The 4 Main Type of Investment Funds | Ep. 5

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Confused about which investment fund structure is right for your capital raising strategy? You're not alone. This deep dive into the four primary investment fund types delivers exactly what both aspiring fund managers and curious investors need to know.

We start by examining Regulation D offerings—both 506B and 506C structures—which dominate the landscape of hedge funds, private equity, and real estate investments. Discover why 95% of fund managers choose the 506B structure despite its marketing limitations, and learn the crucial differences in investor verification requirements that drive this decision. The strategic tradeoff between marketing freedom and administrative simplicity becomes crystal clear through practical examples.

The conversation then shifts to democratized investment vehicles—Regulation CF (Crowdfunding) and Regulation A (mini-IPOs)—that open doors for non-accredited investors. We explore the fascinating world of crowdfunded investments where average contributions hover around $250, alongside the compliance challenges of managing thousands of small investors. For those with bigger capital raising goals, we break down the two-tiered approach of Reg A offerings that allow raises up to $75 million.

Beyond just structures, we illuminate the investor classifications that underpin the entire system: non-accredited investors, accredited investors, qualified clients, and qualified purchasers. The SEC's protective rationale comes into focus as we discuss how these regulations shield less sophisticated investors while still providing access to opportunities. Looking forward, we even touch on potential regulatory changes that could transform who qualifies as an accredited investor.

Whether you're planning to launch your first fund or seeking to understand where your investments fit in the regulatory landscape, this episode provides the clarity you need to make informed decisions. Ready to learn more? Visit fundsonfirecom/founders for free access to our Fund Foundations 101 course.

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Transcript

Introduction to Fund Types

Speaker 1 0:00

Today we're going to talk about a question I get asked all the time. People are like what's the difference between the different type of funds and why should I choose one? If I'm thinking about getting started in a fund, why should I choose this one over that one? And so we're going to talk about the four major type of investment funds. Welcome to Funds on Fire, the podcast that ignites the passion of investment funds and capital raising. Here we turn the complexities of fund management into clear, actionable steps that drive results. I've invested into diverse real estate across the United States and managed thriving funds, and I'm committed to transforming lives through the vehicle of investment funds and helping others to do the same. Join me as we document the journey of scaling businesses, raising capital and impacting tens of thousands of people around the world. My name is Devin Robinson, and welcome to Funds on Fire. I'm Kevin Robinson, and welcome to Funds on Fire 506C.

Reg D 506B and 506C Explained

Speaker 1 0:47

And then the most popular types are going to be Reg CF, and we'll talk about, we'll talk about we'll dive into these a lot more a little bit later on what they are. And then Reg A. Now these are the primary structures you'll come across in the world of investment funds and understanding the difference between them are crucial if you ever want to be a fund manager. So we're going to dive right into here. So let's go ahead and talk about reg d 506b. So these are one of the most common fund structures that you're going to see. These are going to be your major funds. You're going to see hedge funds here, mostly in the reg d space. So reg d 506b and 506c this is where you're going to see hedge funds, private equity firms, real estate funds, debt funds most of them are going to operate in that Reg D space, primarily because of the tax strategies that you have here in the ways that you're going to be able to structure these and raise capital in the United States and globally. So let's talk about, like, who can invest into these different types of funds and how they're made up of.

Speaker 1 1:53

So the really unique thing about these is these allow you to have 35 non-accredited investors. Okay, so you to have 35 non-accredited investors and then you could have 1,999 accredited investors. Now most of the funds like 95% of the funds that you see out there are going to be 506Bs. One of the biggest reasons why they do this is because they just require a lot less validation, so much less validation. On the accreditation part of it, all they have to do in a 506B when they say, oh, they're accredited investors, is they just have to check a box that says they're accredited investors. With a 506C, this only allows accredited investors, so only accred, but they have to go through all types of stuff to confirm that they are accredited investors.

Investor Classifications Breakdown

Speaker 1 2:42

So let's, really quickly, let's talk about what the major type of I guess, investor type are. So you have non-accredited, accredited investors and you have qualified clients and qualified purchasers. Just, really quickly, I want to dive into what these four different types of people are. All right, so let's talk about what an accredited investor is. So an accredited investor we're going to go right here An accredited investor is somebody who has a $200,000 salary over the last two years and for the foreseeable future, or jointly, together with their spouse, have over $300,000 annual salary for the last two years and for the foreseeable future, or jointly together with their spouse, have over $300,000 annual salary for the last two years and for the foreseeable future, or they have a $1,000,000 net worth, excluding their primary residence.

Speaker 1 3:34

So that's going to be an accredited investor. And so if you are non-accredited, then you do not have these things, then a qualified client. A qualified client is somebody that has a $2.1 million net worth, excluding their primary residence. If you're an accredited investor and you own a company and it has over a $5 million evaluation, then you can actually qualify as an accredited investor. A qualified purchaser is somebody who has a net worth of $5 million, or they have a business or an entity with 25 million in assets and then also an accredited investor right here has as well an entity that has $5 million in assets. That will also qualify them as an accredited investor as well, which is really interesting. So that's what those qualifications for these investor types are in these investments. So you got to make sure that you have one of these in order to be able to be a part of a 506C, almost specifically Now 506B.

Speaker 1 4:31

Most of the people are going to be 506Bs. Now, the biggest thing here is 506Bs can not advertise, and it's really interesting because there's a lot of like gray area on what is actually advertising and what is not advertising, and so 506Bs can't go out and advertise. This is why you don't see giant billboards for huge hedge funds, because they can't go out and advertise, but they're at 506B because they like the fact that the validation for an accredited investor is so easy and it has a lot less paperwork than if somebody has to be an accredited investor. But the great thing about 506C is that they only take in accredited investors but they can advertise. So this is why you probably see some advertisements for funds and I do where it's like oh, we'll give you an 8% pref and this, this or that, and I'll see those on Instagram. Those are most likely 506Cs.

Marketing Restrictions and Opportunities

Speaker 1 5:23

Now the bigger companies too that you see a lot of them are 506Bs, where they are allowed non 35 non-accredited investor, and my first fund is a 506B and so we filled up our non-accredited investor points. But then like, I need to be able to go out and find more investors but I cannot advertise it. So this has grown mostly from word of mouth or referrals, or me going to meetups and talking to people, me going to events and talking to people, and so that's how I grow this fund. The most is from word of mouth or going to events and meeting up with a lot of people. So this is not very easy to scale. You want to. If you know that you have a really good investors, well, start up a 506B because it's a lot less paperwork for them to have to fill out to be able to. But you cannot market that Now. If you think, hey, I actually want to market it I'm pretty good at marketing, which me and my partners are then now our second fund will be an accredited investor only, and then it will allow us to advertise, which is going to be huge for us, because then we're not going to be able to get our name out there. More people will be able to get exposed to us and our mission and become a more part of who we are.

Speaker 1 6:34

Now, regcf is exactly what it looks like crowdfunding, and this is where they bring in a lot of people to almost like democratize investing. This allows anybody to invest in startups and small businesses, and so you can raise money in these ones from both accred and non-accred accredited investors. But the only difference here is you can only raise $5 million. That's the maximum you can raise here, so this is going to be more asset based. You're going to have a pre-defined, so you're going to know exactly what you're going to be investing here when you go to pitch this, so you can raise money from accredited and non-accredited investors. The biggest thing here is that they can only invest up to 10% of their net worth, so they can't come in if they have a net worth of, or they don't have a net worth of, a million dollars, so they can't invest $100,000. So you might have somebody that comes into a bunch of money and they're like I want to invest all this money, but their net worth isn't a million dollars, so they can't invest $100,000. They can only invest 10% of their net worth and invest $100,000. They can only invest 10% of their net worth, and so that makes it a little bit different when you're trying to raise capital from those people. Now, this does have the cap right. We talked about that. You can only raise up to $5 million and you can only do that within a 12 month period. So it's a lot more strict on the enrollment or the subscription period for that fund that you can advertise, but you must direct potential investors to your crowdfunding portal, which handles the investing transaction. It handles the compliance, it handles all of that stuff.

Reg CF: Crowdfunding Dynamics

Speaker 1 8:00

This is a really, really interesting. The pros of this is it's broader investment base. I think the average investment on reg CFs is $250. This is where you see like Grant Cardone going in and talking about hey, we're doing this, we're doing that, we've got this building, we've got this asset here, we're about to invest in this building. Right behind me I'm checking my jet and we're going right over there. So this is where you see him doing that. This is where you see Tai Lopez talking about buying up these radio shacks and bringing people in here. So they're bringing a ton of people into here and people are investing $250 with them, which is insane.

Speaker 1 8:32

Now, the crazy thing about this is like, just imagine doing all of that, accounting for thousands of people inside of your reg CF. I actually heard a podcast episode from Grant Cardone's, I think, like the guy who raises capital and runs his operation, and they just have thousands and thousands of people in their fund and they have to do K-1s for all of them and make sure their compliance is up to date and make sure that they communicate with all these people, and that just sounds like a massive, massive headache. So you have the ability to be able to reach a ton more people. It's way more accessible to non-accredited investors, but you have a low fundraising cap. There's more disclosures that you have to put. Compliance is crazy. There's just a lot more. I actually think it costs almost double. And so when we talk about these, the cost of these these are going to cost you. A Reg D is going to cost you anywhere between 15 to heck I've heard of 80,000, but let's just say like 50 K to set up, whereas a Reg CF could cost you anywhere up to a hundred thousand dollars to set up. Like joke. It's going to cost you $100,000 to set up a reg CF.

Speaker 1 9:34

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Reg A: The Mini IPO Option

Speaker 1 10:36

A Reg A. These are often referred to as like mini IPOs. This is going to be something like if you know that you are, you want to have or you want to go and you want to invest into somebody's business. You're like, hey, I want to buy this business or I have this business I want to raise capital for and I want to take it public. This allows companies to raise larger amount of money. So I think you can raise $75 million in these ones from the public with fewer regulatory requirements than a traditional IPO. So if you know that you want to take your business public, that you want to raise a ton of money from the public, then you can do that. So this allows both accredited and non. So we'll go accred and non-accredited investors can invest in these.

Speaker 1 11:15

Non-accredited investors, again limited to 10% of their net worth, so they really try to regulate a lot of these stuff and people go why do they try to regulate so much One? Because they wanna protect Grandma Charlene from the sleazeball salesman that has this crypto fund that's like, oh, we're going to invest into this, this or that, and then take their money and run. And so that's why they want to make sure that they protect grandma shirley from skeezy fund managers who are just taking people's money and running. They want to make sure that these people don't put all of their life savings into an investment that somebody has and then lose it all. And so that's one of the biggest reasons why the SEC has come and said we want to categorize these people in these certain classifications.

Speaker 1 11:54

Well, because, honestly, in a 506B, you're only allowed 35 non-savvy investors. They almost categorize non-accredited investors as not savvy enough to invest into certain funds, so they say, hey, only 35 are allowed in here. Now I know that they are actually going to change some of those stipulations allowing people to be accredited investors based on a test Like and I think they're literally going to do an investment aptitude test to see if these people can qualify to actually be accredited investors because, like, literally their only qualification is you make a lot of money, so you must be a savvy investor. That's far from the truth. You got professional athletes that have no idea how to invest but make a lot of money, so now, all of a sudden, they're accredited investors. That's crazy. So I think they're actually trying to pass some legislation that allows savvy investors that just don't make a whole lot of money to be able to invest, which is fantastic.

Speaker 1 12:42

So back to reg a. They do have a little bit of cap on the raise. They have different tiers. Tier one is one to 25 million and then tier two is up to 75 million, and this is over a 12 month period. Now the difference between these tiers is just a lot of times it's paperwork, compliance, the amount of people that you're allowed in, just different things like that you can advertise widely, similar to a reg D 506C. You do have to have a lot of pre-disclosures. This is another one where you have to pre-define the asset here and so you want to make sure that you're disclosing that to your investor. So this does have a higher raising cap with a broad investor base and the ability to advertise. So very similar to the CF model and the 506C model, but it does have a higher compliance cost with pretty extensive disclosure requirements.

Speaker 1 13:31

It's really interesting when you see a lot of these people that are operating in these areas here and why they categorize them. Rather, they categorize the different type of people that are allowed in your fund, because the last thing you want is somebody coming to you and bothering you a ton because they're like, hey, how's my investment doing, how's my investment doing, how's my investment doing when they only put in like 10 or 20 000 because they're like hey, how's my investment doing, how's my investment doing, how's my investment doing when they only put in like 10 or $20,000 because they've given you their last 10 or $20,000 that they need to honestly use for their mortgage or use because it's their savings and it's their rainy day fund. So they're like please, I hope that you can help me to grow this. It's really interesting in the space of like consulting or even sales, you can they have. They have a saying where it's like, where they have these almost like these different avatars between your two different clients. You have the client that spent $5,000 with you and they're like oh my gosh, I hope this works. This is my last $5,000. I'm really relying on this to work. Please make it work, please, please, please. Then you have the guy who put in like $50,000 and he's just like wire sent and just like wire sent and then, like you, don't hear from him.

Choosing the Right Fund Structure

Speaker 1 14:27

That was a different type of honestly. Those are the different type of people and a lot of times, that's the difference between accredited investors and non-accredited investors. Now I've got a ton of non-accredited investors in our fund that are not like that. I'm super thankful. They trust me explicitly and they give me some really good feedback, but they also don't bother me about what the fund is doing. They trust me and because of that, it allows me to be able to operate at a high level without the stress of being like, oh my gosh, these are these people's life savings. We're still giving good returns and they're not stressing about it, which is fantastic. So I absolutely love these type of funds.

Speaker 1 14:59

Now, to close this all out, if you're coming to me and you're like, oh hey, devin, what type of funds should I start? This is what I'm thinking about doing. Doing Well, depends on how much money you have. If you have $100,000 and you want to go as broad as possible, then a reg CF could be great for you or reg A could be great for you because it allows you to raise more money, but it allows you to get out there as a capital raiser. That could be a great thing for you.

Speaker 1 15:19

But if you are a little bit more limited on funds and you don't have a specific asset that you want to invest into let's say that you want to invest into like an overall thesis of hey, single families here or hey, cryptocurrency, hey, forex trading, hedge funds, something like that then you want to be in a Reg D 506, b or C, because then that allows you to diversify your investments within whatever your thesis says you are allowed to invest into. You don't have to have a specified asset. And then from there it's just how comfortable do you feel with your ability to be able to raise capital from accredited investors only? For me, I was like I don't know any accredited investors, so I started out with a reg D 506B. I actually filled up my non-accredited investor pool, which actually some of our SEC attorney said was extremely rare for the type of fund that we had, because we have like a blind fund which is more of a pool of money rather than a syndication, that is, set asset type, fund, and so we fill up our non-accredited investors. And now I'm like I want to go out and advertise. So then we're going to open up a 506C so that we can go out and advertise. So it really just depends on what you guys want to get into, how you want to raise capital, the type of people that you might know or be connected to. You might be extremely connected, and a 506C is the way to go, because each of them have their advantages and disadvantages, so it's important to choose the one that best fits your strategy and compliance needs.

Speaker 1 16:38

Wow, I hope you enjoyed that. I have a quick favor. If you've been enjoying the show, there's one simple way you can support us, and it's by hitting that follow button or that subscribe button on the app you're listening to. I want to level this podcast up in every single way possible, bringing you more value, incredible content and guests and new strategies. Following the show and leaving a quick review goes a really long way in helping us to grow and continue to deliver top tier content. It's the only free thing I'll ever ask you to do and it makes a bigger impact than I can possibly put into words. So thank you for being a part of this journey and I'll definitely catch you on the next episode, to great success and.