Securities Act of 1933

The Securities Act of 1933 created the basic rules for how securities can be sold in the United States. A "security" includes things like stocks, bonds, and investment interests in funds like hedge funds. The Act requires companies to register their securities with the Securities and Exchange Commission (SEC) and provide detailed financial information to potential investors before they can sell these securities publicly.

However, the Act also provides exemptions that allow certain types of offerings to skip this registration process. For hedge funds, these exemptions are crucial because they allow funds to raise money from investors without the substantial costs and regulatory burdens that come with full SEC registration.

The Act controls how securities can be offered and sold, including when hedge funds offer ownership interests to investors. Under Section 5 of the Securities Act, companies must register their securities with the SEC unless they qualify for an exemption.

The most important exemption for hedge funds is found in Section 4(a)(2), which states that "transactions by an issuer not involving any public offering" do not need to be registered. This is called the "private placement exemption." It allows hedge funds to raise money from investors in the United States without going through the expensive and time-consuming registration process that public companies must complete.

The difference between a "public" and "private" offering depends on several factors. These include how many people the fund approaches as potential investors, how sophisticated those investors are, how the fund markets itself, and what relationship the fund has with its investors.

Since hedge funds first emerged, managers have had to navigate multiple laws affecting how they can form and operate their funds. The Securities Act has always been central to this analysis. Fund managers must determine whether offering fund shares will trigger registration requirements under the Securities Act, while also complying with other laws like the and the . The same fundamental compliance issues that early hedge fund managers faced continue to affect managers today.

Section 4(a)(2) doesn't provide clear guidelines about what makes an offering "private" rather than "public." Instead, the SEC and courts decide this on a case-by-case basis, which creates uncertainty for fund managers.

To avoid this uncertainty, most hedge funds use specific rules called "" that provide clearer guidelines. These safe harbors are found in for offerings within the United States and for offerings to investors outside the U.S.

Under Regulation D, hedge funds most commonly use either or . Rule 506(b) applies to traditional private offerings where the fund cannot publicly advertise or generally solicit investors. Rule 506(c) allows funds to advertise publicly and use , but only to investors who have been verified as accredited investors—meaning they meet certain wealth or income requirements.

Rule 506(c) was created in 2012 as part of the Jumpstart Our Business Startups Act and has become more popular among hedge fund managers after recent regulatory changes. In March 2025, the SEC issued guidance that made it easier for funds to verify that investors are accredited. The SEC said that funds can satisfy their verification requirements by setting minimum investment thresholds—$200,000 for individual investors or $1,000,000 for entities like companies—combined with having investors certify their own accredited status. This guidance made it much simpler for funds to use general solicitation in their marketing.

Even when hedge funds use exemptions to avoid registration, they must still follow the Securities Act's . These provisions protect investors by requiring fund managers to provide accurate information and avoid fraudulent conduct when offering fund interests. The anti-fraud rules apply to all securities offerings, whether public or private, ensuring that investors receive honest treatment regardless of the offering structure.

The prevented states from imposing their own securities registration requirements on certain private offerings, including those conducted under Rule 506 of Regulation D. However, states can still require funds to file notices and pay fees when they sell securities to investors in those states.

Fund managers must determine the specific filing requirements for each state where they plan to offer fund interests. These state-level securities laws are commonly called "blue sky" laws, named after early regulations designed to protect investors from speculative schemes that had "no more basis than so many feet of blue sky."

The Securities Act affects many fundamental aspects of how hedge funds operate. Fund managers must carefully prepare , verify that investors meet suitability requirements, follow marketing restrictions, and provide ongoing disclosures to investors. Proper compliance with the Act's requirements is essential for maintaining exemptions from registration and avoiding enforcement actions that could severely impact both fund operations and the manager's ability to continue operating.