Private Fund Education for RIAs & Wealth Advisors

A private fund is a pooled investment vehicle that raises capital from a limited group of investors, usually without registering its offerings with the SEC. Common structures include limited partnerships and LLCs, in which investors are limited partners or members and a manager serves as general partner or managing member. Funds may focus on areas such as private equity, venture capital, real estate, credit or other strategies.

Access is generally tied to SEC Rule 501(a) of Regulation D, which defines an accredited investor. Categories include individuals who meet income or net worth tests set out in the rule (income over $200,000, or $300,000 jointly with a spouse or spousal equivalent, in each of the last two years with the same expected this year; or net worth over $1 million, excluding the primary residence). The August 2020 amendments added holders in good standing of Series 7, 65 or 82 licenses, and knowledgeable employees of a private fund for that fund. They also added spousal equivalents, and expanded entity categories, including entities and family offices with over $5 million in investments or assets, as well as registered investment advisers and exempt reporting advisers.

Offerings are typically made under Rule 506(b) or Rule 506(c). Rule 506(b) prohibits general solicitation and has limits on non-accredited participants. Rule 506(c) permits general solicitation, but all purchasers must be accredited and the issuer must take reasonable steps to verify that status. Any offering is made only by the issuer through its own offering documents.

Advisors have traditionally begun with the client relationship: goals, time horizon, liquidity needs, and overall financial picture. Accredited status is typically treated as a threshold question, not a suitability conclusion. Many advisors document how a client's status was established and keep their own records alongside any verification the issuer performs.

Evaluating a private fund has traditionally meant reading the offering documents closely, including the fund's strategy, fee and expense terms, governance, conflicts of interest, valuation approach, reporting practices and redemption or lock-up provisions. Many advisors also look at the manager's background, operations and service providers, a process often called due diligence.

Some advisors also consider funds of funds and secondary transactions, which are different ways of gaining exposure or managing timing in private markets. Each carries its own layers of fees, complexity and liquidity considerations. Investors in private funds often receive a Schedule K-1 for tax reporting, and tax treatment, including any questions about Section 1202 (QSBS), depends on individual circumstances and should be reviewed with a licensed tax professional.

The right independent provider may help you organize the questions that matter most. An accredited investor qualification specialist may walk through the Rule 501(a) categories and the kinds of documentation that are commonly used to verify status, which can be helpful when a client's situation is less straightforward, such as with entities or family offices.

A fund due diligence provider may help you assess a manager's documents, operations and practices in a structured way. A first conversation is generally exploratory: they may ask about your client base, your own compliance process and what you already review. Useful questions include what their process covers, what it does not, how they handle conflicts, and how they communicate findings.

Providers focused on funds of funds and secondaries may help you understand how those structures work and where their trade-offs lie. Ask how they are compensated, whether they are registered and in what capacity, and what limits apply to their role. Any decision remains yours and your clients', made with your own legal, tax and compliance advisers.