What it is
A private fund is a pooled investment vehicle that gathers money from a limited group of investors and is managed by a fund manager. Unlike a public company's stock or a mutual fund, a private fund is generally not offered to the general public and is not traded on a public exchange. Offerings are typically made only through the issuer's own offering documents.
Many private funds rely on exemptions from registration, most commonly SEC Regulation D. Under Rule 506(b), an issuer may not use general solicitation. Under Rule 506(c), general solicitation is allowed, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify that status.
Accredited investor status is defined in SEC Rule 501(a). Categories include individuals with income over $200,000 (or $300,000 jointly with a spouse or spousal equivalent) in each of the prior two years, or net worth over $1 million excluding the primary residence. Since the August 2020 amendments, holders of Series 7, 65 or 82 licenses, knowledgeable employees of certain private funds, entities and family offices with over $5 million in investments or assets, and registered investment advisers and exempt reporting advisers may also qualify.
How it’s traditionally been approached
Public investments, such as stocks, bonds and mutual funds, are usually bought and sold on open markets, with regular pricing and standardized public disclosures. Many people begin their investing journey there, and these tools remain a common foundation for many portfolios.
Private funds have traditionally been approached differently. Investors often commit capital for a longer period, receive information through offering documents and periodic reports, and may have limited ability to sell or withdraw. Many investors have historically worked with their own licensed advisers to decide whether such features fit their goals.
Private funds also tend to differ in paperwork and reporting. Investors may sign subscription agreements, complete accreditation verification, and receive a Schedule K-1 for tax reporting rather than a Form 1099. Some funds that hold stock in small businesses may involve questions about QSBS (Section 1202), though tax treatment depends on individual circumstances and should be reviewed with a tax professional.
How the right fund manager may help
The right independent fund manager may help you make sense of an unfamiliar category. A first conversation is generally about learning: how the fund is structured, what it aims to do, how it is managed, and what the documents say. A good manager is typically willing to explain terms in plain English and to point you back to the offering documents.
Questions you might consider asking include: How does the fund make decisions? What are the fees and expenses, and where are they described? How long might my money be committed? How and when is information reported to investors? What are the main risks, and how is conflict of interest handled? How is accredited status verified?
Other providers can also be useful. Accredited investor qualification specialists may help explain verification, funds of funds and secondaries professionals may explain how those structures work, and fund due diligence providers may help you review a manager. The Hastings Fund is an independent directory, not a broker-dealer, funding portal or investment adviser, and it does not recommend, endorse or rank any investment. Consult your own licensed advisers before making decisions.
The bigger picture
Financial decisions are rarely only about numbers. Committing money to something you cannot easily access can affect how secure and calm you feel, so it may help to reflect on your goals, your time horizon, and how much uncertainty you are comfortable with. Taking your time and asking questions is a reasonable part of the process.
Wellbeing also involves the people around you. Talking with family, a trusted adviser, or a partner can bring clarity and reduce stress. If financial worries begin to affect your sleep or health, Providers.plus can help you find supportive professionals, and there is no wrong pace for learning something new.
Keep in mind
- Private fund investments are speculative and illiquid and can lose all of their value.
- Past performance does not guarantee future results, and no manager can promise any outcome.
- Nothing on this page 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.
- Consult your own licensed investment, legal and tax advisers, as tax treatment and suitability depend on individual circumstances.
Fund managers who often help
Get matched privatelyFrequently asked questions
What is a private fund?
A private fund is a pooled investment vehicle, run by a fund manager, that is generally offered only to a limited group of eligible investors rather than the general public. It is typically not traded on a public exchange. Private fund investments are speculative and illiquid and can lose all of their value.
How are private funds different from public investments?
Private funds generally differ from public investments in access, liquidity, and disclosure. Public stocks and mutual funds trade on open markets with standardized public reporting, while private funds are usually offered through offering documents and may restrict when you can sell or withdraw. Each approach has its own considerations, and neither is right for everyone.
Who qualifies as an accredited investor?
Accredited investor status is defined in SEC Rule 501(a). Examples include individuals with income over $200,000 ($300,000 with a spouse or spousal equivalent) in each of the last two years, or net worth over $1 million excluding the primary residence. Holders of Series 7, 65 or 82 licenses, certain knowledgeable employees of a fund, entities and family offices with over $5 million in investments or assets, and RIAs and exempt reporting advisers may also qualify.
What is the difference between Rule 506(b) and Rule 506(c)?
Rule 506(b) does not allow general solicitation, 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. Your own legal adviser can explain how these rules apply to a specific offering.
What should a first-time accredited investor ask a fund manager?
Start by asking how the fund is structured, what the fees and expenses are, how long capital may be committed, and what the main risks are. It is also reasonable to ask how and when investors receive reports and how accredited status is verified. Review the offering documents and consult your own licensed advisers.
Do private funds issue a K-1?
Many private funds structured as partnerships provide investors with a Schedule K-1 for tax reporting, though this varies by fund. K-1s can arrive later than other tax forms and may be more complex. Tax treatment depends on individual circumstances, so speak with a qualified tax professional.
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.