Private Equity

Securities Law Considerations for Texas Private Equity and Venture Capital Firms

Launching and managing a private equity or venture capital fund involves more than sophisticated investment strategy and structuring. It also requires strict compliance with federal and Texas securities laws governing how partnership or membership interests in a fund may be offered and sold to investors. Even though most private funds are “private placements” exempt from public registration, these offerings are still heavily regulated and demand careful attention to investor qualifications, disclosure obligations, and filing requirements.

At Vanguard Legal PLLC, we advise fund sponsors and managers on the legal and regulatory aspects of fund formation, securities compliance, and ongoing operations. The following overview highlights key securities law considerations for Texas-based private equity and venture capital firms.

1. Offering Partnership Interests in a Private Fund

When a private equity or venture capital sponsor forms a fund—typically structured as a limited partnership (LP) or limited liability company (LLC)—the interests sold to investors (limited partnership interests or LLC membership interests) are “securities” under both federal and state law.

Selling those interests to investors, even privately, triggers securities law obligations. The sponsor must either:

Register the offering with the U.S. Securities and Exchange Commission (SEC) and the Texas State Securities Board (rare for private funds), or
Qualify for an exemption from registration (almost always the case for private funds).

Because full registration is impractical and unnecessary for most private funds, fund sponsors rely on private offering exemptions under federal law (typically Regulation D) and corresponding Texas exemptions.

2. Federal and Texas Securities Law Framework

Federal Law

The key federal statutes governing private fund offerings are:

Securities Act of 1933 – requires that all securities offered in the U.S. be registered with the SEC unless an exemption applies.
Investment Company Act of 1940 – generally requires investment companies to register, unless they qualify for exemptions (commonly §3(c)(1) or §3(c)(7) for private funds).
Investment Advisers Act of 1940 – regulates investment advisers and may require registration or an exemption for fund managers.

Texas Law

At the state level, the Texas Securities Act (Tex. Rev. Civ. Stat. Ann. art. 581-1 et seq.) and the Texas State Securities Board rules apply. Texas generally follows the federal framework, offering state-level exemptions for private offerings that parallel SEC Regulation D.

Even if an offering is federally exempt, the sponsor must typically file a notice and pay a filing fee to the Texas State Securities Board when investors reside in Texas.

3. Investor Suitability and Accredited Investor Standards

Accredited Investor Definition

Most private equity and venture capital funds rely on Rule 506(b) or Rule 506(c) under Regulation D, which limit participation to “accredited investors.”
An accredited investor includes (among others):

Individuals with net worth exceeding $1 million (excluding primary residence), or
Individuals with annual income over $200,000 ($300,000 with a spouse or partner) for the last two years with the expectation of the same in the current year, or
Certain entities (banks, insurance companies, trusts, and investment entities) meeting net worth or assets thresholds.

Verifying Accredited Investor Status

Under Rule 506(b), the issuer may rely on the investor’s self-certification through a signed questionnaire.
Under Rule 506(c), the issuer must take reasonable steps to verify accredited investor status—such as reviewing tax returns, W-2s, brokerage statements, or obtaining written confirmation from a CPA, attorney, or registered investment advisor.

Best Practice for Documentation

Sponsors should collect and retain:

Signed investor questionnaires affirming accredited investor status;
Subscription agreements representing investor eligibility; and
Verification records (if relying on Rule 506(c)) to satisfy the SEC’s “reasonable verification” standard.

These documents should be securely retained for at least five years.

4. Common Federal Exemptions Used by Private Equity Funds

Rule 506(b) of Regulation D

Allows sales to unlimited accredited investors and up to 35 non-accredited investors who meet sophistication standards.
General solicitation is prohibited.
Issuer must file Form D with the SEC within 15 days after the first sale of securities.

Rule 506(c) of Regulation D

Allows general solicitation (public advertising), but all purchasers must be accredited investors.
Issuer must take reasonable steps to verify investor accreditation.
Requires filing Form D with the SEC.

Section 3(c)(1) and 3(c)(7) Exemptions under the Investment Company Act

Private equity and venture capital funds generally avoid registration as investment companies by qualifying for one of these exemptions:

Section 3(c)(1): Fewer than 100 investors and no public offering.
Section 3(c)(7): All investors are “qualified purchasers” (typically individuals or entities with at least $5 million in investments).

Texas State Exemptions

Texas generally recognizes federal Regulation D offerings but may require a Form D “notice filing” and fee to the Texas State Securities Board when sales are made to Texas residents.

5. The Private Placement Memorandum (PPM)

A Private Placement Memorandum (PPM) is the cornerstone disclosure document for a private equity or venture capital offering. While not technically required by law, it serves as the primary defense against investor claims of misrepresentation or omission under anti-fraud rules.

A well-drafted PPM should include:

A description of the fund’s structure and investment strategy;
Terms of the offering (minimum investment, capital commitments, management fees, carried interest, and withdrawals);
Risk factors, including market, liquidity, and regulatory risks;
Management background and potential conflicts of interest;
Summary of key provisions of the limited partnership or operating agreement;
Tax considerations relevant to investors;
Use of proceeds and any anticipated leverage; and
Subscription and suitability representations to be completed by investors.

The PPM is often supplemented by a Subscription Agreement, Investor Questionnaire, and Limited Partnership Agreement (LPA) or Operating Agreement.

6. Required Filings

Federal Filings

Form D – must be filed with the SEC electronically via the EDGAR system within 15 days of the first sale.
Investment Adviser Filings – if the sponsor is registered (or exempt reporting), additional filings may be required under the Investment Advisers Act.

Texas Filings

Form D Notice Filing – Texas requires issuers to file a copy of Form D and pay a state filing fee when securities are offered to Texas investors under Regulation D.
The filing must generally be made within 15 days of the first Texas sale.

7. When the Sponsor Must Register as an Investment Adviser

Under the Investment Advisers Act of 1940 and Texas law, a fund sponsor or manager may need to register as an investment adviser unless an exemption applies.

Federal registration may be required if:

The firm manages more than $150 million in private fund assets (private fund adviser exemption threshold); or
The adviser manages funds that are not exclusively private funds.

Exemptions include:

Private Fund Adviser Exemption – available for advisers solely to private funds with less than $150 million in assets under management in the U.S.;
Venture Capital Adviser Exemption – for advisers solely to venture capital funds, as defined by SEC rule (focused on equity investments in private startups, limited leverage, and long-term growth focus).

Even exempt advisers must generally file as an “Exempt Reporting Adviser” (ERA) on Form ADV and comply with anti-fraud provisions, recordkeeping, and certain disclosure obligations.

Under Texas law, investment advisers with a place of business in Texas and less than $100 million AUM are typically required to register with the Texas State Securities Board, unless a federal exemption applies.

8. Compliance Best Practices for Fund Sponsors

Use a well-prepared PPM and subscription documents tailored to the fund’s strategy and investor base.
Document investor accreditation carefully—especially if relying on Rule 506(c).
File Form D and required state notices timely.
Monitor ongoing “bad actor” compliance for all control persons and promoters.
Confirm adviser registration or exemption status before fundraising begins.
Maintain robust recordkeeping for investor communications and capital commitments.

9. How Vanguard Legal PLLC Can Help

Vanguard Legal PLLC advises private equity sponsors, venture capital managers, and family offices on the full range of fund formation and securities law compliance matters, including:

Structuring and forming limited partnerships and LLCs for funds and management entities;
Preparing private placement memoranda, subscription agreements, and investor questionnaires;
Ensuring compliance with SEC Regulation D, the Investment Company Act, and Texas securities laws;
Advising on investment adviser registration and exemption strategies; and
Coordinating with your accountants and administrators to maintain compliance through each fundraising cycle.

Our attorneys serve clients across Houston, Dallas, and throughout Texas, with deep experience guiding sponsors through both legal structuring and regulatory compliance challenges.