By Anthony Geraci, Esq. | Founder, Geraci LLP Published: September 2020 | Updated: January 2025
Private lenders and real estate fund managers seeking to scale operations through investor capital face a critical strategic decision early in the fundraising process: which securities exemption framework provides the optimal balance of regulatory compliance, investor access, marketing flexibility, and operational efficiency?
The federal securities laws require all offers and sales of securities to be registered with the Securities and Exchange Commission unless a specific exemption applies. Full SEC registration—the process public companies undergo when issuing stock—involves substantial costs (often $500,000-$2,000,000+), extensive ongoing disclosure obligations, and regulatory burdens entirely impractical for emerging private lending funds.
Fortunately, Congress and the SEC have established several securities exemptions specifically designed for private capital raises. These exemptions allow fund managers to access investor capital without the full registration process, provided they satisfy specific requirements regarding investor qualifications, offering sizes, disclosure standards, and marketing restrictions.
This guide examines the primary securities exemptions available to private lenders and fund managers in 2025, with particular focus on Regulation D Rule 506(b), Rule 506(c), and Regulation A Tier 2—the three frameworks most commonly utilized in the private lending industry.
The Securities Law Framework: Why Exemptions Matter
Understanding why securities exemptions are necessary provides essential context for evaluating which exemption best suits your capital raising strategy.
What Constitutes a “Security”
Under federal securities laws, broadly speaking, any investment where individuals contribute money to a common enterprise with expectations of profits derived primarily from the efforts of others constitutes a “security.” This definition—established in the landmark SEC v. W.J. Howey Co. case—captures virtually all private lending fund interests.
When investors contribute capital to a mortgage fund, mezzanine lending vehicle, or other private debt fund, they’re purchasing securities. The fund manager pools investor capital, deploys it into loans, and distributes returns to investors based on the fund’s overall performance. Investors’ profits derive from the manager’s loan origination and portfolio management efforts, clearly satisfying the Howey test.
This means fund offerings must either be registered with the SEC or qualify for a securities exemption. Given registration’s impracticality for most private funds, exemption selection becomes the critical compliance decision.
The Registration Alternative: Why It’s Impractical
Full SEC registration involves:
For emerging private lending funds raising $5-50 million, registration costs consume an unacceptable percentage of capital and create operational burdens incompatible with agile lending operations.
Regulation D: The Private Placement Workhorse
Regulation D, adopted by the SEC in 1982 and amended periodically since, provides the most widely-used securities exemptions for private fund offerings. Within Regulation D, Rules 506(b) and 506(c) offer distinct approaches with different trade-offs.
Rule 506(b): The Traditional Private Placement
Rule 506(b) represents the traditional private placement exemption, predating the 2012 JOBS Act amendments that created Rule 506(c).
- Individuals with annual income exceeding $200,000 ($300,000 jointly with spouse) in each of the two most recent years with reasonable expectation of same for the current year
- Individuals with net worth exceeding $1 million (excluding primary residence)
- Entities with assets exceeding $5 million (not formed specifically to purchase the securities)
- Certain institutional investors, registered investment advisers, and other specified categories
Up to 35 Non-Accredited Sophisticated Investors: Unlike 506(c), Rule 506(b) permits up to 35 non-accredited investors provided they’re “sophisticated”—possessing sufficient knowledge and experience in financial and business matters to evaluate the investment’s merits and risks.
Preemption of State Securities Registration: Rule 506(b) offerings are “covered securities” that preempt state securities registration requirements, though states may still require notice filings and fees.
Rule 506(b) works best for “friends and family” raises, where fund managers are raising capital from existing relationships: past business associates, professional contacts, family members, and referrals from trusted sources. The exemption allows including non-accredited investors (useful for smaller investors who may not meet wealth thresholds) while avoiding accredited investor verification burdens.
However, the general solicitation prohibition creates significant limitations. Fund managers cannot:
- Advertise offerings through websites, social media, email blasts, or other public channels
- Promote funds at industry conferences to audiences including non-relationship attendees
- Engage public relations firms to generate offering awareness
- Utilize online fundraising platforms or broker-dealer networks accessing unknown investors
These restrictions make 506(b) increasingly impractical in the digital marketing era, where competitive fundraising requires broad visibility and multi-channel investor outreach.
Rule 506(c): The General Solicitation Alternative
In 2013, pursuant to the JOBS Act, the SEC adopted Rule 506(c), creating a new exemption path allowing general solicitation in exchange for enhanced investor verification.
Mandatory Accredited Investor Verification: Issuers must take “reasonable steps to verify” that all investors are accredited. The SEC provides non-exclusive methods for satisfying this requirement:
- Income Verification: Review IRS forms (W-2s, 1099s, tax returns) from the two most recent years
- Net Worth Verification: Review bank statements, brokerage statements, credit reports, appraisals, tax assessments, and certified third-party reports
- Written Confirmation from Specified Professionals: Obtain written confirmation from the investor’s attorney, CPA, registered investment adviser, or registered broker-dealer that such professional has verified accredited investor status within the prior three months
- Prior Accredited Investor Status: For existing investors verified as accredited in prior offerings within the past five years, confirm no reason to question continued accredited status
- Third-Party Verification Services: Engage SEC-registered verification services
Preemption of State Securities Registration: Like 506(b), Rule 506(c) offerings are covered securities preempting state registration.
Rule 506(c) has become the dominant exemption for private lending fund offerings, particularly for managers seeking to scale beyond immediate networks. Over 70% of fund offerings structured by Geraci LLP utilize Rule 506(c), driven by several factors:
The primary limitation involves excluding non-accredited investors. However, for most private lending funds targeting institutional minimums ($50,000-$250,000+), this rarely presents significant constraints, as investors capable of meeting minimums typically satisfy accredited investor thresholds.
Regulation A Tier 2: The Mini-IPO Alternative
Regulation A Tier 2, substantially revised in 2015, provides an alternative exemption framework often characterized as a “mini-IPO” allowing public offerings with reduced compliance burdens compared to full registration.
- Non-accredited investors may invest up to 10% of the greater of annual income or net worth
- No limits apply to accredited investors
Regulation A Tier 2 suits specific fund manager profiles:
Experienced Sponsors with Institutional Infrastructure: The qualification process, ongoing reporting, and audited financial requirements demand sophisticated legal, accounting, and compliance infrastructure. Emerging managers often lack resources to navigate Regulation A effectively.
Despite these advantages, Regulation A involves significant challenges:
Regulation A works best for crowdfunding platforms, fintech companies, and consumer-facing investment products targeting mass-market retail investors—not typical institutional-minimum private lending funds.
Comparative Analysis: Selecting Your Optimal Exemption
Choosing among these exemptions requires analyzing several factors specific to your fund strategy and sponsor capabilities.
Factor 1: Investor Profile and Accessibility
If your target investors include non-accredited individuals: Rule 506(b) (if maintaining pre-existing relationships) or Regulation A Tier 2 (if seeking broad retail access) are your only federal options allowing non-accredited participation.
If targeting exclusively accredited investors: Rule 506(c) typically provides optimal marketing flexibility and compliance simplicity.
If requiring minimum investments exceeding $100,000: Your investor pool will almost certainly be entirely accredited, making 506(c)’s accredited-only requirement inconsequential.
Factor 2: Marketing Strategy and Investor Acquisition
If raising capital exclusively from existing relationships and referrals: Rule 506(b) works adequately and avoids verification requirements.
If requiring digital marketing, industry conference presentations, or broker-dealer platforms: Rule 506(c) or Regulation A are necessary, as 506(b)’s general solicitation prohibition is disqualifying.
If seeking mass-market retail investor access: Only Regulation A Tier 2 permits the broad public offerings necessary for retail crowdfunding models.
Factor 3: Cost and Resource Constraints
Limited legal/compliance budget ($50,000-$100,000 for offering): Regulation D (either 506(b) or 506(c)) provides cost-effective compliance.
Substantial budget and institutional infrastructure ($300,000+ for offering): Regulation A becomes feasible, though remains expensive relative to Regulation D.
Factor 4: Timeline and Speed to Market
Immediate capital needs (wanting to close within 30-60 days): Regulation D offerings can launch quickly with proper documentation—Form D filings occur after first sales.
Patient capital raise (6-12 month timeline acceptable): Regulation A’s qualification process fits this timeline but still involves substantial delay.
Factor 5: Competitive Positioning
Operating in competitive fundraising environment: Regulation D 506(c)’s marketing permissions increasingly represent table stakes for sophisticated fund managers. Limiting yourself to 506(b) creates competitive disadvantage against managers leveraging digital marketing.
Practical Implementation Considerations
Beyond exemption selection, successful offerings require careful attention to implementation details.
Documentation Requirements
Regardless of chosen exemption, fund offerings require comprehensive documentation:
Private Placement Memorandum (Regulation D): Detailed disclosure document describing fund strategy, management team, fee structures, risk factors, subscription procedures, and terms. While not legally required for Rule 506 offerings, industry practice universally includes robust PPMs for liability protection.
Operating Agreement (for LLCs) or Limited Partnership Agreement (for limited partnerships): Governing document establishing fund structure, management rights, distributions, investor rights, and operational procedures.
Offering Statement on Form 1-A (Regulation A): Comprehensive filing subject to SEC review and qualification.
State Securities Filings
While both Regulation D 506 offerings and Regulation A Tier 2 offerings preempt state securities registration, they don’t eliminate all state involvement:
Managers raising capital nationwide should budget for notice filings in 10-30 states depending on investor distribution.
Verification Procedures for Rule 506(c)
If utilizing Rule 506(c), establish systematic verification processes:
Ongoing Compliance
Post-offering compliance varies by exemption:
- Deliver updated PPMs when material changes occur
- File amended Forms D for material offering term changes
- Comply with state notice filing requirements
- Maintain investor communications and reporting per operating agreement terms
- File annual reports (Form 1-K) within 120 days of fiscal year end
- File semi-annual reports (Form 1-SA) within 90 days of half-year end
- File current reports (Form 1-U) for material events
- Continue EDGAR filing system compliance
Conclusion: Strategic Exemption Selection as Competitive Advantage
Securities exemption selection represents a foundational strategic decision affecting fundraising capacity, operational flexibility, and compliance burdens throughout a fund’s lifecycle. While Regulation D Rule 506(c) has emerged as the dominant framework for most private lending funds in 2025, the optimal choice depends on specific sponsor circumstances, investor targeting, and long-term strategic objectives.
Fund managers should evaluate exemptions comprehensively, considering not only immediate fundraising needs but also anticipated future raises, desired investor base evolution, and willingness to accept ongoing compliance obligations. Working with experienced securities counsel from fund inception ensures exemption selection aligns with business strategy while maintaining robust compliance protecting against SEC or state enforcement.
The private capital markets continue evolving, with periodic SEC rulemaking adjusting exemption frameworks, disclosure requirements, and verification procedures. Staying ahead of these developments—anticipating rather than reacting to regulatory changes—positions fund managers for sustainable growth while competitors scramble to achieve compliance.
For guidance on securities exemption selection, offering document preparation, verification procedure implementation, or ongoing compliance obligations, contact Geraci LLP’s Corporate and Securities team. Our attorneys structure hundreds of fund offerings annually, providing practical guidance navigating federal and state securities requirements while optimizing capital raising strategies.
About the Author: Anthony Geraci is the founder of Geraci LLP, a law firm specializing in private lending, fund formation, and securities compliance for the real estate finance industry. With over 15 years of experience structuring private fund offerings under Regulation D, Regulation A, and other exemptions, Anthony has guided fund managers raising billions in investor capital while maintaining SEC and state securities compliance.
Geraci LLP provides comprehensive fund formation and securities compliance services including exemption analysis, offering document preparation, SEC and state filings, ongoing compliance counsel, and SEC examination defense. The firm serves clients nationwide from offices in California and Arizona.
