Raising Capital for a Debt Fund: SEC Compliance and Investor Strategies

You’ve structured your debt fund with careful attention to legal, financial, and operational details. Now comes the real challenge: raising capital. While your investment strategy might be rock-solid, attracting investors requires navigating a complex regulatory landscape while effectively communicating your fund’s value proposition.

Understanding the SEC Rules: Regulation D Overview

The moment you decide to raise money from outside investors for your debt fund, you’ve entered the world of securities regulation. Many new fund managers are surprised to learn that their capital-raising activities are subject to federal oversight, regardless of the fund’s size or how “private” the offering seems.

Why Raising Capital Triggers Securities Laws

When you accept money from investors who expect returns based on your management efforts, you’re selling securities—even if you never use that term. This fundamental principle comes from the Securities Act of 1933, which defines “securities” broadly to include investment contracts where:

• Investors contribute money
• In a common enterprise
• With the expectation of profits
• Primarily from the efforts of others

Check all these boxes for your debt fund interests. Investors give you money, you pool it together, and they expect returns based on your loan origination and management skills. That makes fund interests securities under federal law.

The default rule under securities law is that all securities must be registered with the SEC unless an exemption applies. Full registration—the process public companies go through—costs hundreds of thousands of dollars and requires ongoing public disclosures that are impractical for most private funds.

Fortunately, Regulation D provides exemptions that make private capital raising viable, but you must follow the rules precisely or risk serious consequences.

What Regulation D Allows

Regulation D creates safe harbors that exempt certain private offerings from the registration requirements. For debt fund managers, this provides three critical benefits:

You can raise unlimited amounts of money without the expense of a public offering. Whether you’re raising $1 million or $100 million, Reg D can accommodate your capital needs without scaling up compliance costs proportionally.

You can skip the full SEC registration process, avoiding the extensive disclosures, ongoing reporting, and significant expenses associated with public offerings. This streamlined approach makes capital raising feasible for funds of all sizes.

You can rely on specific exemption criteria that provide clear guidelines for compliance. The most commonly used exemptions are Rule 506(b) and Rule 506(c), which we’ll explore in detail later.

These exemptions allow the private fund industry to function, but they come with specific requirements that must be strictly followed.

Key Takeaways About Reg D

While Regulation D simplifies capital raising, it’s not a complete exemption from securities laws:

You must still file Form D with the SEC within 15 days after the first sale of securities. This form discloses basic information about your offering, including the amount you’re raising and the exemption you’re relying on. Missing this filing can jeopardize your exemption status.

State “Blue Sky” laws may also apply, requiring notice filings and fee payments in states where your investors reside. These requirements vary by state and can add complexity to your compliance efforts, especially if you have investors across multiple jurisdictions.

Regulation D is not a “free pass” from securities laws—it simply provides an exemption from registration. You’re still subject to anti-fraud provisions, and material misstatements or omissions can lead to investor lawsuits, SEC enforcement actions, and even criminal penalties in extreme cases.

The consequences of non-compliance can be severe. Violations can give investors the right to demand their money back (rescission), trigger regulatory investigations, and create personal liability for fund managers. They can also make future capital raising nearly impossible as regulatory problems follow you.

Understanding these baseline requirements is essential before you begin approaching potential investors. With this foundation in place, your next decision is which specific Regulation D exemption to use for your offering.

Choosing Between Rule 506(b) and 506(c) for Debt Funds

The two primary exemptions available to debt fund managers under Regulation D—Rule 506(b) and Rule 506(c)—offer different approaches to capital raising. Your choice between them will shape your entire fundraising strategy, from marketing to investor verification to compliance procedures.

Advantages of 506(b)

Rule 506(b) is the traditional private placement exemption that most funds have historically used. Its key features include:

No general solicitation allowed – You cannot advertise your offering or use public communications to attract investors. This means no mass emails, social media posts, or website content discussing your specific offering. Each investor relationship must be established prior to discussing the investment opportunity.

Can accept up to 35 sophisticated (non-accredited) investors – While most fund managers prefer to work exclusively with accredited investors, 506(b) gives you the flexibility to include up to 35 non-accredited but financially sophisticated investors. This can be valuable if you have potential investors who don’t meet accreditation thresholds but understand investments and have capital to deploy.

Emphasis on pre-existing relationships – The cornerstone of 506(b) compliance is having a substantive pre-existing relationship with each investor before presenting the offering. This doesn’t mean you need lifelong friendships—professional relationships qualify—but you must establish the relationship before making the investment available.

The 506(b) exemption works well for managers with established networks and those who prefer traditional relationship-based fundraising approaches. It’s also typically less administratively burdensome since you don’t need to verify accreditation status—the reasonable belief that investors are accredited is sufficient in most cases.

Advantages of 506(c)

Introduced in 2013 as part of the JOBS Act, Rule 506(c) created a new pathway that allows public marketing of private offerings. Its features include:

Allows public marketing and advertising – You can advertise your fund through virtually any medium: websites, social media, email campaigns, digital ads, newspapers, television, conferences, or billboards. This ability to cast a wide net can be transformative for managers without large pre-existing investor networks.

Only accredited investors are allowed. Unlike 506(b), Rule 506(c) does not permit any non-accredited investors. Every single investor must meet the accreditation standards, with no exceptions.

Requires verification of accredited status – The trade-off for marketing freedom is a higher compliance burden. You must take “reasonable steps” to verify each investor’s accredited status, which typically involves reviewing financial documents or obtaining third-party verification. Self-certification (simply checking a box) is not sufficient.

The 506(c) exemption has gained popularity, particularly among newer managers and those looking to scale their capital raising beyond their immediate networks. The ability to market broadly can significantly accelerate fundraising timelines.

How to Decide

Your choice between these exemptions should consider several factors:

Size and nature of your network – If you already have relationships with enough qualified investors to meet your fundraising goals, 506(b) may be sufficient. If you need to reach beyond your current contacts, 506(c) offers that capability despite its additional requirements.

Marketing plans and outreach capabilities – If your strategy includes digital marketing, conference presentations about your specific fund, or other public communications, 506(c) is your only option. If you prefer one-on-one relationship building and have no need for public marketing, 506(b) may be more efficient.

Willingness to incur verification compliance costs – The verification requirements of 506(c) create additional administrative work and potential privacy concerns for investors who must share financial documents. Some investors resist this level of disclosure, while others understand it as a necessary compliance step.

There’s no universally “better” exemption—the right choice depends on your specific circumstances and fundraising approach. Some managers even run parallel 506(b) and 506(c) offerings (carefully separated) to maintain flexibility, though this requires strict compliance procedures to prevent cross-contamination between the offerings.

Your choice of exemption will directly influence how you identify and approach potential investors for your debt fund.

Defining Your Target Investor Profile

Not all investors are right for your debt fund, and not all fund structures appeal to every investor. Defining your target investor profile helps you focus your efforts on those most likely to invest while ensuring compliance with securities regulations.

Understanding Accredited Investors

The accredited investor concept is central to Regulation D. These are individuals or entities deemed financially sophisticated enough to understand investment risks without needing the full protections of registered offerings:

Income or net worth requirements – For individuals, accreditation typically means:

• Annual income exceeding $200,000 ($300,000 with a spouse) for the past two years with a reasonable expectation of the same in the current year OR
• Net worth exceeding $1 million (excluding primary residence), either individually or with a spouse

Additionally, certain professionals holding specific FINRA licenses and “knowledgeable employees” of private funds may qualify as accredited investors under newer rules.

Verification documents needed under 506(c) – If using Rule 506(c), you’ll need documentary evidence of accreditation, which may include:

• Tax returns, W-2s, or 1099s for income verification
• Bank and brokerage statements, appraisals, and liability documentation for net worth verification
• Written confirmation from a broker-dealer, registered investment advisor, licensed attorney, or CPA who has verified the investor’s status

Why accredited investors are preferred in Reg D – Even in 506(b) offerings where non-accredited investors are permitted, most fund managers prefer working exclusively with accredited investors for several reasons:

• Reduced disclosure requirements
• Presumed greater financial sophistication
• Typically, larger investment amounts
• Lower perceived liability risk

For debt funds specifically, accredited investors often better understand the risk/return profile of fixed-income investments and have the financial stability to commit capital for the fund’s duration.

Sophisticated Investors in 506(b)

If you choose the 506(b) exemption, you have the option to include non-accredited but sophisticated investors:

Meaning of “sophistication” under SEC rules – A sophisticated investor is someone who, either alone or with a representative, has sufficient knowledge and experience in financial matters to evaluate the merits and risks of the investment. This is a subjective standard that considers factors like:

• Investment experience
• Professional background
• Education
• Understanding of private placements

Extra disclosure obligations – Including non-accredited sophisticated investors triggers additional disclosure requirements:

• You must provide information similar to what would be in a registration statement
• Financial statements may need to be audited
• You must be available to answer questions

These requirements significantly increase the complexity and cost of your offering.

Risk of dealing with non-accredited investors – Beyond the additional disclosure requirements, including non-accredited investors increases potential liability:

• Greater risk of claims they didn’t understand the investment
• Potential rescission rights if disclosure requirements aren’t perfectly met
• Increased regulatory scrutiny if problems arise

For these reasons, many debt fund managers choose to work exclusively with accredited investors, even under 506(b).

Tailoring Your Pitch to Your Audience

Once you’ve determined your investor criteria, crafting the right message becomes critical:

Income investors prefer debt fund stability – Many investors are attracted to debt funds specifically for stable income. These investors—often retirees, family offices seeking yield, or diversified investors looking for portfolio stability—will respond best to messaging that emphasizes:

• Regular distribution schedules
• Capital preservation features
• Collateralization and security interests
• Historical performance stability (if applicable)

Growth investors may need more education on debt advantages – Investors accustomed to equity investments might need help understanding why debt can be attractive:

• Explain the benefits of contractual returns vs. speculative appreciation
• Highlight how debt sits higher in the capital stack than equity
• Demonstrate how debt can provide returns with lower volatility
• Show the role of debt in a balanced portfolio

Using targeted messaging in outreach materials – Your marketing materials (within the constraints of your chosen exemption) should speak directly to your target investor’s needs:

• Focus on benefits that matter most to your specific investor demographic
• Address common concerns preemptively
• Use language and concepts familiar to your target audience
• Provide case studies or examples that resonate with their investment goals

Remember that different investor segments have different priorities. High-net-worth individuals might prioritize tax efficiency, while family offices might focus on downside protection. Institutional investors often care most about track record and process consistency.

With a clear understanding of your target investor profile, you can now consider how to effectively market your fund while staying within regulatory boundaries.

Marketing Your Debt Fund: What You Can and Cannot Say

Marketing a debt fund requires balancing your desire to attract investors with strict regulatory limitations on what you can communicate and how. Your marketing approach will differ dramatically depending on whether you’ve chosen Rule 506(b) or 506(c).

Marketing Restrictions Under 506(b)

If you’re using Rule 506(b), your marketing options are severely limited:

No social media blasts – You cannot announce your fund offering on LinkedIn, Twitter, Facebook, or other social platforms. This includes “teaser” posts that hint at an offering without naming it. Even private groups or messages to connections you don’t know well enough could violate the prohibition on general solicitation.

No paid ads or general public announcements – Advertisements of any kind—digital, print, radio, television, billboards—are prohibited. You cannot issue press releases about your fundraising or distribute offering materials at public events. Even seemingly innocuous actions like listing your fund on a platform accessible to the general public could jeopardize your exemption.

Private communications only – Your communications must be limited to people with whom you have a pre-existing, substantive relationship. This means one-on-one conversations, closed-door meetings, and direct communications with specific individuals you know. You cannot cold-call or email potential investors with whom you don’t already have an established relationship.

These restrictions make 506(b) fundraising relationship-dependent. Your ability to raise capital is directly tied to your network’s size and quality. Many managers using 506(b) spend months or years building relationships before formally launching their funds.

What 506(c) Allows You to Advertise

If you’ve chosen Rule 506(c), your marketing options expand dramatically:

Fund existence – You can publicly announce your fund’s launch, discuss its strategy, and explicitly state that you’re raising capital. This openness extends to all channels: your website, social media, email marketing, conference presentations, and traditional advertising.

Offering terms – You can publicly disclose details like:

• Target returns
• Minimum investment amounts
• Fee structures
• Investment focus (loan types, geography, etc.)
• Fund size and timeline

This transparency makes it much easier to attract investors who may be perfect fits but weren’t in your pre-existing network.

Accredited investor requirements – While you can market broadly, you must clearly disclose that investments are limited to accredited investors only. Your marketing materials should state this requirement prominently to avoid misunderstandings and wasted time with unqualified prospects.

The marketing freedom of 506(c) can dramatically accelerate your capital raise, but remember that it comes with the trade-off of stricter accreditation verification requirements.

Best Practices for All Marketing

Regardless of which exemption you choose, certain principles apply to all fund marketing:

Avoid promises or guaranteed returns – Never use language suggesting returns are guaranteed or that your debt fund is “safe” or “secure.” Terms like “expected,” “targeted,” or “anticipated” returns are more appropriate than definitive statements. Any projections should be clearly labeled as such and based on reasonable assumptions you can document.

Stick to factual, verifiable statements – Every claim about your fund, your team, or your strategy should be factually accurate and supportable. Misrepresentations, even unintentional ones, can violate anti-fraud provisions of securities laws. This applies to:

• Track record representations
• Team qualifications and experience
• Loan performance statistics
• Default rates and recovery procedures

Always include risk disclosures where appropriate – Marketing materials should acknowledge that investments involve risk, including potential loss of principal. While full-risk disclosures belong in your PPM, even marketing communications should include appropriate caveats based on the depth of information provided.

The most successful fund marketers strike a balance between conveying their value proposition clearly while remaining scrupulously honest about both opportunities and risks. This approach not only satisfies regulatory requirements but also builds the trust necessary for successful long-term investor relationships.

If you’re using Rule 506(c), your marketing flexibility comes with additional compliance responsibilities, particularly around verifying that all your investors are accredited.

Verifying Accredited Investor Status: Requirements and Methods

For 506(c) offerings, proper accreditation verification isn’t just a good practice—it’s a legal requirement that can make or break your exemption status. Understanding the verification standards and implementing efficient processes is essential for compliant fundraising.

Why Verification Is Critical Under 506(c)

The SEC established strict verification requirements as the trade-off for allowing general solicitation under Rule 506(c):

SEC scrutiny for 506(c) offerings – Because 506(c) offerings can be marketed publicly, they receive heightened regulatory attention. The SEC has conducted targeted examinations of 506(c) issuers specifically focused on verification practices. In enforcement actions, inadequate verification procedures have been central to finding violations.

Cannot just “accept investor representations” – Unlike 506(b), where self-certification is generally sufficient, 506(c) requires you to take “reasonable steps” to verify accredited status. Having investors simply check a box or sign a statement declaring they’re accredited does not satisfy this requirement. The verification must be based on objective evidence reviewed by you or a third party.

This higher standard serves as an investor protection mechanism—since 506(c) offerings can reach a wider audience through advertising, the SEC wants greater assurance that only qualified investors participate.

Acceptable Verification Methods

The SEC provides several “safe harbor” methods that are deemed to satisfy the verification requirement:

CPA, attorney, or financial advisor letters – Written confirmation from a licensed professional that they have taken reasonable steps to verify the investor’s accredited status within the past three months. This is often the least intrusive option for investors concerned about sharing detailed financial information directly with fund managers.

Review of tax returns, bank statements, and W-2s – For income-based qualification, you can review IRS forms showing income over $200,000 (or $300,000 with a spouse) for the two most recent years, along with a written representation about expectations for the current year. For net worth qualification, you can review bank statements, brokerage statements, tax assessments, and liability statements dated within the past three months.

Third-party verification services – Several specialized services have emerged to handle accreditation verification while providing a buffer between investors and fund managers. These services collect and review documentation, then provide certification of accredited status without sharing the underlying financial details with the fund.

The SEC also acknowledges that other reasonable methods may be appropriate depending on the circumstances. The key is that your approach must be reasonable in light of the facts, including:

• The nature of the investor
• The amount and type of information you have about the investor
• The nature of the offering, including how the investor was solicited

Keeping Compliance Records

Proper documentation of your verification process is as important as the verification itself:

Retain proof of verification – Maintain complete records of all verification materials:

• For professional letters: the actual letter, evidence of the professional’s credentials, and confirmation it was properly executed
• For document review: copies of all financial documents reviewed (redacted if needed for privacy)
• For third-party services: the verification report and evidence of the service’s verification methodology

These records must be maintained for at least the duration of the offering and preferably for several years afterward.

Establish a compliance log – Create a standardized system that tracks:

• Date verification was completed
• Method used for each investor
• Who performed the verification
• When re-verification would be needed (if applicable)
• Any unusual circumstances or exceptions

This log serves as a quick reference to demonstrate your systematic approach to compliance.

Prepare for possible SEC audits – Organize verification materials so they can be efficiently provided if requested during an examination. This includes having clear policies and procedures documented, training records for team members involved in the verification process, and a system for addressing questions or unusual situations.

While these verification requirements add complexity to your capital raising process, they’re the necessary cost of the marketing freedom 506(c) provides. Many fund managers find that once they establish efficient systems, the verification process becomes manageable—especially when weighed against the advantages of broader marketing.

With your compliance procedures in place, the focus shifts to creating the materials and building the trust necessary to convert interested prospects into committed investors.

Building Trust Through Professional Materials and Transparency

In private fund investing, trust is your most valuable currency. Investors are entrusting you with significant capital, often for extended periods with limited liquidity. Professional documentation and transparent communication are essential for building the confidence needed to secure commitments.

Essential Materials for Raising Capital

Your offering documents create critical first impressions and set the legal foundation for your investor relationships:

Professional PPM (Private Placement Memorandum) – This comprehensive disclosure document serves multiple purposes:

• Explains your investment strategy and fund terms
• Discloses all material risks
• Outlines fees and expenses
• Describes the management team
• Details investor rights and obligations

A well-crafted PPM demonstrates professionalism and thoroughness while providing legal protection against claims that investors weren’t properly informed about risks. For debt funds specifically, your PPM should clearly explain:

• Loan origination criteria
• Underwriting standards
• Default procedures
• Security interests and collateral requirements
• Distribution timing and calculations

Generic templates rarely serve your needs adequately—your PPM should be tailored to your specific strategy and fund structure.

Clear subscription documents – The subscription agreement is the actual investment contract between your fund and the investor. Key elements include:

• Investment amount and payment terms
• Investor representations and warranties
• Acknowledgment of risks
• Consent to electronic communications (if applicable)
• Signature blocks and execution instructions

Make these documents as straightforward as possible while including necessary legal protections. Complex, confusing subscription processes can derail otherwise interested investors.

Investor qualification questionnaires – These forms collect information to determine investor eligibility and suitability. They typically include:

• Accreditation status verification questions
• Investment experience and sophistication assessment
• Anti-money laundering information
• Tax identification details
• Contact preferences

Well-designed questionnaires gather all necessary information without being unnecessarily intrusive or burdensome.

Transparency Builds Confidence

Beyond formal documents, your communication approach significantly impacts investor confidence:

Full disclosure of risks and conflicts – Counterintuitively, being forthright about potential risks and conflicts of interest builds trust rather than deterring investors. Sophisticated investors know all investments involve risk—they’re more concerned about risks you haven’t disclosed than those you have. Common disclosures for debt funds include:

• Borrower default risks
• Interest rate fluctuation impacts
• Manager compensation conflicts
• Related party transaction policies
• Liquidity limitations

Track record presentation (or lack of track record honesty) – If you have relevant experience, present it accurately and completely:

• Include both successful and unsuccessful investments
• Explain your calculation methodology
• Provide appropriate context and market comparison
• Make clear distinctions between actual returns and pro forma examples

If you lack a directly relevant track record, be honest about it. Explain how your other experience prepares you for this role and how you’ve structured the fund to mitigate the experience gap.

Regular updates during capital raise – Keep prospective investors informed during the fundraising process:

• Provide progress updates on capital commitments
• Share new developments related to the investment strategy
• Respond promptly to questions and due diligence requests
• Explain any changes to fund terms or timeline

This ongoing communication demonstrates operational competence and reinforces your commitment to transparency.

Using Webinars, Q&As, and Investor Calls

Direct interaction with prospective investors can accelerate the trust-building process:

Opportunity to educate and build rapport – Interactive formats allow you to:

• Demonstrate your expertise through thoughtful responses
• Show your communication style and accessibility
• Address concerns constructively
• Connect personally with potential investors

These interactions give investors insight into your character and competence that written materials alone cannot convey.

Clarifying offering details and risks – Use these sessions to ensure investors truly understand:

• How your debt fund works operationally
• What risks are most relevant to your strategy
• How you mitigate those risks
• How the economic structure benefits different stakeholders

A well-informed investor is typically a more confident one.

Managing expectations upfront – Direct conversations provide opportunities to:

• Address potential misconceptions before they become problems
• Set realistic expectations about returns and timelines
• Explain what communications and reporting investors will receive
• Clarify what circumstances might affect performance

Setting appropriate expectations early leads to stronger, more sustainable investor relationships.

Remember that in regulated offerings, all communications—including informal calls and webinars—are subject to anti-fraud provisions. Maintain consistency between these discussions and your formal offering documents, and document any material information shared in these settings.

With trust established through professional materials and transparent communication, you may want to consider more structured approaches to engaging potential investors.

Hosting Webinars and Events to Attract Investors

Well-executed investor events can significantly accelerate your capital raising by efficiently engaging multiple prospects while allowing them to experience your expertise firsthand. Whether virtual or in-person, these events require careful planning and execution to be both effective and compliant.

Benefits of Live Investor Events

Live events offer unique advantages compared to other communication methods:

Personal interaction builds trust faster – Seeing how you think, speak, and respond to questions gives investors confidence that can’t be developed through documents alone. Your knowledge, professionalism, and authenticity are on display, allowing investors to form impressions that typically speed up their decision-making process.

Opportunity to explain complex structures – Debt fund structures sometimes involve nuanced legal and financial concepts that are easier to explain verbally with visual aids than in written documents. Live presentations allow you to:

• Use diagrams and examples
• Gauge understanding through body language and questions
• Adjust your explanation based on audience feedback
• Make abstract concepts concrete through storytelling

This clarity helps investors overcome hesitation stemming from confusion about how the fund works.

Ability to handle objections in real-time – Every investment opportunity faces objections, and addressing them promptly and thoughtfully can turn skeptics into supporters. In live settings, you can:

• Hear concerns directly from prospects
• Provide immediate, tailored responses
• Demonstrate your thought process and problem-solving approach
• Show how you handle challenging questions (a proxy for how you’ll handle difficult situations)

This real-time feedback loop often resolves concerns that might otherwise prevent investment.

Key Webinar and Event Components

Effective investor events share several important characteristics:

Focused, value-driven content (not sales) – The best events provide genuine educational value rather than aggressive selling:

• Context about the current lending environment
• Analysis of market opportunities and challenges
• Case studies of typical loans in your portfolio
• Educational content about how debt investments work

This value-first approach positions you as a knowledgeable advisor rather than just a product salesperson.

Clear explanation of the fund structure – While avoiding excessive technical detail, clearly outline:

• How capital flows through the fund
• The loan origination and underwriting process
• How interest income is generated and distributed
• The fund’s timeline and exit strategy
• Fee structures and manager compensation

Visual aids like diagrams of the fund structure and investment process help clarify these concepts.

Risk discussion as part of the pitch – Counterintuitively, addressing risks directly enhances credibility:

• Acknowledge the primary risks in your strategy
• Explain how your experience and systems mitigate these risks
• Discuss your contingency plans for potential problems
• Share examples of how you’ve handled challenges in the past

This balanced presentation demonstrates your thoughtfulness and honesty while actually reducing perceived risk through your preparation.

Legal Requirements During Live Events

Events must be conducted within the boundaries of your chosen Regulation D exemption:

No public invitations under 506(b) – If using Rule 506(b), your events must be private, with attendance limited to people with whom you have pre-existing relationships. This means:

• No public announcements of the event
• No open registration forms
• No encouragement for attendees to bring guests you don’t already know
• Careful vetting of all attendees before sending invitations

Even mentioning a specific private fund offering on social media or in public settings could jeopardize your 506(b) exemption.

Full disclaimers under 506(c) – If using Rule 506(c), you can host public events, but they must include clear disclaimers:

• Statements that the offering is limited to accredited investors only
• Reminders that investing involves risk, including potential loss of principal
• Notices that all information is qualified by the full offering documents
• Disclaimers about forward-looking statements and projections

These disclaimers should appear in invitations, presentation materials, and verbal statements during the event.

Document who attends and how they were invited – Maintain records of:

• How each attendee was invited
• The basis for including them (pre-existing relationship for 506(b))
• What materials were provided during the event
• Any follow-up information sent afterward

This documentation demonstrates your compliance efforts if questions arise later.

For 506(c) offerings, webinars can be particularly effective because they allow you to reach a wider audience while controlling your message and providing a streamlined path to your verification and subscription process. For 506(b) offerings, smaller, more intimate gatherings often work better, focusing on deepening relationships that were established before discussing the investment opportunity.

Well-executed events can dramatically shorten your fundraising timeline, but they require careful attention to regulatory boundaries to avoid compliance problems.

Common Pitfalls When Raising Capital for Debt Funds

Even experienced fund managers can stumble during the capital raising process. Being aware of these common mistakes can help you avoid costly errors that could derail your fund or create long-term regulatory problems.

Compliance Violations

Securities law violations are among the most serious mistakes, as they can trigger regulatory actions, investor rescission rights, and even personal liability:

General solicitation mistakes under 506(b) – The most common violation is inadvertently engaging in general solicitation while claiming a 506(b) exemption:

• Mentioning your specific fund on social media or public websites
• Discussing your offering at conferences or networking events with attendees you don’t know
• Sending offering materials to prospects without established relationships
• Having investors forward your materials to their contacts without proper controls

Once general solicitation occurs, it can’t be undone—your 506(b) exemption could be permanently compromised for that offering.

Inadequate investor verification under 506(c) – If using 506(c), insufficient verification processes create significant risk:

• Relying solely on investor self-certification
• Accepting verification documents without proper review
• Failing to document your verification process
• Using inconsistent standards for different investors

The SEC has specifically targeted deficient verification procedures in enforcement actions against 506(c) issuers.

Failure to file Form D on time – The Form D filing requirement is straightforward but frequently missed:

• Must be filed within 15 days of the first sale
• Amendment required for material changes
• Failure to file doesn’t automatically destroy your exemption but creates regulatory risk and potential disclosure issues for future offerings

Set reminders and assign clear responsibility for this filing to ensure compliance.

Poor Investor Communications

Communication issues can undermine investor confidence and create unnecessary friction:

Overpromising returns – Setting unrealistic expectations leads to disappointed investors and potential legal issues:

• Presenting best-case scenarios as likely outcomes
• Using “guaranteed” or “secure” terminology for investments that carry risk
• Cherry-picking historical results without proper context
• Failing to explain the assumptions behind projections

Always frame returns as targets or projections, not promises, and ensure your numbers are defensible based on reasonable assumptions.

Withholding material risk factors – Omitting or downplaying significant risks creates both legal and relationship problems:

• Not disclosing known challenges in your market segment
• Minimizing the implications of higher interest rates or economic changes
• Failing to discuss how specific risk factors apply to your strategy
• Omitting conflicts of interest that could affect investor outcomes

Complete, forthright risk disclosure actually builds trust while providing legal protection.

Infrequent updates leading to investor frustration – Poor communication during fundraising often predicts problems after closing:

• Long delays in responding to investor questions
• Missed deadlines without explanation
• Inadequate updates on fundraising progress
• Changing terms without clear communication

Establish consistent communication practices from the outset to set appropriate expectations.

Structural Mistakes in the Offering

Flaws in your fund structure or documentation can create problems that persist throughout the fund’s life:

Ambiguous terms in PPM – Unclear or contradictory language in your offering documents leads to disputes:

• Vague distribution provisions
• Poorly defined fee calculations
• Ambiguous investment criteria or concentration limits
• Inconsistent terms across different sections of your documents

Have your documents reviewed by experienced counsel and consider “stress testing” key provisions by asking “what if” questions about unusual scenarios.

Weak or missing operating agreements – The operating agreement governs how your fund actually functions:

• Insufficient manager authority to handle loan modifications or workouts
• Unclear provisions for removing or replacing managers
• Inadequate indemnification protections
• Missing provisions for handling investor defaults

This agreement should anticipate potential friction points and provide clear resolution mechanisms.

Inadequate collateral and loan underwriting – Structural weakness in your lending approach will eventually harm performance:

• Unrealistic loan-to-value assumptions
• Insufficient borrower qualification standards
• Inadequate legal documentation for security interests
• Missing or inconsistent loan servicing procedures

Your offering should include robust underwriting standards and loan management procedures that investors can evaluate as part of their due diligence.

Many of these pitfalls stem from inexperience, cutting corners, or rushing the fundraising process. Taking the time to establish proper structures, documentation, and procedures from the beginning creates a foundation for both successful capital raising and effective fund operations.

Conclusion

Raising capital for a debt fund requires navigating complex regulatory requirements while effectively communicating your value proposition to potential investors. The process demands attention to both legal compliance and relationship development—each equally important to your success.

Your journey starts with choosing the right regulatory framework—typically Rule 506(b) or 506(c)—based on your marketing needs and investor network. This decision shapes everything from how you approach potential investors to what verification processes you’ll need to implement.

With your regulatory path established, defining your target investor profile allows you to tailor your messaging and materials to those most likely to invest. Understanding what motivates these investors—whether income, stability, or portfolio diversification—helps you communicate your fund’s benefits in relevant, compelling ways.

Your marketing efforts must stay within regulatory boundaries while clearly conveying your fund’s value proposition. Professional documents, transparent communication, and thoughtful investor events build the trust necessary to secure commitments. Throughout this process, strict compliance with securities laws protects both you and your investors from potential problems.

Ultimately, successful capital raising isn’t just about securing investments—it’s about establishing relationships that can sustain your fund through market cycles and potentially support future offerings. By approaching fundraising with integrity, professionalism, and careful attention to compliance, you create a foundation for long-term success as a fund manager.

If you’re considering launching a debt fund or looking to improve your capital-raising approach, I’d be happy to discuss your specific situation. The right guidance early in the process can help you avoid costly mistakes while maximizing your chances of fundraising success.