Considerations When Selecting Regulation D 506(b) v. 506(c)
When structuring a private fund or securities offering, pre-determining the exemption mechanism is essential, as it dictates offering activities and filings.
While various exemptions are available, the choice most often comes down to Rule 506(b) or Rule 506(c) of Regulation D.
Under Rule 506(b), funds can raise unlimited capital from accredited investors, but:
• Only 35 non-accredited investors with sufficient knowledge can participate.
• Advertising and general solicitation are prohibited.
Under Rule 506(c), funds can also raise unlimited capital from accredited investors:
• Advertising and general solicitation are allowed.
• Only accredited investors can participate.
• Issuers must verify investors’ actual accredited status and provide documentation (an investor questionnaire is insufficient).
Evaluate each rule based on your circumstances, investor base, and intent. Make this determination at the outset of the process to structure the offering and go-to-market plans properly.
Application of the 100-person Rule When Managing Offshore and Domestic Funds
To navigate the 100-person rule when managing offshore and domestic funds, consider structuring the funds to segregate investors geographically. Establish separate offshore and domestic funds, each catering to investors in its respective jurisdiction.
By doing so, the 100-person limit will apply independently to each fund, offering greater flexibility in attracting investors while ensuring compliance.
Consult with legal experts proficient in securities regulations in both jurisdictions to ensure proper fund structuring and adherence to applicable laws and regulations, optimizing investor access while mitigating regulatory risks.
Choosing the right Entity Structure for Your Small Private Fund
It is important to explore the pros and cons when choosing an entity structure for your new private fund. Historically, private funds were established as limited partnerships wherein the investment manager serves as the General Partner and investors own passive limited partnership interests. More recently, however, the limited liability company and/or series limited liability company has proven to be an effective entity structure for private funds.
Regardless of the entity choice, it is imperative for new funds and fund managers to clearly define the goals for the fund and create flexible (albeit detailed and specific) goals and metrics for the fund.
– Determine the type of investor, and how many investors the fund will have;
– Determine the lifespan of the fund;
– Understand the tax implications of each entity structure;
– Clearly establish and specify how various items function (e.g. fees / carry, hurdles / waterfalls, distributions, and gates);
– Consider the compliance requirements for the fund under each structure option.
In private fund formation and management, it’s most often crucial to avoid triggering investment company status for SEC registration. Most funds and managers do not wish to be registered or to be subject to the regulatory burdens that accompany registered status. For such funds and managers it is critical to monitor and maintain compliance to stay within SEC thresholds concerning fund size, investor count, and offering terms. Fund sponsors and managers should seek guidance from legal professionals to navigate regulatory complexities effectively. Strategize fund structure and offerings to prevent unintended registration consequences. Transparency with investors regarding regulatory obligations is also important. Regularly assess and adjust fund operations to remain compliant. By proactively managing the risk of triggering investment company status, private fund managers can safeguard the structural and operational integrity of their funds, ensuring smooth continuity and investor confidence for long-term success.
Developing a niche, unique, or otherwise strong investment strategy is crucial for establishing the fund as a leader in the market and ensuring continued prosperity. In an increasingly competitive landscape, strategic planning enables managers to identify target markets and necessary tools for plan implementation. Oftentimes, investors (particularly in private funds) are looking to accomplish some specific goal with their investment in private funds. Clearly defining objectives and goals aids investors in understanding the fund’s mission and its fit within investors existing or prospective portfolio of investments. Key considerations involve aligning sector and geographic focus with the fund’s vision.
Through careful strategy formulation, the fund can navigate market complexities and seize opportunities, securing its position and reputation in the industry. Thus, dedicating resources to strategy development is essential for achieving lasting success and investor trust.
Engaging Legal Counsel
New private funds benefit significantly from working with experienced private fund attorneys for several reasons. First, these attorneys possess specific knowledge of regulatory requirements and exemptions, ensuring compliance with SEC regulations. Second, they provide invaluable guidance in structuring the fund to accommodate various nuances, drafting offering documents, and navigating complex legal frameworks. Third, experienced attorneys can help mitigate risks by identifying potential legal pitfalls and implementing effective risk management strategies. Moreover, their expertise fosters investor confidence and trust, enhancing fundraising efforts. Ultimately, partnering with a seasoned private fund attorney safeguards the fund’s legal integrity and sets a solid foundation for long-term success.
Jacko Law Group provides tailored legal services and effective strategies for success, delivering exemplary solutions to complex legal and regulatory challenges to ensure that both business efforts and compliance obligations are satisfied.
