Compliance Guidelines for Fund Filings and Operations

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Private lenders, real estate developers, and other private investors often raise capital through private offerings using SEC registration exemptions such as Regulation D of the Securities Act of 1933 (“Funds”). Given that exempt securities offerings carry a higher risk of negligence, fund mismanagement, and potential fraud, regulators are paying closer attention to these offerings to ensure compliance. This article will explore some of the most frequent non-compliance issues including SEC and Blue Sky filings, accredited investor verifications, compensation regulations, ongoing securities compliance, and marketing protocols.

Required Filings

The most overlooked compliance requirement is making timely filings with the SEC and applicable states. Funds are required to comply with both federal regulations and state securities laws and regulations in the states where securities are offered and sold.

1. SEC Form D Annual Renewals. Every Fund must file their Form D within 15 days after the first sale of securities in the offering. The SEC Form D must be filed annually (before the initial Form D filing’s anniversary date) as long as the offering remains open, and you are raising capital. In addition, filing an amended Form D may be required to accurately reflect any material changes such as a change in address or officers/principals. Regardless of the Fund’s exemption, a Form D must be filed (along with any applicable amendments) to maintain compliance with the SEC. Disregarding the Form D filing requirements can lead to a loss of the Regulation D exemption. Loss of exemption is a serious issue, and if a Fund loses its exemption, then it must register the offering as a public offering or find an alternative exemption to continue raising capital. 

2. Blue Sky/State Notice Filings. Blue Sky filings are generally required to be filed within 15 days of the first sale in the state in which the investor resides, though requirements can vary significantly from state to state, and renewals, amendments, and other annual filings may be required depending on the state. An investor’s “residency” depends on the investing entity.  For entities, it’s the entity’s principal place of business and for IRAs/401Ks, it’s where the custodian is based. Keep in mind that many states have taken a more hard-lined approach to their state filing requirements. For example, many states have imposed late fees, penalties, and prohibition from sale when a Fund fails to comply with the respective state law requirements.

Accredited Investor Verification

1. 506c Funds.  For funds utilizing the 506(c) exemption, verification that all investors are “Accredited Investors” is mandatory.  For individuals, this means either (i) income of $200,000 per year ($300,000 if filing joint), and for entities, either (i) entity has at least $5,000,000 in assets, or (ii) all owners are accredited investors. This is generally accomplished by getting a letter from the investor’s CPA, financial advisor, or attorney verifying the investor’s accreditation status, or using a third-party online service. Best practice is to conduct verifications anytime an investor chooses to invest additional capital after 90 days of the initial verification.

2. 506b Funds.  Investors in a 506b fund must have “pre-existing substantive relationship” established prior to any discussions of investment opportunities. This means that prior to being approached with any Fund details, a relationship already exists with the investor so that there is a deep and meaningful understanding of the investor’s financial situation, investment experience, and risk tolerance.

Additionally, although investors are allowed to self-certify whether they are accredited Investors for 506b funds, keep in mind that the Fund is only allowed to have up to 35 non-accredited Investors, and these 35 slots are for the duration of the Fund. This means that even if a non-accredited Investor fully redeems out of the Fund, that non-accredited investor slot will be permanently gone.

Deviating from the Fund’s Offering Documents

Many fund managers are not fully aware of the terms, scope of authority, restrictions, or even business restrictions in their Fund’s offering documents. This creates significant risk because continued deviation from the offering documents could amount to an argument that the fund manager violated Rule 10b-5 of the Securities Exchange Act of 1934 or committed securities fraud.

This becomes extra problematic when the terms are so broad that the fund manager operates inconsistently. Fund activities must strictly adhere to what is explicitly outlined within the Fund’s offering documents. If your Fund documents don’t permit you to make certain types of loans, or exceed certain loan-to-values, it would be improper to do so without revising and disclosing these changes to the investors and giving them an opportunity to exit the Fund. It is very common for Funds to suddenly add new asset classes to their business model without verifying their capability to do this. By limiting activities to those specified within these documents, Fund managers ensure that they operate within the agreed-upon parameters and investor expectations, thereby reducing the risk of legal disputes and regulatory scrutiny.

It is imperative that Fund managers consult with securities counsel consistently to ensure they are fully aware of their authorities as the Fund manager, but also to make decisions that will not create additional liability in the long term. It is also crucial for Fund managers to regularly review and, if necessary, update their Fund documents to reflect current operations and strategies accurately, ensuring ongoing compliance and alignment with investor interests.

Broker-Dealer Regulations on Paying Commissions

Another frequently overlooked securities matter is broker-dealer regulations, and there are several factual scenarios that Fund managers often don’t think could trigger broker-dealer regulations. For example, paying finder’s fees, paying referral fees, operating multiple funds, or even allowing others to negotiate with investors on behalf of the Fund, are all potential situations in which state or federal securities regulators could require a broker-dealer license.

Regulations are extremely stringent when it comes to paying any fees related to fundraising activities. Only licensed individuals may receive transaction-based compensation. Flat fees for finders or referrals are narrowly permissible under certain circumstances, provided that the fees are paid regardless of whether the referred investor ultimately invests in the Fund. If a Fund manager pays compensation to an unlicensed individual for referring an investor and negotiating the terms of the investment, the penalties can include SEC or state enforcement action, monetary penalties, investor lawsuits, rescission, and loss or return of invested capital. State regulators and the SEC strictly prohibit unlicensed broker-dealer activity, and the SEC has increased its enforcement efforts against unlicensed broker-dealer activity in exempt securities offerings. For these reasons, Fund managers should consult with a securities attorney before any form of commission, referral fee, or finder’s fee is paid for referring investors.

Investment Company Act & Investment Adviser Act Regulations

For Funds that are solely designed to be originating, funding, and/or making loans secured by real estate for its own account, there is a strong argument that the Fund and its Fund manager should not need to address compliance with the Investment Advisers Act and the Investment Company Act—meaning the Fund manager would not have to file as a private fund adviser or register as a registered investment adviser. However, if the Fund were to buy or sell securities (including purchasing marketable securities, trading loans in such a manner that the trade constitutes a sale of securities, or buy/sell exempt securities), these Investment Company and Investment Adviser requirements would be triggered, and the Fund or Fund manager would have to take the necessary steps to remain compliant from a regulatory standpoint.


1. Securities Disclosures and Disclaimers.  The Fund’s marketing materials must include appropriate disclosures and disclaimers to provide investors with accurate and comprehensive information regarding the fund’s objectives and risks.

2. Accuracy and Honesty. Marketing materials should refrain from making misleading statements or guarantees of returns to avoid potential regulatory violations. Compliance also extends to the use of language that accurately represents the Fund’s terms and investment strategies, steering clear of ambiguous or exaggerated claims. Resources should also be cited if any informational metrics are used from another source.

3. Prohibited Terms: Best practice is to avoid using terms like “guarantee”, “guaranteed returns”, or “risk-free.” Additionally, you should never put yourself out there as giving investment advice unless you are appropriately licensed with FINRA or registered with the SEC.

By adhering to these guidelines, Fund managers can ensure regulatory adherence, build investor trust, and maintain the integrity of their Fund operations.


The heightened scrutiny by regulators underscores the importance of understanding and addressing common non-compliance issues. Fund managers should retain experienced securities counsel and take a proactive approach to securities compliance by regularly conferring with securities counsel and establishing an ongoing dialogue. This will ensure improved compliance with securities regulations, reduce potential liability and enforcement actions, and improve investor relations, ultimately fostering a more trustworthy and stable investment environment.

Please contact the Corporate and Securities team at Geraci LLP for all of your fund compliance questions.

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