Raising from investors: Reg D / Reg S compliant

Raising money is the moment securities law gets real — and there are actually two separate bodies of law in play. One governs the offering (how you sell interests without registering them); the other governs the fund itself (how you avoid being regulated as an investment company). Both have to line up, and the choices interact. Done right, it is routine. Done wrong, it can unwind the raise.

Part one: exempting the offering (Regulation D)

A private fund sells securities (the LP interests) under an exemption from SEC registration. The workhorse is Regulation D, and the choice between its two rules shapes your entire fundraising behavior.

Rule 506(b) — the traditional private raise

• No general solicitation. You cannot publicly advertise the fund. You raise through your existing network and pre-existing relationships.
• Investors: unlimited accredited investors, plus up to 35 non-accredited but financially sophisticated investors (most funds simply take accredited only).
• Verification: investors may self-certify accredited status through the subscription questionnaire — you are not required to independently verify, though you cannot ignore red flags.
• Best for: managers with a real network who do not need to advertise — the most common choice.

Rule 506(c) — the advertised raise

• General solicitation allowed. You may publicly market the fund — website, social media, events, press.
• Investors: accredited investors only.
• Verification: the catch — you must take reasonable steps to verify each investor is actually accredited. Self-certification is not enough; you collect tax returns, brokerage statements, or a third-party verification letter (from a CPA, attorney, or a verification service).
• Best for: managers building a public brand or raising from beyond their immediate network — at the cost of the verification burden and a permanent public marketing trail.

Regulation S — the offshore companion

Reg S exempts offers made outside the United States to non-U.S. persons. It is typically paired with a Reg D raise: the U.S. feeder raises under Reg D, the offshore feeder raises under Reg S. The two regimes are run in parallel for a cross-border fund.

Part two: exempting the fund (the 3(c)(1) vs 3(c)(7) choice)

Separately, a private fund must avoid being regulated as an "investment company" under the Investment Company Act of 1940 — a regime built for mutual funds that would make a private fund unworkable. Private funds rely on one of two exclusions, and this choice is one of the most consequential a hedge fund or private fund sponsor makes, because it caps who and how many can invest.

Section 3(c)(1) — the "100-investor" fund

• Cap: no more than 100 beneficial owners (250 for certain qualifying venture capital funds under the limited "qualifying venture capital fund" provision).
• Investor standard: typically accredited investors (driven by the Reg D offering), without the higher 3(c)(7) wealth test.
• Best for: smaller funds and emerging managers raising from a limited number of investors who may not all clear the qualified-purchaser bar.
• Trade-off: the 100-holder cap is a hard ceiling that can constrain growth and complicate later fundraising.

Section 3(c)(7) — the "qualified purchaser" fund

• Cap: effectively up to roughly 2,000 investors before triggering Exchange Act reporting — far more room than 3(c)(1).
• Investor standard: every investor must be a qualified purchaser — a much higher bar than accredited (generally individuals with $5M+ in investments, or entities with $25M+).
• Best for: funds targeting institutional and ultra-high-net-worth capital that want room to scale the investor count.
• Trade-off: you exclude merely-accredited investors entirely — everyone must clear the qualified-purchaser threshold.

What the raise actually requires

• Form D filing with the SEC (within 15 days of first sale) and blue-sky notice filings in the states where your investors reside.
• An accreditation / qualified-purchaser framework — how you confirm (and, under 506(c), verify) that investors qualify for your chosen exemptions.
• Marketing-materials review — pitch decks, websites, and social posts reviewed for performance-claim, testimonial, and solicitation compliance (especially critical under 506(c) and the marketing rule).
• Side letters — negotiating special terms (fees, MFN, reporting, co-invest) with anchor investors without breaking the deal for everyone else.
• Investment-adviser status — running the fund may make you an investment adviser, triggering state registration or an exemption (and, for some strategies, CFTC/NFA registration). Assessed alongside the raise.

Common questions