Private Funds, Public Rules – What Fund Managers Need to Know

July 3, 2025  |  By

When it comes to attracting funds from investors, many fund managers feel that staying private makes things easier. Though this may hold some truth, there are still specific guidelines from the Securities and Exchange Commission (SEC) that apply — even if you are not managing a big-time Wall Street fund.

Let’s break down how the SEC defines an “investment company” and how private funds, such as hedge funds and venture capital funds, can avoid public registration by meeting certain criteria.

What is an Investment Company?

Under the Investment Company Act of 1940, an “investment company” is any business that issues securities and is primarily in the business of investing in securities. This definition is broader than you might expect and can apply to many private funds if certain exemptions don’t apply. Typically, investment companies are required to:

  • Register with the SEC
  • Make Significant Disclosures
  • Follow Strict Compliance Requirements

This process can be costly and is usually unnecessary for smaller, privately operated funds. This is why most private funds are carefully structured to fit within specific exemptions provided under federal law.

 Types of Investment Companies

The SEC categorizes registered investment companies into three main types:

  • Mutual Funds
  • Closed-End Funds
  • Unit Investment Trusts (UITs)

These funds are usually large, publicly available, and built to serve everyday investors. They are subject to intense regulation and public disclosure requirements. If you’re raising money from a small group of high-net-worth investors or institutions, these rules likely don’t directly apply — but others might.

Within the Investment Company Act of 1940, there are two exemptions that allow private investment companies to avoid registration with the SEC.

First, under 3(c)(1), your fund must not make a public offering and must have 100 or fewer beneficial owners (investors). However, as of August 2024, that number increases to 250 if your fund qualifies as a “qualifying venture capital fund.” To qualify, the fund must stick to a venture capital strategy, stay under a $12 million cap in committed capital, and meet other conditions, such as limiting redemption rights and leverage. In either case, most investors must still be accredited, meaning they must meet certain financial thresholds (e.g., net worth over $1 million, not including a primary residence).

Second, under 3(c)(7), you may have up to 1,999 investors, but every one of them must be a qualified purchaser—typically individuals with $5 million or more in investable assets.

In both cases, the fund cannot make a public offering. Most funds comply with this by making a Regulation D Rule 506 filing—commonly called a Reg D filing—which limits participation to accredited investors and avoids the registration requirement.

What Counts Toward Investor Limits?

Investor limits can get technical. Certain insiders, such as well-informed employees, may not count towards the cap. If an investor uses a trust or business entity, it might count as one investor, unless it exists solely to invest in your fund. If you choose to include any non-accredited investors, you’re limited to 35 and must provide additional disclosures.

The Integration Doctrine: One Fund or Many?

Even when separate funds are set up with different names or documents, the SEC could potentially treat them as one if they are too similar. This is called the “integration doctrine.” If funds share the same terms, investors, or strategies, they may be combined and treated as a single offering—which could, in turn, blow your investor limit and exemption eligibility.

Final Thought: Talk to a Lawyer Early

Many business owners and fund managers assume private fundraising is informal and low risk, but even private offerings can involve complex legal requirements. Understanding how the SEC’s rules apply and how exemptions work is key to running a compliant fund. If you’re raising capital or offering investment opportunities, talk to a lawyer before moving forward. It’s a lot easier and cheaper to prevent a problem than to fix one later.

Kevin would like to thank VW law clerk, Emily Keller, for her help with this blog.

 

Posted in: Funding & Capital Raising

About the Author(s)

Kevin Vela

Kevin is the managing partner at Vela Wood. He focuses his practice in the areas of venture financing, M&A, fund representation, and gaming law.

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