false or misleading statements to investors, and the subscription agreement cannot be used to paper over disclosure failures.
What the subscription agreement can do — and does — is create a clear record that the investor acknowledged specific facts, received specific information, and made specific representations about their own eligibility and understanding. When an issuer is later defending against a fraud claim, the subscription agreement is often the first document examined. A well-drafted agreement that accurately reflects the investor’s representations and the information provided to them supports the issuer’s defense. A poorly drafted or misleading agreement can reinforce a plaintiff’s narrative.
2. The Exemptions: What Each One Requires from Investors
The investor representations in a subscription agreement should be calibrated to the specific exemption being used. A document that copies boilerplate from a prior offering without checking whether the representations match the current exemption is a compliance problem waiting to surface. The table below maps the three most common Regulation D exemptions to their core investor-side requirements:
| Exemption | Investor Eligibility Requirement | Key Subscription Agreement Implications |
| Rule 506(b) | Unlimited accredited investors; up to 35 non-accredited investors who individually or with a purchaser representative have sufficient financial sophistication to evaluate the investment | Must collect accreditation confirmation for each investor; must collect sophistication representation for any non-accredited participants; no verification required for accredited status (reasonable belief standard); non-accredited investors trigger enhanced disclosure obligations |
| Rule 506(c) | All purchasers must be accredited investors; issuer must take reasonable steps to verify accredited status — not just collect self-certification | Must collect accreditation confirmation; verification required beyond self-certification alone; March 2025 SEC no-action letter provides new minimum-investment-threshold path to reasonable verification; general solicitation and advertising permitted |
| Section 4(a)(2) (no safe harbor) | No fixed standard; purchasers must be sophisticated, have access to the type of information available in a registration statement, and agree not to distribute the securities | Representations should confirm sophistication, access to information, investment intent, and non-distribution agreement; no specific verification standard but issuer bears burden of proving exemption if challenged |
| Rule 504 | No accreditation requirement; some state law conditions apply depending on offering size and state | Investor representations still needed for anti-fraud compliance and state law compliance; accreditation not required but investment intent and risk acknowledgment remain important |
The critical point is that the exemption choice determines the legal standard, and the subscription agreement must reflect that standard precisely. Issuers who switch between exemptions mid-offering, or who conduct a 506(c) offering but use 506(b) subscription documents that do not include proper verification provisions, create compliance gaps that may later be difficult to explain.
3. Accredited Investor Status: Categories, Qualification, and Documentation
The Complete Accredited Investor Definition
Rule 501 of Regulation D defines the term ‘accredited investor,’ and the SEC expanded that definition significantly in August 2020 to include categories based on professional credentials and financial sophistication — not just financial thresholds. Subscription agreements should be updated to reflect the full current definition, because investors who qualify under newer categories (such as professional license holders or knowledgeable employees) are often incorrectly screened out by older questionnaires that only ask about income and net worth.
The current accredited investor categories for natural persons include:
- Income test: Individual income exceeding $200,000 in each of the two most recent calendar years, with a reasonable expectation of the same in the current year. Joint income with a spouse or spousal equivalent of $300,000 meets the same threshold. The 2020 amendments added ‘spousal equivalent’ to recognize common-law marriages and same-sex partnerships.
- Net worth test: Net worth of more than $1 million, individually or jointly with a spouse or spousal equivalent, excluding the value of the primary residence. The primary residence exclusion matters: any mortgage on the primary residence up to the home’s fair market value is also excluded from the net worth calculation, but mortgage debt exceeding the home’s value counts as a liability.
- Professional credentials: As of the 2020 amendments, individuals holding the Series 7 (General Securities Representative), Series 65 (Investment Adviser Representative), or Series 82 (Private Securities Offerings Representative) licenses in good standing qualify as accredited investors regardless of their financial position. This is a knowledge-based pathway that does not require meeting any income or net worth threshold.
- Directors, executive officers, and general partners: A director, executive officer, or general partner of the issuer — or of a general partner of the issuer — qualifies as an accredited investor for investments in that issuer specifically.
- Knowledgeable employees (private funds only): For investments in a private fund, individuals who are ‘knowledgeable employees’ as defined in Investment Company Act Rule 3c-5(a)(4) — including executive officers, directors, trustees, and employees who have participated in the fund’s investment activities for at least 12 months — qualify as accredited investors.
- Family clients of qualifying family offices: Family clients of a family office that has more than $5 million in assets under management and is itself an accredited investor qualify as accredited investors, provided the investment is directed by the family office.
For entities, the primary qualification pathways include: any bank, registered broker-dealer, insurance company, registered investment company, or business development company; any employee benefit plan with assets over $5 million; any charitable organization, corporation, partnership, or LLC with assets exceeding $5 million that was not formed for the specific purpose of acquiring the offered securities; investment advisers and exempt reporting advisers; rural business investment companies; and any entity in which all equity owners are individually accredited investors.
| ⚠️ Older Subscription Questionnaires May Miss Eligible Investors Subscription agreement questionnaires drafted before the 2020 amendments to the accredited investor definition may not include the professional credential pathway (Series 7, 65, or 82 licenses), the knowledgeable employee category, or the expanded entity categories. An investor who qualifies under one of those newer pathways but is presented with a questionnaire that only asks about income and net worth may incorrectly indicate they do not qualify. This is both a compliance issue and a practical one: eligible investors who cannot confirm their status through available checkboxes create administrative confusion and potential exclusion from offerings they are legally entitled to join. Issuers should review their subscription questionnaires against the current Rule 501 definition and update them to reflect all current qualification pathways. |
The Verification Question: 506(b) vs. 506(c)
The most significant operational difference between Rule 506(b) and Rule 506(c) is what the issuer must do to confirm accredited status. Under Rule 506(b), the issuer must have a ‘reasonable belief’ that investors are accredited. In practice, this has meant relying on the investor’s self-certification — their representations in the subscription agreement questionnaire — together with any other facts the issuer has about the investor. Collecting a completed questionnaire and reviewing it for consistency with what the issuer knows about the investor is generally sufficient.
Under Rule 506(c), that is not enough on its own. The issuer must take ‘reasonable steps’ to verify that each purchaser is an accredited investor. The rule includes a non-exclusive list of verification methods: reviewing IRS forms for the two most recent years to verify income; reviewing bank statements, brokerage statements, or tax assessments to verify net worth; obtaining written confirmation from a registered broker-dealer, investment adviser, licensed attorney, or CPA that the person is an accredited investor within the prior three months. All of these methods require collecting sensitive personal financial information, which many investors resist providing.
The March 2025 SEC No-Action Letter: A New Path for 506(c) Verification
On March 12, 2025, the SEC’s Division of Corporation Finance issued a no-action letter — in response to a request from Latham & Watkins LLP — that significantly simplifies the verification burden for issuers conducting Rule 506(c) offerings. This is the most significant development in private placement practice since Rule 506(c) was adopted in 2013.
The guidance establishes that an issuer may reasonably conclude it has taken reasonable steps to verify accredited investor status — without reviewing tax returns, brokerage statements, or obtaining third-party confirmations — when three conditions are satisfied:
- Minimum investment threshold: The investor commits to a minimum investment of at least $200,000 for natural persons or at least $1,000,000 for legal entities (including through a binding capital commitment structure), and the investor confirms that commitment is not financed by a third party for the specific purpose of making this investment.
- Written self-certification: The investor provides a written representation identifying the specific category of the accredited investor definition under Rule 501(a) on which they rely, and confirming that the minimum investment amount is not third-party financed.
- No actual knowledge of contrary facts: The issuer has no actual knowledge of any facts indicating the investor is not an accredited investor or that the minimum investment amount is financed by a third party for the purpose of making the investment.
If those conditions are met, the issuer need not review tax returns, bank statements, or brokerage records, and need not obtain written confirmations from external professionals. The self-certification, combined with the high minimum investment amount as objective evidence of financial capacity, is sufficient.
| 📌 What the March 2025 Guidance Changes — and What It Does Not The practical effect of this guidance is substantial for private fund sponsors. The verification requirement has historically caused most issuers to default to Rule 506(b) to avoid the burdensome documentation process under 506(c). Now, issuers conducting offerings with minimum commitments above the threshold can use 506(c) — and the general solicitation and advertising that goes with it — without requesting tax returns or financial statements from investors. What the guidance does not change: it does not eliminate the obligation to file Form D. It does not relax the Marketing Rule for registered investment advisers — materials using hypothetical performance, composite returns, or third-party endorsements must still comply with Rule 206(4)-1. And it does not permit general solicitation in parallel with a 506(b) offering — an issuer who switches from 506(b) to 506(c) mid-offering must follow the amendment process and cannot offer the two exemptions simultaneously. Katten Muchin attorneys also noted that if a 506(c) offering fails its exemption after general solicitation has occurred, neither 506(b) nor Section 4(a)(2) are available as fallback options. |
What the Subscription Agreement Must Capture for Each Exemption
| Accreditation Element | What the Subscription Agreement Must Address |
| Qualification category | The specific category under Rule 501(a) that the investor is relying on — not just a general ‘I am accredited’ confirmation. Each category (income, net worth, professional license, entity type) requires a separate representation. |
| Calculation methodology for net worth | For the net worth test: explicit confirmation that primary residence value is excluded; treatment of mortgage debt exceeding home value; whether spousal equivalents are included in a joint net worth calculation. |
| Timing of accredited status | Accredited status is assessed at the time of sale, not at the time of subscription. Rolling offerings and funds with multiple closings should require investors to reconfirm status or notify the issuer of any change before the applicable closing. |
| Professional credential verification (506(c)) | For investors qualifying via Series 7, 65, or 82 license: issuers must verify the credential is in good standing. FINRA BrokerCheck and the SEC’s Investment Adviser Public Disclosure database are the recommended verification sources. |
| Third-party financing (506(c) new guidance) | For issuers using the minimum investment threshold under the March 2025 guidance: the subscription agreement must include a specific representation that the minimum investment amount is not financed by a third party for the purpose of making this investment. |
| Entity qualification basis | For entity investors: the specific basis for entity accreditation (total assets, investment advisers, equity owners all accredited, etc.) must be separately identified. An entity accredited because all its equity owners are accredited requires individual confirmation from each equity owner. |
4. Sophistication and the Non-Accredited Investor Exception
Rule 506(b) permits issuers to include up to 35 non-accredited investors in an offering, provided those investors — either alone or with a purchaser representative — have sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the prospective investment. This is the sophistication standard, and it is both an eligibility test and a representation obligation that must be captured in the subscription agreement.
The sophistication standard does not require formal credentials or licensing. It requires demonstrated capacity to evaluate this particular investment. A high-net-worth individual without a financial background who happens to meet the income threshold is accredited but may not be sophisticated. A retired finance professor with investment experience but below-threshold income is sophisticated but not accredited. The two tests measure different things.
How Sophistication Is Documented
Subscription agreements for 506(b) offerings often ask non-accredited investors to describe their investment experience, their prior participation in private offerings, their familiarity with financial statements and business analysis, and their professional background. The representation should confirm not just general financial literacy, but the capacity to evaluate the specific type of investment being offered.
A real estate syndication, a venture fund interest, a private credit instrument, and a digital asset security each require different analytical skills. A subscription agreement that asks a non-accredited investor only whether they have investment experience, without connecting that experience to the type of investment at issue, may not be sufficient to support the sophistication standard in a later dispute. The representation should be specific enough to demonstrate that this investor can evaluate this offering.
Purchaser Representatives and Their Role
An investor who does not independently meet the sophistication standard may still participate in a 506(b) offering through a purchaser representative — someone who assists the investor in evaluating the investment and who meets their own sophistication standard. The purchaser representative concept is codified in Rule 501(h) and requires the representative to be unaffiliated with the issuer (with specific exceptions), and the investor to acknowledge in writing that they are relying on the purchaser representative.
When a purchaser representative is involved, the subscription agreement should capture: the identity and qualifications of the purchaser representative, the investor’s written acknowledgment that they are relying on that representative to evaluate the investment, and a representation that the purchaser representative has no disqualifying conflicts with the issuer. Issuers who allow investor representatives to evaluate an investment on behalf of unsophisticated investors without documenting that arrangement properly have neither the investor’s sophistication representation nor the protection of the purchaser representative structure.
| ⚠️ Non-Accredited Investors Trigger Additional Disclosure Obligations Issuers are sometimes tempted to include a long-standing relationship or family member in a 506(b) offering without fully addressing the implications. Under Rule 506(b), admitting even one non-accredited investor requires the issuer to provide disclosure documents of the type that would be included in a registration statement — including audited financial statements — which significantly increases the offering’s documentation burden. For that reason, most 506(b) issuers limit participation to accredited investors only, even though the exemption technically permits non-accredited participation. If a non-accredited investor is included, their sophistication representation must be documented carefully, and the additional disclosure requirements must be satisfied. |
5. Investment Intent, Restricted Securities, and Risk Acknowledgment
The Investment Intent Representation
Every private placement subscription agreement should require the investor to represent that they are acquiring the securities for investment purposes and not with a view to immediate resale or distribution. This representation tracks the logic of the private placement exemptions: Section 4(a)(2) is an exemption for transactions not involving a public offering, which means the securities cannot be immediately redistributed to the public.
The investment intent representation is not purely philosophical. It has direct legal consequences. An investor who immediately resells privately placed securities without a valid resale exemption has potentially conducted an unlawful distribution — which can taint the original offering’s exempt status. Securities purchased in a Regulation D offering are restricted securities that cannot be freely resold without either registration or a valid exemption such as Rule 144.
Restricted Securities: What Investors Must Acknowledge
Securities sold in unregistered private offerings are restricted securities under Rule 144. The subscription agreement should require explicit investor acknowledgment of what that means:
- The securities have not been registered under the Securities Act and are subject to restrictions on resale.
- The securities may not be offered or sold without registration or an applicable exemption. The investor cannot simply list them on a secondary platform or transfer them to a friend.
- The securities carry a restrictive legend on any certificates or electronic records, and the issuer may instruct its transfer agent to refuse transfers that do not comply with applicable restrictions.
- Any transfer may require the issuer’s prior written consent, a legal opinion from counsel that the transfer is exempt, or satisfaction of the conditions of Rule 144 — including a minimum holding period of 12 months from the date of acquisition.
- No public market exists for the securities, and there is no guarantee that any public market will ever develop.
Investors who skim past the restricted securities acknowledgment sometimes discover years later that they cannot sell their interest when they want to, cannot transfer it to a trust or family member without the issuer’s consent, and cannot use it as collateral in the way they assumed. The subscription agreement is the opportunity to make that picture clear before the investment is made.
Risk Acknowledgment and the Total Loss Representation
Private placements are by their nature higher-risk investments than public market securities. They are illiquid, thinly disclosed, difficult to value, and may involve early-stage companies, development-stage projects, or strategies that depend heavily on execution. The SEC’s investor guidance on private placements is direct: investors should be able to weather a total loss of their investment and should understand that the investment is highly illiquid.
Subscription agreements reflect this by including a risk acknowledgment that investors sign alongside their commitment. A comprehensive risk acknowledgment addresses more than just market loss:
- Liquidity risk: The investor may not be able to liquidate their position for an extended period, potentially for the full term of the investment.
- Disclosure risk: The investment is not subject to the same disclosure obligations as a registered public offering, and the information available to the investor may be significantly less complete than a public company prospectus.
- Valuation risk: There is no readily available market price for the securities, and valuations may be estimates that diverge from actual realizable value.
- Business and execution risk: The underlying business, project, or investment strategy may fail to perform as projected, and projections presented in offering materials are forward-looking estimates subject to uncertainty.
- Legal, tax, and regulatory risk: The tax treatment of the investment may change, regulatory environments may shift, and the investor should consult their own advisors for tax and legal analysis specific to their situation.
- Total loss risk: The investor may lose some or all of their invested capital.
No Guarantee of Returns or Specific Outcomes
A recurring source of investor disputes in private offerings is alleged oral representations — things a founder, sponsor, or placement agent said during a meeting that were never put in writing and that the investor later interprets as a guarantee. The subscription agreement is one of the tools for limiting that exposure.
A well-drafted no-guarantee representation states that: the investor is not relying on any oral representation, guarantee, warranty, or commitment concerning the investment’s future performance, return, exit timeline, or valuation; all representations about the offering are contained in the written offering documents; and the investor understands that forward-looking statements, projections, and target returns are estimates that may not be achieved.
This provision does not protect against deliberate fraud — a material misstatement in the PPM remains actionable regardless of what the subscription agreement says — but it does protect against after-the-fact inflation of casual comments into contractual guarantees. It also reinforces to investors, at the moment of signing, that the rosy projections in the pitch deck are not promises.
6. Financial Sophistication, Due Diligence, and Independent Evaluation
The Sophistication Representation Beyond Accreditation
Accredited investor status and financial sophistication are related but distinct concepts. Accredited status is a financial or professional threshold: income, net worth, or credential. Financial sophistication is a functional test: whether the investor actually has the knowledge and experience to evaluate this investment. An investor can be accredited without being sophisticated in the relevant area, and vice versa.
In the Rule 506(b) context, sophistication is an explicit legal requirement for non-accredited investors. In the broader securities law framework, sophistication matters because private placement exemptions are premised on the idea that certain investors can fend for themselves — that they have access to the information they need and the analytical capacity to use it. An issuer who admits investors who clearly lack the capacity to evaluate the offering is taking on both legal and reputational risk that the accreditation representation alone does not address.
The financial sophistication representation in a subscription agreement typically asks the investor to confirm that they have prior investment experience with private or similar offerings; that they can analyze financial information, business plans, and risk factors; and that they are either personally capable of evaluating this investment or have engaged advisors who are. The representation should be specific enough to reflect actual capacity, not just a general assertion of investor experience.
Independent Due Diligence and Advisor Consultation
Subscription agreements routinely include a representation that the investor has had an opportunity to review all relevant offering materials, ask questions of the issuer, receive answers to those questions, and consult independent legal, tax, accounting, or financial advisors before making the investment decision. This representation serves several purposes simultaneously.
For the issuer, it establishes that the investor was not relying exclusively on issuer-provided materials or oral statements. For the investor, it should serve as a reminder — at the moment of signing — that getting personalized professional advice is their responsibility. For regulators, it confirms that the investor had access to the kind of information normally available in a registered offering.
The due diligence representation should include:
- Confirmation that the investor has reviewed the PPM and all other offering materials provided by the issuer.
- Confirmation that the investor had an opportunity to ask questions of the issuer and received satisfactory answers.
- Confirmation that the investor has had the opportunity to consult independent legal, tax, and financial advisors and has done so to the extent the investor considered appropriate.
- Confirmation that the investment decision is the investor’s own, made independently and not in reliance on the issuer’s representatives for personal legal or tax advice.
| 📌 The Advisor Consultation Representation Protects Both Sides Issuers sometimes worry that requiring investors to confirm they have consulted advisors will slow down the closing process or make investors nervous. In practice, the opposite tends to be true. Investors who have reviewed the documents with counsel and understand what they are buying are less likely to become difficult investors later. The representation creates a record that the investor was told to get advice and had the opportunity to do so. For investors, this is also genuinely important guidance. Private offering documents are complex, and the tax, legal, and economic implications of the investment are often not apparent from reading the PPM alone. Consulting an advisor before signing is not a formality — it is how investors protect their own interests. |
7. Accuracy, Authority, and Entity-Specific Representations
Truthfulness and Completeness of All Investor Information
The subscription agreement requires the investor to represent that all information they provide is true, correct, and complete in all material respects as of the date of signing. This covers the accreditation questionnaire, suitability information, entity formation documents, beneficial ownership disclosures, and any tax forms submitted as part of the subscription package.
The materiality of this representation is underappreciated. An investor who misstates accredited status, omits a beneficial owner who would disqualify the subscription, or provides inaccurate income or net worth information creates a compliance problem for the issuer that may be difficult to remedy after the offering closes. The issuer’s ability to rely on the investor’s representations in good faith is the foundation of the exemption — that reliance is only valid if the issuer has a reasonable basis for believing the representations are true.
Authority to Enter the Subscription Agreement
When an investor is an entity — an LLC, trust, partnership, corporation, retirement account, or family office — the subscription agreement requires a representation that the person signing has full legal authority to bind the investor to the subscription. That authority is not assumed; it must exist in the entity’s governing documents and must be accurately represented.
Common authority failures include: a manager of an LLC who is not authorized to make investment decisions of this type without member approval; a trustee whose trust document restricts investment in illiquid securities; an individual signing on behalf of a pension plan without the required plan fiduciary approval; and a corporate officer whose authority is limited to a dollar threshold the investment exceeds.
The authority representation should also address that the investment does not violate any contract, agreement, or applicable law binding on the investor — including any restrictions in the investor’s own governing documents and any ERISA or tax requirements applicable to the investor’s structure.
Bad Actor Representations Under Rule 506(d)
Rule 506(d) disqualifies certain issuers, their principals, and others connected to the offering from relying on Regulation D if any of them have been subject to specified disqualifying events — including certain SEC enforcement actions, criminal convictions, court injunctions, and other regulatory sanctions. Issuers must also be aware of their ‘covered persons’ — which include the issuer, directors, executive officers, general partners, 20% or greater beneficial owners, promoters, compensated solicitors, and others — and confirm that none of them are disqualified.
On the investor side, some subscription agreements ask the investor to confirm that the investor itself, or anyone investing through the investor, is not a bad actor under Rule 506(d). This is particularly relevant for entity investors whose beneficial ownership structure could include disqualified persons. While the bad actor disqualification technically runs to the issuer’s covered persons rather than investors, investors who know they are disqualified persons cannot validly participate in offerings that would be disqualified by their participation.
Best practice is to include a bad actor representation in the subscription agreement and to back it up with a separate bad actor questionnaire, particularly for entity investors and for investors who have regulatory histories in the financial services industry.
ERISA Representations
Investors who are employee benefit plans subject to ERISA — including pension plans, 401(k) plans, and certain IRAs — must make representations that address ERISA’s fiduciary requirements and prohibited transaction restrictions. The most important of these is the plan assets analysis: if a fund’s investors include too many ERISA benefit plan investors, the fund’s assets may be treated as ‘plan assets’ under ERISA, which would impose fiduciary obligations on the fund manager that it may not be structured to handle.
To avoid plan asset status, many private funds and real estate syndications structure their investor base to keep the percentage of benefit plan investor capital below 25% of total equity. The subscription agreement should ask ERISA investors to confirm their plan asset status, and should include a representation that the investment is prudent under ERISA’s standards, is permitted under the governing plan documents, and does not constitute a prohibited transaction under ERISA Section 406 or Internal Revenue Code Section 4975.
Anti-Money Laundering and OFAC Representations
Every private placement subscription agreement should include representations addressing anti-money laundering compliance and OFAC sanctions screening. These provisions are required by FinCEN regulations, required by most fund-level compliance policies, and expected by any institutional investor or lender reviewing the fund’s compliance infrastructure.
The AML and OFAC representations typically require the investor to confirm:
- The funds being invested are not derived directly or indirectly from activities that violate applicable anti-money laundering laws, including the Bank Secrecy Act and USA PATRIOT Act.
- The investor, and any person through whom the investor is acting, is not a person or entity listed on the OFAC Specially Designated Nationals list or any other sanctions list maintained by U.S. or applicable foreign authorities.
- The investor is not a senior foreign political figure, and no beneficial owner of the investor is a senior foreign political figure, immediate family member, or close associate of such a figure.
- The investor will promptly notify the issuer if any of the above representations become inaccurate during the term of the investment.
For entity investors, the AML representations should extend to beneficial owners — a corporation that is not itself on a sanctions list but whose 25% beneficial owner is a sanctions target is still a problem. Issuers should implement a consistent beneficial ownership collection process that aligns with FinCEN’s Customer Due Diligence rule requirements.
8. Complete Subscription Agreement Representations Reference
The table below summarizes every major category of investor representation in a private placement subscription agreement, with the legal basis for each and the key drafting considerations:
| Representation Category | Legal Basis / Key Drafting Requirements |
| Accredited investor status | Rule 501 / Reg D — Must identify specific qualification category; updated for 2020 amendments including professional credentials and knowledgeable employees; timing tied to date of sale; must be re-confirmed in rolling or multi-close offerings |
| Sophistication (non-accredited investors) | Rule 506(b) — Must reflect capacity to evaluate this specific offering, not just general investment experience; purchaser representative structure must be documented if used |
| 506(c) verification and self-certification | Rule 506(c) / March 2025 SEC no-action letter — Must identify qualification category under Rule 501(a); minimum investment threshold representation; no-third-party-financing certification; issuer must have no actual knowledge of contrary facts |
| Investment intent and non-distribution | Section 4(a)(2) / Rule 505/506 — Acquiring for investment, not with view to immediate distribution; understanding of restricted security status |
| Restricted securities acknowledgment | Rule 144 / Securities Act Sec. 5 — Securities are unregistered; resale restrictions apply; restrictive legend will be applied; transfer restrictions in governing documents apply |
| Risk acknowledgment | Anti-fraud compliance / investor protection — Total loss risk; liquidity risk; disclosure limitations; valuation uncertainty; business and execution risk; no public market |
| No guarantee of returns | Anti-fraud compliance — Not relying on any oral representation; no guarantee of return, exit, or liquidity; forward-looking statements are estimates |
| Financial sophistication | Section 4(a)(2) / Rule 506(b) — Prior investment experience; ability to analyze financial information; capacity to evaluate this specific type of investment |
| Independent due diligence | Section 4(a)(2) / Rule 506(b) — Reviewed offering materials; had opportunity to ask questions; opportunity to consult independent advisors; independent investment decision |
| Accuracy of all investor information | Exemption compliance / anti-fraud — All representations are true, correct, and complete; investor will notify issuer of material changes |
| Authority to invest (entities) | Contractual validity — Authorized signatory; no conflict with governing documents, contracts, or applicable law; fiduciary authorization for plan investors |
| Bad actor disqualification | Rule 506(d) — No disqualifying events applicable to investor or persons investing through investor; obligation to notify issuer of future disqualifying events |
| ERISA compliance | ERISA Sections 406/408 — Investment is prudent; not a prohibited transaction; plan assets analysis if benefit plan investor; 25% threshold representation |
| Anti-money laundering / OFAC | Bank Secrecy Act / USA PATRIOT Act / FinCEN — Funds not from illicit sources; not a sanctioned person or entity; no senior foreign political figure; beneficial ownership certification |
| Commitment to notify of material changes | Ongoing compliance / rolling offerings — Investor will promptly notify issuer if any representation becomes inaccurate before the applicable closing or before additional closings in multi-close offerings |
| The Subscription Agreement Is Not Boilerplate — Draft It Like It Matters Every private offering is different. The exemption being used, the investor base, the type of security, and the regulatory environment all affect what the subscription agreement needs to say. An agreement drafted for a 506(b) offering with accredited-investor-only participation needs different representations than one for a 506(c) offering using the new minimum-investment verification pathway. An agreement for a fund with ERISA participants needs different representations than one for a single-asset real estate syndication with individual investors. Template documents that do not account for these differences create compliance gaps. The March 2025 SEC no-action letter on 506(c) verification is a meaningful development that makes general solicitation more accessible to a broader range of private offerings — but only if the subscription agreement is updated to include the specific self-certification language and minimum commitment representations the guidance requires. Issuers who continue to use 506(b) documents in 506(c) offerings, or who have not updated their questionnaires since before the 2020 expansion of the accredited investor definition, are relying on documents that may not accurately capture their legal position. |