What it is
Regulation D is a set of rules from the U.S. Securities and Exchange Commission (SEC) that provides exemptions from registering a securities offering. Many private fund offerings rely on Rule 506 of Regulation D. A Regulation D offering is often documented in a private placement memorandum, a disclosure document the issuer prepares to describe the offering, its terms and its risks.
Rule 506(b) does not allow general solicitation, meaning the issuer generally cannot advertise the offering publicly. It is typically built around pre-existing, substantive relationships. Rule 506(c) allows general solicitation, but all purchasers must be accredited investors, and the issuer must take reasonable steps to verify that status.
Under SEC Rule 501(a), accredited-investor categories include individuals with income or net worth above the thresholds written in the rule, holders in good standing of Series 7, 65 or 82 licenses (added by the August 2020 amendments), and knowledgeable employees of a private fund. The 2020 amendments also added spousal equivalents, and entities and family offices with more than $5 million in investments or assets, as well as registered investment advisers and exempt reporting advisers. After a Regulation D offering begins selling, the issuer generally files a Form D, a short notice with the SEC that gives basic facts about the offering.
How it’s traditionally been approached
Historically, many private offerings were shared through personal networks, existing relationships and professional introductions. Rule 506(b) fits that tradition, since it prohibits general solicitation and relies on a relationship between the issuer, or its agents, and the people it approaches.
Rule 506(c) opened another path by allowing issuers to publicly describe an offering, for example through websites or media. In exchange, the issuer must take reasonable steps to verify that each purchaser is accredited, rather than relying only on a self-certification. Verification methods vary and are determined by the issuer and its advisers.
Form D has traditionally served as a public notice rather than a disclosure of every detail. It is not an approval or endorsement by the SEC. Detailed terms, risks and conflicts are generally found in the offering documents, including the private placement memorandum, subscription agreement and fund agreement. Readers should review those documents with their own licensed attorney, tax professional and financial adviser.
How the right fund manager may help
The right independent fund manager may help you make sense of how an offering is structured, including whether it relies on Rule 506(b) or 506(c), and what that means for how you were introduced to it and what the manager may ask of you. That may be a helpful way to learn, though it never guarantees any outcome.
A first conversation is generally an educational one. A manager may explain the strategy in general terms, describe how the offering documents are organized, and discuss what accredited-investor status means and what documentation may be requested. Any offering is made only by the issuer through its own offering documents.
Useful questions to ask include: Which exemption does this offering rely on? How is accredited status verified? Where can I read the private placement memorandum and risk factors? How are fees and conflicts of interest disclosed? What are the restrictions on selling or withdrawing? Will I receive a K-1, and what should I discuss with my tax professional? Always consult your own licensed advisers.
The bigger picture
Decisions about private funds can touch more than a spreadsheet. Sharing financial documents for verification, reading long offering documents and weighing risk can feel stressful. Taking time to learn the vocabulary first may help you feel more settled and more in control of your own pace.
It can also help to think about how a decision fits into your whole life, including your goals, your need for flexibility and your peace of mind. If wellbeing is part of your planning, Providers.plus is one resource you may find useful. There is no single right approach, and different people reasonably choose differently.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results.
- Nothing here is an offer to sell or a solicitation of an offer to buy any security. Any offering is made only by the issuer through its own offering documents.
- The Hastings Fund is an independent directory, not a broker-dealer, funding portal or investment adviser, and does not recommend, endorse or rank investments. Consult your own licensed investment, legal and tax advisers, as tax treatment depends on individual circumstances.
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Frequently asked questions
What is the difference between Rule 506(b) and 506(c)?
The main difference is general solicitation. Rule 506(b) does not permit it, while Rule 506(c) does. Under 506(c), all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status. Rule 506(b) has its own conditions, which an attorney can explain.
What is a Regulation D offering?
A Regulation D offering is a private securities offering that relies on an SEC exemption from registration. Rules 506(b) and 506(c) are among the most commonly used. Because the offering is not registered, investors generally receive information through the issuer's own offering documents.
What is Form D?
Form D is a notice the issuer of a Regulation D offering generally files with the SEC. It gives basic information about the issuer and the offering. It is not an SEC approval, and it does not replace the detailed offering documents.
What is 506(c) accredited investor verification?
It is the process by which a 506(c) issuer takes reasonable steps to confirm that each purchaser is accredited. Self-certification alone is generally not enough. What counts as reasonable depends on the facts, and issuers often work with their own legal counsel or third parties.
What is the general solicitation rule in Rule 506?
General solicitation means publicly promoting an offering, such as through advertising or open websites. Rule 506(b) does not allow it, while Rule 506(c) does, provided that all purchasers are accredited and verified. Which rule applies is determined by the issuer.
What is a private placement memorandum?
A private placement memorandum is a disclosure document an issuer prepares for a private offering. It generally describes the terms, strategy, fees, conflicts and risk factors. Readers should review it carefully with their own licensed advisers, and remember that private fund investments are speculative and illiquid and can lose all of their value.
Educational resource. The Hastings Fund shares general information and connects people with independent fund managers. It is not professional advice. Talk with a qualified professional about your own situation.