Recent enforcement actions brought by the Securities and Exchange Commission (SEC) involving private funds highlight more than the misconduct alleged in the complaints and settlement orders.[1] They also surface a variety of regulatory issues that can be easy to miss amid the headlines. Tucked beneath allegations of hidden markups and fees, misleading disclosures and aggressive sales practices are technical issues that private fund sponsors and their counsel deal with every day. They include:
- The difference between a Rule 506(b) and Rule 506(c) offering under the Securities Act of 1933 (Securities Act).
- The “no public offering” condition in Sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (Investment Company Act).
- The 20% nonqualifying basket under the venture capital adviser exemption (VC exemption) in the Investment Advisers Act of 1940 (Advisers Act).
- The mechanics of obtaining a fund’s consent to a principal transaction under Section 206(3) of the Advisers Act.
For a review of the basic regulatory building blocks applicable to private funds, see Securities Laws Fundamentals for Venture Capital Fund Managers.
Regulation D: Know which offering you’re conducting
Almost all private funds rely on Regulation D to offer their interests without Securities Act registration, and most rely on Rule 506(b), although Rule 506(c) has become more common in recent years. Importantly, the two rules are not interchangeable.
Rule 506(b) prohibits general solicitation and general advertising. Rule 506(c) permits general solicitation and general advertising, but all purchasers must be accredited investors, and the fund must take reasonable steps to verify each investor’s accredited status.
The SEC’s August 2026 complaint in SEC v. Spaventa is a useful example of what can happen when the fundraising process fits neither regime. According to the SEC, the defendants offered interests in 11 private funds using more than 100 sales agents who cold-called prospective investors, while also marketing the funds through websites and social media. The SEC alleged that this general solicitation made Rule 506(b) unavailable. Although some offerings purported to rely on Rule 506(c), the SEC further alleged that the defendants failed to take reasonable steps to verify that purchasers were accredited investors, including in cases where investor questionnaires did not establish accredited status.
The alleged facts are extreme, but the compliance point is basic: A fund’s fundraising practices and subscription process need to match the exemption on which it is relying. For a Rule 506(b) offering, fundraising practices should be designed to avoid general solicitation. For a Rule 506(c) offering, the fund must establish and follow a reasonable accredited investor verification process. Simply obtaining the self-certifications commonly used in a Rule 506(b) subscription agreement is not, by itself, sufficient. The Form D should also reflect the rule the fund is actually relying on.
A public offering also matters under the Investment Company Act
Sections 3(c)(1) and 3(c)(7) exclude private funds from the definition of investment company, but require, among other things, that a private fund not make or presently propose to make a public offering of its securities. Offering compliance therefore matters not only under the Securities Act, but also to a fund’s ability to rely on the exclusions that make it a private fund. Rule 506(c) is expressly accommodated in this framework: Section 201(b) of the Jumpstart Our Business Startups (JOBS) Act provides that an offering conducted in compliance with Rule 506 is not a public offering for purposes of Sections 3(c)(1) and 3(c)(7). A fund may therefore engage in general solicitation without losing its ability to rely on Section 3(c)(1) or 3(c)(7) if the offering complies with Rule 506(c).
In Spaventa, the SEC alleged that the funds engaged in general solicitation but did not satisfy Rule 506(c). According to the complaint, the funds’ offering documents stated that they relied on Section 3(c)(1) or 3(c)(7). While the SEC did not bring an Investment Company Act charge in Spaventa, it did do so in an earlier action against Vestech Partners in April 2026. There, the SEC found that no Securities Act registration exemption was available for offerings by a series of venture capital funds. It separately found that the funds were investment companies, that none was registered, and that no Investment Company Act exemption was available. Because the funds were unregistered investment companies but continued to offer and sell their interests, the SEC found that the advisers caused the funds’ violations of Section 7(a) of the Investment Company Act. Although the order does not tie that finding to the offering violations, the two sets of findings sitting side by side are a reminder that an offering that cannot be squared with Regulation D also puts pressure on the “no public offering” condition.
The VC exemption: Watch the 20% basket
Recent enforcement has also put the asset-composition requirements underlying the VC exemption back in focus. Section 203(l) of the Advisers Act exempts an adviser that advises solely venture capital funds from SEC registration. A key component of the definition of “venture capital fund” in Rule 203(l)-1 is the 20% nonqualifying basket. Generally, immediately after acquiring a nonqualifying investment, no more than 20% of a fund’s aggregate capital contributions and uncalled committed capital may consist of investments that are neither qualifying investments nor specified short-term holdings.
As discussed in our August 2025 post, the basket can hold essentially any type of nonqualifying investment, including debt, public company securities, interests in other investment funds and securities acquired in secondary transactions. In general, secondary purchases are not qualifying investments because, except in limited circumstances, a qualifying investment must be equity acquired directly from a qualifying portfolio company.
In a complaint filed in August 2026, the SEC alleged that an adviser claimed the VC exemption from April 2016 through March 2024, even though it managed funds that did not qualify as venture capital funds. The complaint alleges that, by at least May 2022, the adviser’s CEO knew that the adviser did not qualify for the exemption but “failed to register as an investment adviser, which meant that it was not subject to regular SEC examinations and therefore could engage in the scheme described [in the complaint] with a lower risk of detection.” While the complaint does not provide details regarding how particular funds failed to be venture capital funds, it does indicate that the 20% nonqualifying basket was likely breached as the funds participated in secondary purchases and investments in third-party funds.
For advisers relying on the VC exemption, the broader point is that eligibility should be monitored over time rather than tested once at formation. The annual Form ADV update that exempt reporting advisers already file may be a natural occasion to rerun the basket calculation across every fund in the complex, and the case is a reminder that the SEC does bring enforcement actions for failing to register as an investment adviser.
What does the fund actually own?
A fund seeking exposure to a private company might own newly issued shares purchased directly from the company, secondary shares acquired from an existing shareholder, or an interest in a special purpose vehicle (SPV) or another private fund that owns the shares. Those structures may provide exposure to the same underlying company, but they are not interchangeable from a regulatory perspective.
As described above, the distinction matters under the VC exemption. It can also affect valuation, liquidity and transfer restrictions, fees and expenses, and affiliated- or principal-transaction issues. It matters for disclosure purposes too. In Spaventa, the SEC alleged that investors were led to believe that the funds directly held specified pre-IPO securities when, according to the complaint, more than 90% of the funds’ holdings were interests in other private funds that purported to hold those shares. The SEC also alleged that sponsor-controlled entities acquired the relevant investments and transferred them to the funds at substantial markups. Vestech makes a related point from another angle. There, the SEC found that investors were assured that established institutional investors had invested alongside the funds in the same private technology companies when those investments had not occurred, or in one instance had occurred only in a much earlier funding round.
The takeaway here is that fund and marketing disclosures should accurately describe what the fund actually owns. A reference to “access” to a private company or an “investment in” a company should not obscure a materially different legal or economic structure when that distinction would matter to investors.
Principal transactions: Client consent and fiduciary duty
Spaventa also highlights the importance of identifying and obtaining the proper consent mechanism for principal transactions. Section 206(3) generally requires an adviser acting as principal for its own account in a securities transaction with a client to disclose in writing the capacity in which it is acting, and obtain the client’s consent before completing the transaction. For a private fund adviser, the client generally is the fund, not its investors.
In Spaventa, the SEC alleged that sponsor-controlled entities acquired investments and subsequently sold them to advised funds without obtaining the funds’ written consent. Notably, the complaint also points to the absence of a board, investor advisory committee or independent third party that could evaluate the transactions for the funds. For many private funds, a limited partner advisory committee may serve that function if the fund documents give it appropriate authority and the consent process satisfies Section 206(3)’s transaction-specific requirements.
The SEC’s February 2026 Madison Capital Funding order provides another example of a fund-level consent mechanism. In that matter, each fund had engaged an independent third-party review agent to review proposed principal transactions and provide consent on the fund’s behalf.
But Madison also shows that obtaining Section 206(3) consent does not end the analysis. Madison’s advisory agreements with the funds and its disclosures to investors stated that it would price principal transactions at fair value as reasonably determined by Madison, and the SEC found that Madison continued transferring loans to the funds during the COVID-19 market disruption without reasonably determining whether those transfers were at fair market value. The SEC charged Madison under the Advisers Act’s general antifraud provisions – Sections 206(2) and 206(4) and Rule 206(4)-8 – but not under Section 206(3). Madison satisfied the consent requirement, in other words, but the consent it obtained was based on its own valuation.
These issues come up in routine private fund transactions, including warehousing arrangements and transfers of sponsor-owned investments to a fund. In those situations, Section 206(3) consent is only one part of the analysis; the adviser also needs to consider conflicts disclosure, the fund documents and its broader fiduciary obligations.
Familiar rules, changing facts
While the alleged facts in some of these enforcement matters are far removed from the day-to-day operations of most private fund managers, the underlying rules are not. Regulation D, Sections 3(c)(1) and 3(c)(7), the VC exemption and Section 206(3) are all basic parts of the private-fund regulatory framework.
Problems can arise when a fund manager’s business changes but its regulatory analysis does not. A new fund may be marketed through a website or social media rather than through existing relationships. A venture strategy may move further into secondaries or fund-of-funds positions. Investments may be acquired through an SPV rather than directly from the company. Or market timing may require assets to be warehoused before being transferred to a fund. Each of those changes can affect regulatory conclusions that were sound when a fund was initially formed, and each is a sensible trigger for revisiting them. The recent cases are a useful reminder to do that work as the business evolves rather than after an examination begins.
[1] This post focuses on the private fund regulatory issues raised by the matters discussed rather than providing a comprehensive account of the alleged conduct, remedies or outcomes. Although some of the matters involve allegations of significant fraud or other misconduct, the regulatory issues discussed here can arise in more routine private fund activities. The matters are at different procedural stages, including pending litigation, settled administrative proceedings and consent judgments.
The authors
