Private lending is a debt business, but a meaningful portion of every private lending platform’s regulatory exposure lives in securities law. The moment a lender raises capital from third-party investors — through participations, fund interests, fractionalized loans, debt notes, or any structure where someone else’s money is being put to work — securities law enters the analysis, even when the lender does not realize a security has been offered.
The federal default rule is straightforward: if a security is offered or sold, it must be either registered with the SEC (or applicable state regulators) or sold under an exemption such as Regulation D. There is no third path. Lenders who proceed under the assumption that “we’re just lending money, this isn’t a security” sometimes discover, after a regulator inquiry or a private plaintiff suit, that the structure they were running was a securities offering all along.
This guide walks through the three categories of securities-law issues Geraci LLP’s banking and finance and securities teams see most often in private lending — and how lenders get them wrong.
Category 1: “It’s a Loan, Not a Security”
The most common misconception in private lending is that debt is categorically not a security. It is not true. Most debt instruments are securities under federal and state law. The Securities Act of 1933 expressly includes “notes” within the definition of security, and the Supreme Court’s Reves v. Ernst & Young framework (the “family resemblance” test) treats most notes as securities unless they fall into a recognized non-security category.
The structures that lenders mistakenly assume are not securities include:
- Co-lender, multi-beneficiary, and fractionalized lending arrangements where one investor receives a piece of a loan
- Promissory notes issued by the lending platform to investors
- Loan participation interests sold to passive investors
- LLC or limited partnership interests in entities formed to hold loans
The simplified analytical framework: if the end investor is passive and is relying on the lender’s efforts to generate the return, the instrument is a security. Active co-lenders making credit decisions alongside the platform are different; passive capital providers are not.
The wrinkle that catches many lenders is offering across multiple states to non-accredited investors. Federal anti-fraud rules (which apply regardless of registration or exemption status) are likely to require the equivalent of a prospectus — a private placement memorandum (PPM) that discloses the structure, the investment terms, and the risks. A multi-state offering of even modest size to non-accredited investors without a proper disclosure document is the kind of fact pattern state securities regulators look for first.
The defensible posture for any lender raising third-party capital:
- Assume the instrument is a security unless securities counsel has confirmed otherwise.
- Identify the applicable exemption before the offering begins (Regulation D Rule 506(b) or 506(c) for most private offerings; Regulation A for larger raises; intra-state exemptions in narrow cases).
- Match the offering structure to the exemption. Rule 506(b) prohibits general solicitation; Rule 506(c) requires accredited-investor verification. The offering’s marketing has to align with the exemption being relied on.
- Prepare a PPM for any offering involving multiple investors, particularly when non-accredited investors are involved.
- File the required notices (Form D federally, blue-sky notices state by state).
Category 2: Investment Company Act and Investment Advisers Act Exposure
The second category of overlooked securities exposure involves the Investment Company Act of 1940 and the Investment Advisers Act of 1940. These statutes regulate funds (vehicles holding investment securities) and fund advisers (entities advising or managing those vehicles). They typically arise in three contexts in private lending:
Debt funds that buy or sell securities as part of their strategy. A fund whose strategy is solely to originate, fund, and hold real estate-secured loans for its own account has a strong argument that it is not an investment company under § 3(a)(1)(A) and (C) of the Investment Company Act, and that its manager is not subject to the Investment Advisers Act. Loans secured by real estate are generally not investment securities, and a fund holding originated loans for its own account does not look like the investment company structure the Act was designed to regulate.
The argument breaks down when the fund buys or sells securities as part of its activity. Marketable securities purchases, loan trading at a scale that constitutes the sale of securities, or buying and selling exempt securities all start to look like investment-company activity, and the fund and its manager have to evaluate registration or exemption (often the 3(c)(1) or 3(c)(7) private fund exemptions, which themselves require the manager to consider Investment Advisers Act compliance).
Lenders offering “real estate annuities.” A lender holding itself out to the public as offering an annuity-like product is positioning itself within the regulatory frame the Investment Advisers Act was designed for. Annuity-style products typically involve registered investment advisers (RIAs) who owe fiduciary duties to their investors. A lender marketing such a product without RIA registration is taking on the regulatory risk of an unregistered RIA holding itself out as one.
“Separately managed account” marketing. The same logic applies. SMA-style marketing positions the lender as an RIA managing investor capital — a profile that historically requires RIA registration with the SEC or state securities regulators.
The cure for this category of exposure is structural clarity. Funds and lenders should evaluate which side of the Investment Company Act and Investment Advisers Act lines they intend to be on, structure their activity and marketing to support that position, and obtain the registrations or exemptions that fit. The most expensive errors here are not registration failures — they are operational drift, where a fund that started as a real estate loan originator slowly adds securities-trading activity until its profile no longer matches its original exemption analysis.
Category 3: Commissions, Referral Fees, and Finder’s Fees
The third category is the one that most often produces actual SEC enforcement actions, and it is the most preventable: paying transaction-based compensation to unlicensed parties.
The SEC has been clear and consistent for decades: transaction-based compensation paid for assistance in raising capital is broker-dealer activity. Anyone receiving such compensation must be a registered broker-dealer (or an associated person of one). The compensation can be labeled a referral fee, a finder’s fee, a marketing fee, or anything else — the label does not change the analysis. What controls is whether the compensation is tied to the success or size of a securities transaction.
The “finder’s exception” is narrower than commonly believed. A genuine finder — a person who introduces parties without negotiating, structuring, or marketing — may sometimes be paid a fee, but the safe-harbor analysis is unforgiving and the recent direction of SEC enforcement has been to constrain rather than expand it. Outside of very limited circumstances, paying a non-broker-dealer for capital-raising assistance is a securities violation.
The consequences are not theoretical:
- Disgorgement of fees paid (usually with interest)
- Civil penalties at both the federal and state level
- Disqualification from future Reg D offerings under the “bad actor” rules
- Rescission rights for investors — meaning the lender may have to refund the entire investment to anyone who participated in an offering tainted by unregistered broker activity
- Personal liability for officers and managers who knowingly participated
The safe operating posture: do not pay anything that resembles a commission or transaction-based compensation to anyone who is not a registered broker-dealer. Salaried marketing employees who do not receive transaction-based compensation are generally fine. Independent finders are not, except in very limited and well-counseled circumstances. When in doubt, structure the relationship as fixed-fee compensation for services that are clearly separate from capital-raising — and document the separation carefully.
What This Means Operationally
For a private lending platform, the operational implications come down to three rules:
1. Treat every capital raise as a securities offering. Even when the answer eventually is “no, this is not a security,” the analysis has to be done deliberately, with counsel, and with documentation. 2. Map the structure to the regulatory frame at the start. Investment Company Act, Investment Advisers Act, Reg D, blue-sky laws, NASAA model act provisions — the framework is built before the offering goes live, not after. 3. Build the compensation structure inside the broker-dealer rules. Don’t pay finders, don’t pay transaction-based commissions to unlicensed parties, and treat every fee arrangement involving capital raising as something to clear with counsel before money changes hands.
These rules are not obstacles to scaling a lending platform. They are the rules under which scaled platforms operate. The lenders who build their compliance posture early avoid the rebuilds, the rescissions, and the regulatory inquiries that catch their less careful competitors.
Where Geraci LLP Helps
Geraci LLP’s banking and finance and securities teams structure capital-raising programs for private lenders and mortgage funds — exemption analysis, PPM drafting, Regulation D filings, blue-sky compliance, Investment Company Act and Investment Advisers Act analysis, broker-dealer review of compensation arrangements, and remediation when a structure was started without securities counsel and now needs to be cleaned up.
If you are raising capital for a lending platform, structuring a fund, or evaluating whether your current compensation arrangements expose you to broker-dealer issues, contact Geraci LLP.
