One of the ways to make your life easier as a fund manager is by setting your fund up correctly.
This is why most funds in the world use Regulation D filings,
Namely 506(b) and 506(c) funds.
I mention these fund types, and others, quite often in my posts and videos.
So to make it easier to understand I thought I should explain them more thoroughly.
506(b) vs. 506(c)
Each of these ways require you to file what’s called a Form D with the SEC.
The great thing about this is that you can do it after you have gone out and raised the money for the fund.
With these you can also raise unlimited amounts of money.
After you do these things you need to file with the state you will be operating out of…
Now that we covered the basics let’s jump into each.
506(b) is the most common filing for funds.
Under this fund filings you are aloud to have as many accredited investors (or above) as you want to.
You can also have 35 non-accredited investors.
According to the SEC those accredited investors must be “sophisticated in financial matters”.
They aren’t very clear on what that means but as a baseline those investors should have some experience with business or finance.
The SEC basically doesn’t want you pulling in people who have no knowledge of investments.
It is for your safety and for theirs.
Sort of like a mini check and balance.
The SEC requires that you over-disclose to the non-accredited investors in your fund.
I tell a lot of my students to try and take on as little of these types of investors as possible because it will cause you so much more work!
Another interesting note here is that you do not need to verify that your investors are accredited.
They simply check a box and self verify.
Couldn’t they just lie?
Well sure they could, but that is on them under this type of fund.
The one caveat with this fund type is that you cannot publicly endorse or advertise your fund.
This is why you don’t see Blackstone billboards everywhere.
It is illegal to run any sort of ads.
So how do you raise money?
It is something crazy called “word of mouth” or “networking“.
That’s right, you have to be bold and go out and talk to people!
So what about a 506(c)?
Well, in a 506(c) you can ONLY have accredited investors.
You must also VERIFY that these people are accredited.
This means W-2s, Self Employment Taxes, etc…
But you get to now publicly advertise your fund making it easier to raise capital,
Yes you get to advertise but wealthier people might be turned off by the amount of work it will take them to provide for you their tax documents, cash flow statements, asset details, and more…
They are concerned about their privacy.
As they should be.
This can turn off an investor that would have otherwise invested with you and you fund.
When you start a fund you want to set it up so that it is easy for investors to give you their money. This is why most funds choose 506(b) filings.
Funds can be a great way to build wealth,
But you can’t have a fund without investors.
This is why choosing the right filing is important!
Make it easy for investors to give you money.
What do you think are some of the advantages and disadvantages of each fund type?
Let me know in our free FaceBook group below!
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DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.