Regulation D

Regulation D creates the main legal pathway that allows hedge funds to raise money from investors without having to register their securities with the SEC. This exemption is essential for hedge funds because full SEC registration would create heavy compliance requirements and investment restrictions that would fundamentally change how hedge funds operate.

Regulation D offers three main exemptions through Rules 504, 505, and 506. However, hedge funds almost always use Rule 506 because it has no dollar limits on how much money can be raised and it overrides state registration requirements. Rule 506 actually contains two separate exemptions: Rule 506(b) Rule 506(b) Rule 506(b) is a securities law exemption that allows private companies to raise unlimited capital without SEC registration, provided they don't advertise publicly and limit sales to accredited investors plus up to 35 sophisticated non-accredited investors. and Rule 506(c) Rule 506(c) Rule 506(c) allows companies to raise money privately without SEC registration and permits public advertising, but only accredited investors can participate and their status must be verified—not just self-certified. . Each serves different marketing approaches and has different requirements for verifying that investors qualify.

Under Rule 506(b), hedge funds can raise money without registering with the SEC if they follow two key rules. First, they cannot use general solicitationPublic communications or advertisements directed to potential investors, prohibited under Rule 506(b) but permitted under Rule 506(c). or general advertisingPublic marketing communications used to promote investment opportunities, restricted under certain private placement exemptions. to find investors—meaning no public marketing. Second, all purchasers must be accredited investors Accredited investor An accredited investor refers to an individual or entity that meets specific financial thresholds set by securities regulations, qualifying them to invest in unregistered securities offerings such as hedge funds, with standards including minimum income or net worth requirements. , except for up to thirty-five non-accredited investors who are allowed.

To use this exemption, fund managers must have a reasonable belief that their investors qualify as accredited investors. They typically satisfy this requirement by having investors fill out questionnaires and sign documents stating they meet the qualifications. Independent verification is not required under this rule.

Rule 506(c) offers a different approach. Under this exemption, hedge funds can use general solicitation and general advertising to find investors—meaning they can market publicly. However, all purchasers must be accredited investors with no exceptions for non-accredited investors. Additionally, fund managers must take reasonable steps to independently verify that each investor actually qualifies as accredited.

The SEC issued new guidance in March 2025 that made Rule 506(c) much easier to use. Fund managers can now satisfy the verification requirements through investor self-certificationProcess where investors attest to their accredited status without independent verification, permitted under certain Rule 506(c) offerings with minimum investment thresholds. when certain minimum investment amounts are met: $200,000 for individuals and $1 million for entities. This change has made Rule 506(c) more attractive to hedge fund managers who want to market publicly.

Funds using either Rule 506 exemption must file a Form D with the SEC within 15 days of their first sale of securities. This form provides basic information about the offering and the fund manager. The filing serves as notice to regulators and is required to maintain the exemption. However, failure to file does not automatically disqualify the exemption if other requirements are met.

One major benefit of using Rule 506 exemptions is that they override state registration requirements under the National Securities Markets Improvement Act of 1996Federal legislation that created the qualified purchaser standard and Section 3(c)(7) exemption for private funds.. While states can still require basic notice filings and fees, they cannot impose additional registration requirements or conduct merit reviewsState regulatory evaluations that assess whether an investment offering is suitable or appropriate for investors, prohibited for certain federal securities under NSMIA. of Rule 506 offerings. This creates significant efficiency for funds raising money across multiple states.

When Rule 506(c) was introduced, it represented a significant change by allowing hedge funds to market themselves publicly for the first time, provided they implemented stronger investor verification procedures. Despite this new opportunity, many funds continued using traditional 506(b) offerings to avoid the more rigorous verification requirements and maintain their established marketing practices.

However, the March 2025 SEC guidance that substantially reduced verification requirements may encourage more managers to adopt Rule 506(c) for its broader marketing capabilities. This regulatory development could reshape how hedge funds approach investor outreach and capital introduction Capital introduction Capital introduction is a networking service provided by prime brokers to connect hedge fund managers with potential investors through conferences, meetings, and targeted introductions, typically offered without charge as part of the broader prime brokerage relationship. .

These features make Regulation D the foundation of the legal framework that allows the hedge fund industry to operate efficiently while maintaining appropriate investor protections.