Private Fund Education for High-Net-Worth Individuals

A private fund is a pooled investment vehicle that raises money from a limited group of investors, rather than from the general public. It is typically offered privately under exemptions from SEC registration, and it is run by a fund manager who makes decisions under a set of written terms.

Alternative asset classes are categories outside traditional publicly traded stocks, bonds and cash. Common examples include private equity (ownership in privately held companies), private credit (loans made outside traditional banks) and real estate (property or property-related holdings). Each works differently and carries its own risks.

Many private funds are offered only to accredited investors under SEC Rule 501(a). Individuals can qualify through certain income or net worth tests set out in the rule, or through holding certain licenses, such as Series 7, 65 or 82, following the August 2020 amendments. Those amendments also added categories such as knowledgeable employees of the fund, spousal equivalents, RIAs and exempt reporting advisers, and entities or family offices with over $5 million in investments or assets. Whether you qualify depends on your own facts.

Traditionally, wealthy individuals have approached alternatives gradually. Many begin by learning how the asset class works, then review a fund's offering documents with their own attorney, accountant and financial adviser before deciding whether anything fits their situation.

Private funds are usually offered under Regulation D. Under Rule 506(b), the issuer may not use general solicitation, and it relies on existing relationships with investors. 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.

Fund terms have long been a core part of the conversation. Readers commonly encounter terms such as the management fee, carried interest, capital calls, lock-up periods, redemption limits, reporting schedules and the roles of the general partner and limited partners. Investors often receive a Schedule K-1 for tax reporting from partnership-style funds, and tax treatment depends on individual circumstances. Some investors also learn about Qualified Small Business Stock (Section 1202), which has specific rules, and should discuss it with a tax professional.

The right independent fund manager may help you understand how their private fund is structured, in plain language. A first conversation is generally informational. It may cover the manager's background, the strategy in general terms, how the fund is organized and what the offering documents contain.

Questions you might bring include: How are fees calculated and when are they paid? How and when might capital be requested? What are the restrictions on withdrawing money? How often will I receive reports? Who are the service providers, such as the administrator and auditor? What are the main risks and conflicts of interest?

Any offering is made only by the issuer through its own offering documents, and nothing in a conversation replaces reading them carefully. It is wise to have your own licensed attorney, tax professional and financial adviser review the materials. A good manager should welcome thoughtful questions and be open about risks.