How I Messed Up My SEC Filing (So You Don’t Have To)

We are building off off last week’s conversation, where we addressed some listener questions about setting up a fund. I thought it would be helpful to dive deeper into some of the errors I made when I was setting up my own fund and filing the Form D with the SEC. I want to take the time to share some key lessons learned along the way to make sure you don’t face the same challenges I did.

I’ve mentioned before on the podcast that I set up the fund myself—a decision I made to save anywhere from $30,000 to $80,000, which, frankly, is a massive amount of money for most people. And honestly, after going through the process, I still believe it’s totally possible to do it on your own. That being said, it’s easy to make mistakes, especially when you’re working with a website that’s… let’s just say, not built with the best user experience in mind.

So today, I’ll share a few things that tripped me up during the process, specifically regarding the SEC’s website and the Form D filing. These are not just my opinions; they’re things I’ve learned the hard way that could save you time, money, and stress. If you’re looking to dive into setting up a fund or filing with the SEC, pay close attention to these tips and insights.

…things I’ve learned the hard way that could save you time, money, and stress.

If you want a more detailed breakdown of the entire fund setup process, feel free to check out episode 7 of the podcast. There, I walk you through everything, step-by-step. But for now, let’s get into the mistakes I made and how you can avoid them.

Mistake 1: Selecting the Wrong Fund Type

When you go to the SEC’s website to submit your Form D for a Reg D filing, one of the first things you’ll encounter is item number nine. This asks you to select the type of fund you’re setting up. At first glance, this seems like a pretty straightforward question. But after navigating through the website, I realized how easy it is to make a mistake here. The options in this dropdown include things like debt fund, equity fund, pooled investment fund, and several others.

I made the mistake of checking both “pooled investment fund” and “debt fund.” In hindsight, I now realize this wasn’t the best choice, and it ended up causing me some unnecessary complications. Logically, my thinking was that a fund is, after all, a pool of capital, right? So I assumed that “pooled investment fund” made sense. Additionally, our fund focuses on issuing debt (specifically in the real estate sector), so I figured selecting debt fund was also necessary.

However, the SEC doesn’t view these two categories as interchangeable. A pooled investment fund generally refers to a structure where investors are pooling capital for the purpose of making investments. Debt funds focus on lending money, usually in the form of loans, and they might involve very different legal and regulatory considerations.

As a result, I had to amend my Form D after realizing my mistake. In the end, we decided that our fund is solely a debt fund because that’s what it is. We’re primarily lending capital, not pooling capital for other types of investments.

If you’re a private lender, or your fund is focused on making real estate loans, you will most likely fall under the debt fund category. In fact, if you’re not doing something highly specialized, I’d recommend just selecting debt fund. It simplifies the process and avoids confusion with the SEC’s classification system.

Unless you’re doing something out of the ordinary, you can likely stick with a debt fund. Keep it simple!

…you can likely stick with a debt fund. Keep it simple!

Mistake 2: Confusion Around Sales Compensation

Item number 12 on the Form D is another area where I ran into trouble. This section addresses sales compensation, which is a key issue when you’re raising capital for your fund. To legally be compensated for raising funds, you need to have a broker-dealer license. This registration allows you to raise capital legally and get paid for doing so.

I didn’t have a broker-dealer license, and I thought it was logical to list myself as the recipient of sales compensation. After all, I raise capital for the fund and earn compensation indirectly through the fund’s operations. Well, this turned out to be a problem later on.

The way the SEC’s website works is that if you don’t have a broker-dealer license, the form doesn’t allow you to bypass the sales compensation section easily. There’s no simple “next” button to click, which frustrated me. Instead, the system simply asks for a name and license number for anyone receiving compensation for raising funds. Since I didn’t have a license number to provide, I just listed myself, thinking that would suffice.

When it came time to do our blue sky filings with individual states, the states rejected my filing because I didn’t have a broker-dealer license number. This was a huge setback and caused a lot of unnecessary delays.

In hindsight, the fix was simple, but the process was frustrating. There is a small button in the bottom left-hand corner of the website, labeled “add and remove.” This allows you to remove this entire section if you’re not working with a broker-dealer. By removing it, you can bypass this part of the form completely.

Unless you are working with licensed broker-dealers, you should not list anyone for sales compensation. If you are the General Partner (GP) of the fund and are raising capital, you’re not required to list yourself in this section. Just make sure to remove the sales compensation part from the form if it doesn’t apply.

It’s important to pay attention to the nuances of sales compensation and make sure you’re compliant with SEC rules, especially if you’re raising capital without a broker-dealer license.

Pay attention to the nuances of sales compensation and make sure you’re compliant with SEC rules

Mistake 3: Overly Optimistic Investor Website

Now, this next mistake wasn’t directly related to the Form D filing, but it is still crucial for anyone raising capital. Early on, I set up our investor website with an overly optimistic view of what investors could expect. I had past investor testimonials praising the fund’s performance. I made the mistake of over-promising expected returns, claiming this was an excellent opportunity in a post-COVID world with relatively low yields.

The SEC did not appreciate this. Even though I believed the investment was very low risk (we’re lending against real estate assets with first lien positions, low loan-to-value ratios, and strong collateral), the SEC takes issue with any promotional language that seems too positive or guarantees future returns. They want to make sure investors are aware of the risks. They don’t want any fundraising material to mislead potential investors about the security of the investment.

The SEC doesn’t want fund managers or GPs to present their opportunities as “guaranteed” or “safe”. There are inherent risks involved in every investment. As I found out, being too optimistic on your website can get you flagged, which can delay your fund’s fundraising efforts and possibly even put you at risk of noncompliance.

As I found out, being too optimistic on your website can get you flagged

So, we made several changes to our website to ensure it was more neutral in tone. We included language that clarified that past returns are not indicative of future results, and we emphasized the risks involved, including the potential for market downturns and the possibility of losing money.

For example, we added a disclaimer about our returns calculator. We explain that any projections are based on ideal conditions and past performance but not guaranteed.

Be neutral in your marketing materials. You should outline both the pros and cons of the investment. While it’s important to share the benefits, you should also highlight the potential risks involved. This can help you avoid potential SEC issues and ensure you’re being transparent with investors.

Conclusion

So, to summarize the three main mistakes I made:

Fund Type Confusion: Always double-check the fund type you’re selecting on the SEC’s website. Most private lenders will classify their funds as debt funds, which simplifies the filing process.

Sales Compensation: Be cautious about listing sales compensation, especially if you don’t have a broker-dealer license. Make sure to use the “add and remove” button to bypass this section if it’s not applicable.

Overly Optimistic Marketing: When setting up your investor website, avoid overpromising. Present the opportunity with a balanced perspective, ensuring you’re not guaranteeing returns or minimizing risks.

I hope these insights help you avoid the mistakes I made and save you time and frustration. Remember, the SEC filing process can be tricky. If you stay organized, follow the rules, and stay transparent, you’ll be in a much better position.

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