While private lenders primarily operate in real estate and business finance, many also raise capital from investors to fund their lending operations. The moment you solicit funds from others — whether through a fund, pooled investment vehicle, or fractional loan interests — federal securities laws come into play.
The U.S. Securities and Exchange Commission (SEC) regulates these investment activities, and non-compliance can result in serious legal and financial consequences. Below are the key SEC rules and regulations private lenders need to understand.
- Securities Act of 1933
This act governs how securities (including promissory notes, fractional loan interests, and fund shares) are offered and sold in the U.S.
Rule to Know: Regulation D (Reg D)
Most private lenders raising capital use Reg D to avoid registering securities with the SEC. The two most commonly used exemptions are:
Rule 506(b):
- Allows raising unlimited capital
- No general solicitation (no advertising or public promotion)
- Investors must be accredited, though up to 35 non-accredited investors are allowed (with extensive disclosure)
- Must file a Form D with the SEC within 15 days of the first sale
Rule 506(c):
- Permits general solicitation (e.g., advertising, social media, webinars)
- All investors must be accredited
- Issuer must take reasonable steps to verify accredited status (bank records, tax returns, third-party verification)
Important: Many private lenders mistakenly believe that simply having a private relationship exempts them from securities laws. The SEC takes a strict view — if you’re pooling investor money and offering a return, it’s likely a security.
- Investment Company Act of 1940
This governs entities that pool investor funds for the purpose of investing in securities, which includes private lending funds in certain cases.
Rule to Know: Section 3(c)(1) or 3(c)(7) Exemptions
Most private lending funds avoid regulation under this act by using:
- Section 3(c)(1): Fund limited to 100 beneficial investors
- Section 3(c)(7): Unlimited investors, but all must be qualified purchasers (>$5M in investments)
Key Tip: Even exempt funds must operate like a professional investment vehicle — clear PPMs, audited financials, and strong governance.
- Investment Advisers Act of 1940
This act governs anyone who is advising others on investing in securities — including managing a private lending fund.
Do You Need to Register?
You may need to register as an Investment Adviser with the SEC or your state unless you qualify for an exemption. Common exemptions include:
- Private Fund Adviser Exemption (SEC): Advisers to private funds with < $150 million AUM
- State Exemptions: Vary by state, some require registration even at low AUM levels
Caution: Managing a private lending fund may count as “investment advice” if you select and manage loan investments on behalf of pooled investors.
- Anti-Fraud Provisions (Rule 10b-5)
Regardless of exemptions, all securities offerings are subject to the SEC’s anti-fraud rules under the Securities Exchange Act of 1934.
You must:
- Provide full and fair disclosure of all material facts
- Avoid any misrepresentation or omission
- Deliver a detailed Private Placement Memorandum (PPM) or Offering Circular
- Disclose risks, conflicts of interest, and fees
Even honest mistakes can be treated as securities fraud under SEC scrutiny — precision in documentation is essential.
- Blue Sky Laws (State Securities Laws)
In addition to SEC rules, state regulators enforce their own securities laws. Most Reg D offerings require a Form D notice filing in each state where investors reside.
Geraci LLP helps clients:
- File required state notice filings
- Pay applicable state fees
- Understand unique state rules (e.g., CA’s Commissioner’s Regulations, NY’s Martin Act)
Practical Examples of SEC Triggers for Private Lenders
| Forming a mortgage fund | Securities offering — Reg D 506(b) or 506(c) |
| Raising money from friends/family to lend | Likely a security; requires exemption and disclosure |
| Selling fractional loan interests | May be deemed securities by the SEC |
| Charging fees to manage investor money | Triggers Investment Adviser Act registration |
| Advertising investment returns online | General solicitation — requires 506(c) and accredited investor verification |
Work with Experts to Stay Compliant
The SEC’s jurisdiction begins the moment private lenders raise capital from others. Misclassifying your activities or relying on informal advice could expose you to regulatory action, investor lawsuits, or worse.
Geraci LLP provides industry-leading counsel to private lenders on:
- SEC compliance and Reg D offerings
- PPM and offering document preparation
- Investment adviser and fund formation issues
- Exemption analysis and investor qualification
- Ongoing securities law compliance
