Running a private lending fund requires far more than originating quality loans. The moment you raise capital from outside investors, you enter the domain of federal and state securities law — a regulatory environment with specific filing requirements, investor qualification standards, operational rules, and marketing restrictions that every fund manager must understand and actively manage.
This article provides a comprehensive overview of the key securities compliance considerations for operators of Regulation D debt funds, including filing obligations, investor qualification frameworks, ERISA considerations, capital raising rules, fund activities, and licensing requirements.
Federal and State Filing Obligations
Form D: The Federal Notice Filing
Once your fund has received its first signed subscription agreement from an investor, a federal filing obligation is triggered. The Form D is a notice filing submitted to the Securities and Exchange Commission (SEC) alerting the agency that the fund is selling securities — specifically, the membership interest or limited partnership interest in the fund. The filing deadline is within 15 days of the first sale.
Best practice is to file the Form D before that 15-day window closes rather than waiting until the last possible moment. After the initial filing, Form D must be renewed annually for as long as the offering remains open and the fund is actively raising capital. The renewal should occur on or before the anniversary date of the original filing. Amendments to Form D are also required whenever there is a material change to the information previously filed.
Blue Sky Filings: State-Level Compliance
In addition to the federal Form D, funds must file notice filings with the applicable state securities regulators — commonly called “blue sky” filings. The governing rule is the state of residence of each investor:
- Individuals: The state where the investor maintains their primary residence
- LLCs and entities: The state where the entity has its principal place of business
- IRAs and 401(k) plans: The state where the custodian is located
The same 15-day deadline generally applies at the state level. Most states accept online filings, though some — including New York — require advance notice and involve more procedural complexity than the standard online submission. State filing renewal timelines vary, and ongoing annual filings may be required. Lenders with investors in multiple states should work with counsel to maintain a current compliance calendar for all active jurisdictions.
Rule 506(b) Versus Rule 506(c): Choosing the Right Exemption
The most significant structural decision for any Reg D debt fund is whether to operate under Rule 506(b) or Rule 506(c). The two versions differ primarily on investor verification requirements and marketing permissions.
Rule 506(b) Funds
Under Rule 506(b), a fund may raise an unlimited amount of capital without requiring independent verification that investors are accredited. Investors may self-certify their accredited status. However, there is a critical trade-off: the fund must have a pre-existing substantive relationship with each investor before discussing or offering the investment.
“Substantive” means the fund manager has genuinely gotten to know the prospective investor — their financial background, risk tolerance, and professional history — prior to any fund-specific conversations. This relationship typically requires multiple meaningful interactions over time. Conducting those conversations and then immediately presenting the investment opportunity is not sufficient.
Rule 506(b) funds may accept up to 35 non-accredited investors, provided each is financially sophisticated. This limit applies for the life of the fund — if a non-accredited investor exits, the slot is permanently consumed. Additionally, any fund with even one non-accredited investor will be required to obtain audited financial statements once assets under management reach $20 million.
Under Rule 506(b), public advertising and general solicitation are prohibited. The fund may not post fund-specific details on social media, advertise an investment opportunity on LinkedIn, or otherwise market the fund to individuals with whom no prior relationship exists.
Rule 506(c) Funds
Rule 506(c) permits general solicitation and public advertising, which makes it more accessible for fund managers building brand awareness or reaching new investors through digital channels. The trade-off is that every investor who enters the fund must be independently verified as an accredited investor.
Verification may be accomplished by obtaining a certification letter from a licensed CPA, attorney, registered investment adviser, or broker-dealer confirming that the investor meets the accredited investor standard — $200,000 annual income ($300,000 joint), or $1 million in net assets excluding a primary residence. Third-party verification services are also available. Managers cannot rely solely on investor self-certification under 506(c).
Marketing under 506(c) is broadly permitted, but certain language must be avoided in all materials: terms like “guaranteed returns,” “risk-free,” or similar phrases that imply the absence of investment risk are prohibited. Fund marketing materials — including pitch decks, emails, and social media posts — should include appropriate securities disclosures and disclaimers at all times.
ERISA Considerations for Fund Managers
Employer-Sponsored Plans Versus Self-Directed IRAs
Retirement account investors fall into two regulatory categories that require different treatment. Employer-sponsored plans — 401(k) plans, pension plans, or any plan with employees — are governed by ERISA and often have restrictions on investing in alternative assets. These plans generally require custodial approval before they can participate in a private fund.
Solo self-directed IRAs, solo 401(k) plans, and other plans without employees are governed by IRC Section 4975 rather than ERISA. Despite this distinction, the practical consequences of the two regulatory regimes are nearly identical with respect to prohibited transactions, and they should be treated consistently.
The 25% Threshold
The critical compliance trigger for ERISA purposes is when plan assets — meaning capital from IRAs, 401(k)s, and similar retirement accounts — exceed 25% of the fund’s total equity. Once that threshold is crossed, the fund itself may be treated as a “plan” under ERISA, and the fund manager will be deemed a fiduciary. This triggers the prohibited transaction rules under ERISA and IRC Section 4975.
For debt funds, the practical impact is significant. Prohibited transaction rules can affect how the fund accounts for origination fees, servicing fees, and other fee income received by the manager. Fund managers approaching the 25% threshold should contact counsel immediately to assess their position and determine what structural adjustments may be necessary.
Self-Dealing Caution for Principals
Fund managers and their spouses, lineal ancestors, and lineal descendants should not invest their personal retirement accounts into the fund. Doing so creates self-dealing issues and prohibited transaction concerns that affect the individual’s IRA rather than the fund itself. If a principal wishes to invest in the fund, the preferred method is through the general partner entity or another non-retirement vehicle.
Capital Raising and Broker-Dealer Compliance
One of the most common compliance missteps private fund managers encounter involves compensating individuals who help raise capital. The fundamental rule: no transaction-based compensation may be paid to anyone who is not licensed with FINRA or the SEC.
This means a fund cannot pay a person a commission, fee, or other compensation that is contingent on, or measured by, the amount of capital they help bring into the fund — unless that person holds the required license. Paying an unlicensed individual $10,000 because they introduced an investor who committed $500,000 to the fund is a securities violation regardless of how it is characterized.
The permissible alternative is a flat-fee referral or introduction payment. This fee is paid for the introduction itself — not for whether the investor ultimately subscribes or how much they invest. Consistency is important. The same flat fee structure should apply to all comparable referral arrangements.
Registered investment advisers (RIAs) make attractive capital-raising partners because they are licensed and their compensation is paid by their clients rather than the fund. Engagement with managing broker-dealers or placement agents is also an option but warrants careful review of the agreement terms, as these arrangements can contain provisions that are unfavorable to the fund.
Fund Activities: Staying Within the Four Corners
Every Reg D debt fund’s Private Placement Memorandum (PPM) describes what investment activities the fund is authorized to undertake. This is sometimes called the “four corners” rule — the fund’s activities must stay within what the PPM says they are.
For most private lending debt funds, authorized activity is making or acquiring mortgage loans secured by real property. The PPM may reference personal property collateral, but only as an equity pledge securing the real property loan — not as authorization to make standalone equipment loans or other personal property financings.
Departing from the PPM’s described activities creates serious legal risk. Investing in marketable securities (stocks, bonds, Treasury instruments, CMBS, or other funds) will likely cause the fund to be treated as an investment company under the Investment Company Act of 1940 and the fund manager to be treated as an investment adviser requiring SEC registration.
On the question of dry powder: cash in depository accounts and savings accounts is acceptable while awaiting deployment. Money market funds are not — they constitute investment in a security and can trigger the 40 Act analysis.
Whole and fractional loan sales to investors are an area requiring additional caution. If the buyer is a high-net-worth individual or trust deed investor who is relying on the fund manager’s underwriting and expertise rather than conducting independent due diligence, the sale may constitute a securities transaction. Sales to institutional loan buyers or aggregators who conduct their own underwriting, apply their own credit guidelines, and make independent evaluations are generally not considered securities transactions.
Licensing Requirements for Lending Activity
Operating a debt fund also requires attention to state lending licensing requirements. For business purpose loans — defined as loans not made for personal, family, or household purposes — the following states require licensing regardless of collateral type: California, Arizona, Nevada, North Dakota, South Dakota, and Vermont.
If the fund makes loans secured by one-to-four residential properties, four additional states require licensing: Utah, Oregon, Minnesota, Idaho, and Virginia.
For loans secured by owner-occupied properties, Iowa, Kansas, and Washington have licensing requirements.
Certain states offer broker-arranged exemptions. In California, loans arranged by a licensed DRE broker can be funded by an unlicensed fund. Arizona provides an exemption for commercial property loans of $250,000 or more, and for broker-arranged loans where the fund has no Arizona office. Oregon has a similar broker-arrangement exemption.
Funds that also broker loans — rather than only originate for their own portfolio — face additional licensing requirements. Most of the states listed above require a broker’s license to collect a brokerage fee, and several East Coast states require a broker’s license even where a lender’s license is not required.
Fund Documentation, Side Letters, and Amendments
Fund managers should review and refresh their PPM every two to three years to ensure the document accurately reflects current fund operations and any changes in applicable law. Certain amendments require investor consent; others require only notice to existing investors.
Side letters — arrangements offering individual investors modified economics, reduced fees, or enhanced liquidity rights — must be handled consistently and with a defensible rationale. Offering a seed investor a preferred rate or reduced management fee is common and generally acceptable when based on investment size or timing. Side letters should not be issued arbitrarily or in a manner that creates unfair treatment among similarly situated investors.
Conclusion
Operating a Reg D debt fund compliantly requires ongoing attention to a layered set of federal and state obligations. From Form D filings and blue sky compliance, to investor verification, ERISA thresholds, capital raising restrictions, and lending licenses, the compliance framework is detailed and consequential. Missteps in any of these areas carry real legal and financial risk.
Geraci LLP’s corporate and securities team has extensive experience structuring, documenting, and maintaining compliance for private lending funds of all sizes. To discuss your fund’s structure or compliance posture, contact us at (949) 403-3488 or visit us at 90 Discovery, Irvine, CA 92618.
