Private lenders, real estate developers, and investors who raise capital through private offerings rely heavily on registration exemptions under the Securities Act of 1933—most commonly Regulation D. Because exempt offerings carry elevated risk of mismanagement and potential fraud, regulatory bodies are devoting significantly more attention to fund compliance. This article examines the most common areas where fund managers fall short, including SEC and Blue Sky filings, accredited investor standards, broker-dealer rules, ongoing operational compliance, and marketing restrictions.
Required Regulatory Filings
Fund managers frequently underestimate the importance of timely and accurate filings with both federal and state regulators. Funds must satisfy obligations at both levels simultaneously.
SEC Form D Filings and Annual Renewals
Every private fund utilizing a Regulation D exemption must file a Form D within 15 days of its first sale of securities. This is not a one-time obligation. As long as the offering remains open and the fund continues to raise capital, an updated Form D must be filed annually before the anniversary date of the initial filing.
Material changes—such as a change in business address, principals, or officers—require an amended Form D submission as well. Failure to maintain Form D compliance can result in the loss of the Regulation D exemption entirely. That outcome is severe: a fund that loses its exemption must either register the offering as a public offering or locate an alternative exemption before continuing to accept new capital.
Blue Sky and State Notice Filings
In addition to federal requirements, funds must comply with the securities laws of each state where investors reside. These Blue Sky filings are typically required within 15 days of the first sale to an investor in a given state, though the specific rules—including renewal cycles, amendment requirements, and annual obligations—vary considerably from jurisdiction to jurisdiction.
Determining an investor’s state of residence depends on the nature of the investing entity. For business entities, residency is determined by the entity’s principal place of business. For IRAs and 401(k) plans, it is determined by the custodian’s location. Many states have adopted aggressive enforcement postures, including late fees, monetary penalties, and suspension of sales activity for non-compliance.
Accredited Investor Verification Standards
The nature of a fund’s accredited investor verification obligations depends on which Regulation D exemption the fund employs.
Rule 506(c) Funds
Funds operating under the 506(c) exemption may engage in general solicitation and advertising, but they bear a heightened burden: they must take reasonable steps to verify that every investor qualifies as an accredited investor. For individuals, this means annual income exceeding $200,000 (or $300,000 jointly with a spouse) or a net worth exceeding $1 million excluding the primary residence. For entities, accreditation requires either at least $5 million in assets or all owners individually qualifying as accredited investors.
Verification is typically accomplished through written confirmation from the investor’s CPA, financial advisor, or attorney, or through a qualified third-party verification service. Best practice is to re-verify investors who contribute additional capital more than 90 days after their initial verification.
Rule 506(b) Funds
Investors in 506(b) funds are permitted to self-certify their accreditation status, but the fund must have a pre-existing substantive relationship with each investor before any investment opportunity is discussed. This relationship must reflect a meaningful understanding of the investor’s financial situation, investment experience, and risk tolerance—it cannot be established simultaneously with the pitch.
One critical limitation: 506(b) funds may have no more than 35 non-accredited investors, and this count is permanent for the life of the fund. Even if a non-accredited investor fully exits the fund, that slot is consumed and cannot be reused.
Operating Within the Fund’s Offering Documents
Many fund managers do not have a complete working knowledge of their own offering documents—including the fund’s stated purposes, investment restrictions, and the scope of the manager’s authority. This creates serious legal exposure.
Consistently operating outside the boundaries of the offering documents can amount to a violation of Rule 10b-5 under the Securities Exchange Act of 1934, and in serious cases, may constitute securities fraud. Common examples include making loan types or exceeding loan-to-value ratios not authorized by the fund documents, or adding new asset classes without first amending the documents and providing investors an opportunity to exit.
Fund managers must treat their offering documents as binding operational guidelines, not aspirational frameworks. Before taking any action that might fall outside those documents, fund managers should consult with securities counsel, revise the documents if necessary, and provide investors with full disclosure of any material changes.
Ongoing review of offering documents is not optional—it is a regulatory expectation. Fund managers who allow their documents to drift out of alignment with actual operations create both investor relations problems and regulatory liability.
Broker-Dealer Registration and Compensation Restrictions
The rules governing who may receive compensation for fundraising activities are among the most strictly enforced in securities law, and the fact patterns that trigger these rules are more common than many fund managers realize.
Paying finder’s fees, referral fees, or any transaction-based compensation to an unlicensed person in exchange for introducing investors is potentially a broker-dealer violation. Allowing unlicensed individuals to negotiate investment terms on behalf of the fund also raises this concern. Running multiple funds simultaneously can itself attract regulatory scrutiny regarding whether the fund manager is acting as an unregistered broker-dealer.
Flat referral fees that are paid regardless of whether a referred investor actually invests are narrowly permissible under some circumstances, but these arrangements must be carefully structured. If a fund manager pays an unlicensed person transaction-based compensation for investor referrals, the consequences can include SEC enforcement actions, state regulatory sanctions, monetary penalties, investor rescission claims, and disgorgement of invested capital.
No compensation of any kind related to fundraising should be paid without prior review by a securities attorney.
Investment Company Act and Investment Advisers Act Considerations
For funds whose sole activity is originating, funding, and holding real estate-secured loans for their own account, there is a strong argument that neither the Investment Company Act nor the Investment Advisers Act applies—meaning the fund manager would not need to register as a private fund adviser or a registered investment adviser.
However, this safe harbor disappears if the fund begins to engage in buying or selling securities, including purchasing marketable securities, trading loans in ways that constitute securities transactions, or buying and selling exempt securities. Fund managers who are considering any of these activities must assess their compliance obligations under both Acts before proceeding and consult with qualified securities counsel accordingly.
Marketing Compliance
Investor-facing marketing materials carry their own compliance requirements that cannot be overlooked.
Required Disclosures
All marketing materials must include appropriate disclosures and disclaimers that provide investors with an accurate, complete picture of the fund’s objectives, risks, and investment strategy. Generic disclaimers are not sufficient—materials must be tailored to the fund’s actual activities.
Accuracy Requirements
Marketing materials must be factually accurate and must not contain statements that could mislead investors. Return projections must be grounded in reasonable assumptions, not optimistic expectations. Any statistics or metrics sourced from third parties must be properly cited. Ambiguous or exaggerated claims expose the fund to regulatory action even if there was no intent to deceive.
Prohibited Terms and Investment Advice
Terms such as “guaranteed,” “guaranteed returns,” and “risk-free” should not appear in any fund marketing materials under any circumstances. Additionally, fund managers who are not licensed with FINRA or registered with the SEC as investment advisers must not position themselves as providing investment advice—even informally.
Conclusion
The current regulatory environment demands that fund managers take a proactive, ongoing approach to compliance rather than treating it as a one-time setup task. The risks of non-compliance extend beyond fines and enforcement actions to include investor lawsuits, loss of fundraising ability, and reputational damage that can be difficult to reverse.
Fund managers are well-served by maintaining a consistent dialogue with experienced securities counsel and by scheduling periodic compliance reviews as a standard part of fund operations. For fund-level compliance questions or assistance structuring an offering that meets current regulatory standards, contact the Corporate and Securities team at Geraci LLP at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
