Week 21: Undue Burden
I <3 LPs, too. More than GPs, actually.
Housekeeping
Welcome to another week of No NDA Required. We’re here to fill the void that exists between emerging fund managers.
My morning routine consists of chugging 2 scoops of pre-workout mixed with Saratoga and eating a David protein bar. What about yours?
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As always, please hit me back with feedback and comments—I’m constantly seeking ways to make this newsletter a more valuable read.
Diving right in and keeping things brief:
On my radar:
Have your portcos apply to Distilled Intelligence here. Be sure to have them name-drop NNR!
If you’re an investor, shoot me an email here and we’ll get you on the ticket pre-order list.
Thinking of putting together an emerging fund manager/VC dinner sometime before summer starts… maybe one in LA and one in NYC? Shoot me an email here if you wanna come!
Special edition NNR next week focused on productivity & prosumer FoW tools.
The main idea:
Same shpiel as last week… I am not an attorney. I am not an authoritative source. Question everything you read on the internet. Trust but verify. Do not listen to me. More importantly, do not sue me. Thanks!
506(c) got a makeover
Regulation D
The best starting point to talk about this is by explaining Regulation D (commonly called Reg D). Regulation D sets out how VC funds can offer and sell interests in the fund to investors without doing a full SEC registration. It comes from the Securities Act of 1933, and is a framework of rules that makes it easier for companies and investment funds to raise money without registering their securities with the SEC.
For more context on registering with the SEC, check out last week’s edition":
Reg D basically outlines what the rules of engagement are for VC funds. It tells funds to file a Form D, sets solicitation rules with 506(b) and (c), mandates compliance with Blue Sky Laws, and enforces certain disclosures.
What are 506(b) and (c)?
Both 506(b) and 506(c) are SEC Reg D exemptions that allow venture funds to raise money without going through a full SEC registration.
From a flow perspective, 506(b) and (c) sit at the bottom. The Securities Act outlines Reg D, which contains Rules 506(b) and 506(c) as exceptions. See my poor attempt at visualizing this below:
When filing a Form D (the filing tied to this Act), a venture fund would check a box indicating which exemption they are relying on. The Form D must be filed electronically with the SEC (within 15 days after the first sale). But which box should you check? Traditionally, this has been the criteria:
506(b):
No general solicitation or advertising, meaning that you can’t publicly market the offering (e.g., no open website pitches, social media campaigns, or mass email blasts).
There is no cap on how many accredited investors you can have in the fund. See the definition here, it’s not worth getting into that here.
You can include up to 35 investors who are not accredited but can demonstrate sufficient knowledge or experience to evaluate the risks of the investment. Because non-accredited investors are involved, you’re typically required to provide more thorough disclosures akin to what you’d see in a registered offering.
The investors would “self attest” to the fact that they are accredited, by literally just checking a box on your subscription documents.
In order to solicit someone, there must be a “pre-existing, substantive relationship” with that individual or entity. Basically, you can’t connect with them just for the sole purpose of soliciting the fund. Most attorneys recommend having an existing relationship for at least 30 days before soliciting the fund so as to clearly separate solicitation efforts.
506(c):
As interesting context: In 2012, Congress created the JOBS Act. Before the JOBS Act, only 506(b) existed, which did not allow for general solicitation. As part of the JOBS Act, Congress asked the SEC to update rule 506 to allow funds and startups to publicly advertise their raises — as long as they verify all investors are accredited. To allow for this, the SEC then created 506(c).
General solicitation is allowed, meaning you can publicly market the offering in almost any format (podcasts, social media, announcements).
You can have literally 0 non-accredited investors. They must all be accredited, with no exceptions.
Importantly, you must verify each investor’s accredited status (e.g., by checking tax returns, net worth statements, letters from a CPA/lawyer, etc.). This has been the biggest hurdle to 506(c) given the privacy concerns that LPs may have. The most common portal for this has been VerifyInvestor.com.
The rule gives examples of how to verify accredited status but says companies don’t have to use those examples. Instead, companies can look at the specific situation to decide what’s reasonable. The SEC also said that using a minimum investment amount is one valid factor in the verification process.
So all in all, 506(c) is a pretty new thing, and there isn’t an ultra-clear cut process on how it all works.
So what is changing?
No-Action Letters:
The SEC released something called a No-Action Letter. Let me start by explaining what that is, for context:
An SEC no-action letter is basically a public signal from the SEC staff saying they don’t plan to take enforcement action if you move forward with a specific plan — even if that plan might otherwise raise legal questions under securities laws. It’s not a formal approval, and it’s not legally binding, but it does offer some reassurance: as long as you stick to the exact facts you laid out in your request, the SEC isn’t likely to step in.
To get one, you submit a detailed explanation of what you want to do and why you believe it doesn’t break the rules. If the SEC staff agrees, they’ll respond with a letter saying they don’t intend to pursue enforcement — again, assuming everything stays exactly as you described.
Companies usually ask for these when the legal landscape is uncertain, especially with new financial products or technologies. In that sense, a no-action letter is a cautious green light. More importantly, these letters often give a window into how the SEC is approaching newer or evolving areas — like crypto, crowdfunding, or alternative fund structures — without the agency having to formally rewrite the rules. That’s why people pay close attention to them: they hint at where regulation might be going next.
The recent No-Action Letter in response to Latham Watkins’ request:
On March 6th, Latham Watkins sent this letter to the SEC. They outlined that they plan to approach rule 506(c) investor verification by leveraging the total investment amount as their method. More practically, they “believe that an issuer in a Rule 506(c) offering will have taken reasonable steps to verify the accredited investor status of the purchasers by using the minimum investment amounts and related conditions described below”:
Individuals
The company gets written confirmation that:
The investor qualifies as an accredited investor under Rule 501(a)(5) or 501(a)(6).
They are not using financing from someone else for this specific investment.
And the investor agrees to invest at least $200,000 (this can be in installments if agreed in advance).
Entities Qualified by Assets
The company gets written confirmation that:
The investor is an accredited entity under Rule 501(a)(3), (7), (9), or (12).
They are not using outside financing for this investment.
And the entity agrees to invest at least $1,000,000 (can be in installments under a binding agreement).
Entities Qualified Because All Owners Are Accredited
For entities that qualify only because all their owners are accredited, the company gets written confirmation that:
The entity qualifies under Rule 501(a)(8) because all owners are accredited under Rule 501(a)(3), (5), (6), (7), (9), or (12).
Each owner has committed to invest at least $200,000 (if an individual) or $1,000,000 (if an entity), either directly or through the entity.
Neither the entity nor any of its owners is using financing for this investment.
And the entity agrees to invest either:
$1,000,000 total; or
$200,000 per owner if there are fewer than five individual owners.
No Knowledge of Misrepresentation
In all cases, the company must not know anything that contradicts the investor’s claims, either about being accredited or not using outside financing for the investment.
Because this proposed method relies on written statements, no outside financing, and a high minimum investment, they believe this combination meets the standard of "reasonable steps" in Rule 506(c).
On March 12th, the SEC published this No-Action Letter in response to Latham Watkins’ letter, “agreeing” with their stance, echoing that a high minimum investment can be a helpful factor when verifying if someone is accredited. They once again stated that if someone invests a large amount of money and it’s not financed by someone else, then it's reasonable to assume they are accredited — unless there are red flags.
They highlighted the three pieces necessary in addition to the large check size would be:
The investor would provide a written confirmation that they are accredited.
They’d confirm that neither their investment, nor that of any equity owner (in the case of some entities), is financed by a third party.
The company would not know of anything that contradicts those claims.
Based on these representations, the SEC agrees that it would be reasonable for the issuer to conclude that the investor is accredited.
All this in practice:
So now we understand the context & the changes (hopefully). The next logical step is, what do we do with this information? If you’re already registered as a 506(c) fund on your Form D, then you can skip to “Step Two" (the next paragraph). If you are currently registered as a 506(b) fund, then you can’t currently take advantage of any of this, and you must first re-file as a 506(c) fund. I highly recommend you talk to your attorney about this to find out what your options are.
Once you’re certain you’re a 506(c) fund, then the next step is to meet with your fund admin, your attorney, and your LP onboarding portal to make the necessary changes. I don’t know what those changes will look like (I’m not an attorney & it’s case by case) but my best guess is that there will be an additional addendum to your subscription documents that make sure the check size meets that minimum, and that they self attest to the points above, depending on what kind of investor they are.
The thing to keep an eye on is if you’re currently a 506(b) who has non-accredited LPs in the fund. Talk to your attorney about what happens to those LPs, and if there is a way to still take advantage of these new changes — I honestly don’t know.
Headlines
Apparently, David protein bars have been causing anal leakage. Just eat real food, people.
11x is deep into a debacle… basically, they lied about their customers and traction. It’s all getting uncovered now, and a16z is PISSED. Apparently they’ve also been paying their employees late, which is bad bad bad. ZoomInfo is now suing 11x, because 11x used their logo as a “customer,” even though ZoomInfo has never been a customer…
The Series A was led by Benchmark, with participation from 20VC, Quiet Capital, SV Angel, Lux Capital, Abstract Ventures, Operator Partners, Visionaries, Activant, HubSpot Ventures, Project A, 20Growth, and 20Sales. The Series B was led by Andreessen Horowitz (a16z), with no additional investors explicitly listed for that round. (source)
Browser Use is leading the charge on web-enabled AI agents. They just closed a $17M seed round led by Felicis’ Astasia Myers with participation from Paul Graham, A Capital, and Nexus Venture Partners.
Perplexity is apparently in talks to raise $1B at an $18B valuation. Just stoooopid.
XEIA Venture Partners invested in Vonova’s seed round, a company that uses minimally invasive transvascular technology to help treat neurological disorders.
Long Journey raised a $181,818,181.8 fund because of Lee Jacobs’ post-Oct 7th connection to Judaism. He explains how the “repetition of 18s, embodies a personal commitment to life and creation and mirrors what Long Journey has always been about: recognizing and amplifying belief.” An amazing Kiddush Hashem.
Bar Keepers Friend, founded in 1882, was acquired by Forward Consumer Partners. What’s the IRR for the funds who invested at seed?
23andMe has filed for Chapter 11 bankruptcy to reorganize its debts and facilitate a court-supervised sale of its assets. CEO Anne Wojcicki has resigned but plans to bid for the company as an independent buyer, citing her commitment to its future. The company has secured $35 million in financing to sustain operations during the bankruptcy and sale process.
Waymo is coming to DC.
Napster was acquired for $207M by Infinite Reality. The company is now 25+ years old… this feels a bit like the Bar Keepers Friend acquisition timeline.
Aardvark Weather replaces traditional forecasting pipelines with a single AI model, enabling predictions in minutes on standard desktop computers. It outperforms the US GFS system with just 10% of the input data.
Bryan Johnson is doping.
Silna announced a $27M seed & series A led by Accel and Bain Capital. What made me laugh are the round participants. It looks like the sponsor section of TBPN:
Paid AI raised 10 million euros from EQT Ventures and Sequoia.
Icing on the Cake:
Distilled Intelligence! Want to raise money? Come to Distilled Intelligence. Want to source great companies? Come to Distilled Intelligence. Want to help your portcos succeed? Tell them to come to Distilled Intelligence.
IRL events
a16z is hosting an event for AI voice founders in SF here.
Andrew Yeung is hosting his next founder poker night on April 1 in NYC here.
Startup Fundraising Summit for VCs & Founders on April 8 in NYC here.
He’s also hosting a cool fireside chat on April 10 in NYC here.
Brex Social Club for Fintech on April 22 in NYC here.
The Info is hosting an event on April 28 in NYC here.
Some cool stuff on my radar
Here is this week’s pocket dump:
Someone should please buy this house so that you can invite me over. If I had $32k/mo, I would spend it all on this. It’s perfect.
I recently invested in a salad spinner and I must say, it’s pretty life changing.
Honestly haven’t seen too much cool shit this week! Sorry folks!
Closing
Thanks for taking time out of your Wednesday to read.
As always, you can find me on X and LinkedIn, and I’d love to hear from you via email. If you want to learn more about me, the best place to do so is at kia.vc. Whether it’s talking startups or just shooting the shit, I’m always happy to connect.
Onto the next!
//Eli