When private lenders and fund managers seek to raise capital, one of the most consequential decisions they face is how to structure their securities offering. Federal law requires that every offer or sale of securities either be registered with the Securities and Exchange Commission (SEC) or qualify for an exemption from registration. For most private lending professionals, the registration process is prohibitively expensive and time-consuming, making exemptions the practical path forward.
These exempt offerings, commonly known as private placements, allow fund sponsors to raise capital while maintaining operational control of their fund or investment vehicle. The three most widely used frameworks fall under Regulation D (Rules 506(b) and 506(c)) and Regulation A of the Securities Act of 1933. Each pathway carries distinct advantages, limitations, and compliance obligations that directly impact how you raise capital and who you can accept as investors.
Below, we break down each exemption framework so you can make informed decisions about which structure best fits your capital-raising strategy.
Who Qualifies as an Accredited Investor?
Before evaluating the specific exemptions, it is essential to understand who qualifies as an accredited investor under SEC guidelines. This classification is foundational because it determines which investors can participate in your offering and what verification obligations you carry as the issuer.
An individual qualifies as an accredited investor if they satisfy any one of the following criteria:
- Net worth threshold: A net worth exceeding $1 million, either individually or jointly with a spouse or spousal equivalent. The value of the investor’s primary residence is excluded from this calculation.
- Income threshold: Annual income of at least $200,000 individually (or $300,000 jointly with a spouse) for each of the two most recent years, with a reasonable expectation of reaching the same level in the current year.
- Professional certifications: Holders of certain financial licenses, including the Series 7, Series 65, or Series 82, as well as knowledgeable employees of the fund.
- Entity qualification: Certain entities possessing total assets in excess of $5 million may also qualify.
Understanding these thresholds is critical because the exemption you choose will dictate whether you can accept non-accredited investors, and if so, under what conditions.
Regulation D, Rule 506(b): The Relationship-Based Approach
Rule 506(b) is the most commonly used exemption for private fund offerings and is particularly well-suited for sponsors who raise capital through established professional networks and personal relationships.
Key Features of Rule 506(b)
No cap on capital raised. There is no limit on the total amount of capital you can raise under a 506(b) offering, making it ideal for funds of any size.
Mixed investor eligibility. You may accept an unlimited number of accredited investors alongside up to 35 non-accredited investors. Each non-accredited investor must be “financially sophisticated,” meaning they possess sufficient knowledge and experience in financial and business matters to evaluate the merits and risks of the investment. Be aware that including non-accredited investors triggers enhanced disclosure requirements, including the obligation to provide audited financial statements once the fund reaches certain asset thresholds.
Transfer restrictions. Securities sold under Rule 506(b) are restricted securities, meaning investors cannot resell them for a minimum of one year.
The Pre-Existing Relationship Requirement
The defining characteristic of a 506(b) offering is the prohibition on general solicitation and advertising. You cannot market your fund through television, radio, social media, email blasts, or any other public channel.
To discuss the specific terms of your offering with a potential investor, you must have a substantive pre-existing relationship with that person. This means you have gathered sufficient information about their financial background, investment experience, and risk tolerance to determine their suitability before presenting the opportunity. Courts and the SEC also look for a reasonable “cooling-off period” between establishing the relationship and presenting the investment opportunity.
You can certainly discuss your business activities in general terms. However, sharing specific deal terms, projected returns, or subscription details requires that pre-existing relationship to be firmly in place.
Regulation D, Rule 506(c): The Marketing-Friendly Alternative
Rule 506(c) was introduced to address a significant limitation of 506(b): the inability to advertise. If your capital-raising strategy depends on reaching a broad audience through digital marketing, industry conferences, or media outreach, Rule 506(c) provides that flexibility.
Advertising and General Solicitation Permitted
Under Rule 506(c), issuers may use any form of marketing or advertising to promote their offering. This includes social media campaigns, podcast sponsorships, conference presentations, email marketing, print advertisements, and any other channel. Any communication about the offering that reaches the general public qualifies as general solicitation, and Rule 506(c) expressly permits it.
Accredited Investors Only with Mandatory Verification
The tradeoff for the ability to advertise is a stricter investor eligibility requirement. Every investor in a 506(c) offering must be a verified accredited investor. Unlike 506(b), where investors can self-certify their accredited status, Rule 506(c) requires the issuer to take “reasonable steps” to verify accreditation.
Acceptable verification methods include:
- Reviewing the investor’s tax returns, W-2 forms, or other income documentation for the prior two years
- Obtaining bank statements, brokerage account records, or third-party appraisals to confirm net worth
- Receiving a written confirmation from a licensed attorney, CPA, registered broker-dealer, or registered investment advisor who has verified the investor’s status
- Using a third-party accredited investor verification service
This verification obligation adds administrative overhead, but it provides greater certainty that your offering remains compliant.
Regulation A (Tier 2): The Path to Non-Accredited Capital at Scale
For sponsors who want to raise capital from a broader base of investors, including non-accredited individuals, or who are pursuing a crowdfunding-style strategy, Regulation A Tier 2 offers a viable framework. However, the compliance burden is substantially greater than Regulation D.
Regulation A Tier 2 functions more like a mini public offering. It requires SEC qualification and imposes ongoing reporting obligations that mirror many aspects of a fully registered offering.
Annual Capital Limits and Investor Restrictions
Tier 2 offerings are capped at $75 million in capital raised per year. Both accredited and non-accredited investors may participate, though non-accredited investors are subject to investment limits based on the greater of their annual income or net worth.
Like Rule 506(c), Regulation A Tier 2 permits general solicitation and advertising.
SEC Qualification Process
Before accepting investors, the issuer must file Form 1-A with the SEC and receive a “Qualified” designation. The SEC reviews the filing and may issue comments requiring amendments before qualification is granted. This process can take several months and requires significant legal and accounting resources.
Financial Statement Requirements
Tier 2 issuers must include audited financial statements in their offering documents. Form 1-A requires balance sheets and related financial statements covering the two most recent fiscal year ends. The cost of obtaining audited financials can be significant, particularly for newer funds without established accounting infrastructure.
Continuous Reporting Obligations
Once qualified, Tier 2 issuers must maintain an ongoing reporting cadence with the SEC, including:
- Annual reports filed on Form 1-K
- Semi-annual reports filed on Form 1-SA
- Current event reports filed on Form 1-U for material developments
- Exit reports filed on Form 1-Z when the issuer terminates its reporting obligations
These obligations create a sustained compliance workload that issuers must budget for in both time and cost.
The Offering Memorandum: A Non-Negotiable Best Practice
Regardless of which exemption you choose, preparing a comprehensive offering memorandum (also called a private placement memorandum or prospectus) is considered industry standard and a critical risk management tool. This document serves multiple essential functions:
- Discloses the material terms and structure of the offering
- Identifies the risks associated with the investment
- Outlines investor eligibility and subscription procedures
- Provides the issuer with a documented defense against future claims of inadequate disclosure
Skipping this step to save time or legal fees is a false economy. A well-drafted offering memorandum protects both the issuer and the investors and is expected by sophisticated capital sources.
Choosing the Right Exemption for Your Fund
The right exemption depends on your specific circumstances, including your existing investor network, marketing strategy, target investor base, and willingness to take on compliance obligations. Here is a simplified comparison:
Rule 506(b)
- Capital limit: None
- Investor types: Accredited + up to 35 non-accredited (sophisticated)
- Verification: Self-certification permitted
- Advertising: Prohibited
- SEC filing: Form D (notice filing)
- Ongoing reporting: None required
Rule 506(c)
- Capital limit: None
- Investor types: Accredited only
- Verification: Mandatory third-party or documentary verification
- Advertising: Permitted
- SEC filing: Form D (notice filing)
- Ongoing reporting: None required
Regulation A Tier 2
- Capital limit: $75 million per year
- Investor types: Accredited and non-accredited (with investment limits)
- Verification: Varies
- Advertising: Permitted
- SEC filing: Form 1-A (SEC qualification required)
- Ongoing reporting: Annual, semi-annual, and current event reports required
Taking the Next Step
Whether you are launching a mortgage fund, syndicating a real estate project, or structuring a private credit vehicle, understanding these securities exemptions is foundational to building a compliant and successful capital-raising operation. The regulatory landscape continues to evolve, and working with experienced securities counsel ensures your offering documents, marketing practices, and investor onboarding procedures meet current requirements.
To discuss which exemption framework is right for your next offering, contact Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
