🎉 Happy Friday, Funds Family!

Laws change! As a result, we’re going to update each of the four core regulatory articles.

1. ⚖️The Securities Act of 1933 (2025 update)

2. ⚖️The Investment Company Act of 1940 (2025 update)

3. ⚖️The Investment Advisers Act of 1940 (2025 update)

4. ⚖️ State Investment Adviser laws (2024 version)

This one (as the subtitle suggests) is an updated version of the Securities Act of 1933. We’re going to update the other three articles in the coming weeks.

⚖️ Who does the Securities Act apply to?

The Securities Act applies to anyone selling securities. Big surprise.

But what is a security really?

Well, the Securities Act defines “Security” as follows:

To help refine the statutory definition, there are a couple of common tests.

Howey Test

The famous 🔗 Howey Test lays out the four main factors of an “investment contract” (which is a common type of security):

1. An investment of money. There must be a financial investment or commitment.

2. In a common enterprise. The investor’s fortunes are tied to those of the promoter or other investors.

3. With the expectation of profit. The investor is led to expect a return or profit from the investment.

4. To be derived from the efforts of others. The profits come primarily from the efforts of the promoter or a third party, not the investor. If the investor does a lot of work and has management control, their interest may not be considered a security. This is fact-dependent analysis.

We’re not going to get into the weeds of Howey test here. The main idea is that if you’re offering economic interests (shares, LLC interests, LP interests) to multiple passive investors, you’re likely selling securities. 📈 

There are other tests for other types of securities.

Reves Test

For example, the 🔗 Reves Test includes a test to determine whether a promissory note counts as a security. The upshot is that some types of debt count as securities and some don’t.

The factors, according to the court, include:

1. The motivations of the buyer and seller. If the seller’s purpose is to raise money for general use and the buyer’s purpose is to earn a profit, it's more likely a security. If it's for consumer or commercial purposes (e.g., buying a house, a car), it's less likely to be a security.

2. The plan of distribution of the instrument. If it’s offered and sold to a broad segment of the public, it’s more likely a security. If it's a private or limited transaction, it’s less likely.

3. The reasonable expectations of the investing public. If people reasonably believe they are investing in a security, the courts will likely treat it as one.

4. Whether there is a regulatory scheme that reduces the risk of the instrument. If there's another regulatory regime (e.g., banking laws) that protects investors, the note may not be considered a security.

A public bond offering is obviously a security. A single home mortgage secured by real estate is unlikely to be a security. There’s a messy middle where you might want to work with a lawyer to determine whether a debt instrument is or is not a security.

🤔 What do you need to do if you’re selling securities?

As a general rule, if you are selling securities, you must either:

1. Register: Register the securities with the Securities and Exchange Commission (SEC)

   or

2. Find an exemption: Sell the securities pursuant to an exemption from SEC registration.

Registering the securities means doing an IPO (or another take-public transaction) for your fund or SPV. You would need to file an S-1, S-3, or similar offering documents.

⛔️ Unless you are raising a massive investment vehicle (multiple billions of dollars), you do not want to go public. Way too burdensome and expensive. Too much lawyer time for your own good.

You want an exemption.

🏦 What exemptions from securities registration are there?

Common exemptions to SEC registration include:

• Regulation A: A public/private hybrid that has two tiers (Tier 1 for simpler raises of up to $20 million in a 12-month period and Tier 2 for more complex raises of up to $75 million in a 12-month period. This requires significant disclosure.

• Regulation S: An exemption for sales of securities outside the US.

• Regulation CF: The “crowdfunding” exemption that allows you to raise up to $5 million in a 12-month period. This has investment limits and other technical requirements.

• 4(a)(2): An exemption for transactions by an issuer of securities not involving a public offering.

While these exemptions are all well and good, most investment funds and SPVs rely on the golden child: Regulation D.

💪 What is Regulation D?

Regulation D is a magnificent law that provides a “safe harbor” for certain securities offerings.

There are multiple flavors to Regulation D. The two most typical options for investment funds and SPVs are Rule 506(b) and Rule 506(c).

They are easy to use, do not limit the amount of money you can raise, and require less lawyer time than the other options. 🕰️ 

This is a true private placement. What does that mean?

👍️ The upside of 506(b)

The beauty of 506(b) is that you can have investors self-certify whether they are an 🔗 accredited investor. All you have to do is ask (assuming you don’t have reason to believe they’re lying).

This is very simple and low friction.

👎️ The downside of 506(b)

You must have a preexisting relationship with each investor. Friends, family, etc.

Ways you cannot fundraise:

• Podcasts

• Tweets

• LinkedIn

• Fund-related speeches at conferences

• Blasting an email to a bunch of people you don’t know

• General advertising

So…what can you talk about?

In general, it’s best to avoid all mention of the fund or fundraising. You can potentially mention that you make investments, and you can talk about your views on the market, but don’t solicit investors or even suggest you’re raising money. It’s a gray, murky analysis.

We counsel clients that it’s better to be safe than sorry and advise erring on the side of saying less rather than more. 🦺 

When in doubt, ask your lawyer.

⚠️ Non-Accredited Investors in 506(b)

506(b) technically allows you to have up to 35 non-accredited investors.

Many lawyers will tell you that.

What many lawyers will forget is that, pursuant to 🔗 Section 502(b), if you accept even one non-accredited investor, you must do a bunch of extra disclosure.

Below are some of the requirements:

Basically, you need a mountain of disclosure, similar to what you would need to disclose if using Regulation A. For this reason, many funds/SPVs accept only accredited investors even if they use Rule 506(b).

506(c) is a newer creature that is becoming increasingly popular. It allows for public solicitation.

👍️ The upside of 506(c)

You don’t need to worry about speaking publicly. Go ahead and talk about your fund or SPV wherever you want. You can post about fundraising on the internet. You can go on podcasts. You can even advertise.

Even if you don’t want to solicit per se, 506(c) is helpful because you can post updates on LinkedIn (or wherever) without sheepishly getting your lawyer to approve every little post. It gives you peace of mind.

👎️ The downside of 506(c)

Unlike 506(c), you must “take reasonable steps to verify” that 100% of investors are accredited.

You can do this by getting a letter from each investor’s attorney, CPA, or financial advisor verifying accreditation. You can also hire a third party to verify the investor for you. Common providers include VerifyInvestor, InvestReady, and Parallel Markets. ☑️ 

In a pinch, you can also review their tax returns. We try to avoid this whenever possible though.

💸“Per se” accredited investor verification based on minimum investment size

On March 12, 2025, the SEC issued a ⚖️ 506(c)-related no-action letter that shook things up. In short, the letter suggests that funds/syndications may be able to assume that investors are accredited if the following requirements are met:

• Minimum Investment: The minimum check size is $200k for individuals and $1 million for entities.

• LP Representations: The LP represents that it is not financing any portion of its capital commitment.

• GP Representations: The GP represents that it isn’t aware of any untrue statements of fact by the LP regarding its accredited status.

If an LP is an entity that is accredited only because all of the LP’s owners are accredited, then each of the above applies to each of the LP’s underlying equity owners.

For larger funds with larger minimums, this may offer an easy way to use 506(c) without explicit third-party verification. However, a no-action letter isn’t exactly black-letter law, so using this approach (or deviating from the exact facts in the no-action letter) could theoretically carry some risk. Ask your lawyer!

🤷‍♂️ Which is better – 506(b) or (c)? 

In short, the benefit of 506(c) is that you can raise money publicly.

The benefit of 506(b) is that investors can self-certify they are accredited without meeting the new minimum check size thresholds.

If you’re not sure which you prefer, you can change from 506(b) to 506(c) if you change your mind mid-fundraise. ♻️ 

However, you can’t go from 506(c) back to 506(b). No putting the genie back in the bottle, toothpaste back in the tube, rabbit back in the hat, etc. You’re locked in.

Anything you have to change in the legal documents if you switch from 506(b) to 506(c)? 

Most of your legal documents will be the same whether you use 506(b) or 506(c).

The primary difference is that you should require in the subscription documents that each investor must be accredited. In addition, if you’re going to do 506(c) and plan to “verify” by having high minimum investment sizes, your attorney should add the representations and warranties (by the GP and the LPs) mentioned above.

You can also include a form accredited investor verification letter that the investor can send to their financial or legal professional. 📧 

📜 What government filings are required for Regulation D?

If you use 506(b) or 506(c), you must file a 🛠️ Form D with the SEC within 15 days of the fund’s initial closing date.

This is a simple notice filing and isn’t difficult.

Some funds/SPVs file the Form D just before their initial closing, as pre-filing allows you to disclose less information (mostly about dollars raised and the number of investors admitted).

Many states also require “blue sky” notice filings within 15 days of the initial close. This is essentially a tax you pay in each state where you sell securities to investors. 🤑 

🦹‍♂️Bad Actor Disqualification

Regulation D (where both 506(b) and 506(c) live) is not available to “bad actors” as set forth in 🔗 506(d).

Examples of “bad acts” include:

• Financial crimes

• Being restricted from being a financial professional

• Generally getting in trouble with the SEC

If you have been subject to a “disqualifying event” prohibiting you from using Regulation D, you can still sell securities, but it’s more difficult.

One common route is to use 4(a)(2). However, unlike Regulation D, 4(a)(2) doesn’t “preempt” state law. 👨‍⚖️ 

In normal person terms:

• If you use Regulation D, you generally don’t need to deal with state-specific versions of the Securities Act (other than making the Blue Sky filings discussed above).

• If you use 4(a)(2), you need to research and comply with the state-specific version of the Securities Act in each state where one of your investors is based.

Reg D is much easier than 4(a)(2).

🤡 No Bamboozling the Public 

No matter how you sell securities, Regulation D or otherwise, you can’t lie.

More specifically, 🔗Rule 10b-5 prohibits fraud, material misstatements and/or omissions, and other methods of deceit.

Court cases have held that private citizens (as well as the SEC) can go after issuers of securities (including fund/SPV managers) for these actions, which are generally referred to as securities fraud.

Please don’t commit fraud.

To avoid fraud, don’t overpromise in your marketing materials.

And, for the love of funds, 🚨never “guarantee” returns🚨 

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.