Regulated Funds, including business development companies (BDCs) and closed-end funds (CEFs), have played a pivotal role in providing retail investors with access to alternative asset classes, including private credit and private equity. However, their operational frameworks were often hamstrung by legacy regulations, procedural rigidity, and regulatory limitations that made them less agile compared to their private fund peers. The SEC’s willingness over the last three months to review and update some of these historical regulatory positions comes as a welcome development.

The SEC’s most recent updates indicate the possibility of increased operational flexibility, broader fundraising pathways, and reduced compliance burdens in the future that could unlock significant opportunities for retail investors and fund sponsors. As discussed in more detail below, these recent updates include: (i) simplified co-investment exemptive relief, (ii) multi-share class exemptive relief for privately offered BDCs, and (iii) potential for broader capital raising enabled by updated Rule 506(c) guidance.

Modernization of Co-Investment Exemptive Relief

On April 29, 2025, the SEC issued an order granting an application for more flexible co-investment exemptive relief for Regulated Funds. Under the Investment Company Act, Regulated Funds are generally restricted from jointly negotiating or participating in certain investments alongside affiliates, unless they obtain SEC exemptive relief. The process for obtaining that relief can be complex and can come with conditions that impose operational and administrative burdens. However, the new, more flexible co-investment relief should ease some of these burdens.

• Streamlined Allocation Processes: Under the updated co-investment relief, advisers will be able to utilize their existing, customary allocation policies for co-investments, provided the adviser adopts and implements policies and procedures reasonably designed to ensure that: (i) opportunities to participate in co-investment transactions are allocated in a manner that is fair and equitable to every Regulated Fund; and (ii) the adviser negotiating the co-investment transaction considers the interest in the transaction of any participating Regulated Fund. This departs from the historical approach that required that an investment opportunity be shared with a Regulated Fund if the investment opportunity fell within the fund’s investment objective and any board-established criteria. Enabling investment advisers to rely on their existing allocation policies should streamline internal workflows relating to co-investment transactions.
• Removal of the “Propping Up” Restriction: Historically, a Regulated Fund has been barred from making an investment in an issuer in which it did not already hold an interest if any affiliate of the Regulated Fund already held an interest in that issuer. Under the new, streamlined co-investment relief, a Regulated Fund will be able to participate in such investment if the transaction is approved in advance by the “required majority” of the Regulated Fund’s board, on the basis of the determinations set forth in Section 57(f) of the Investment Company Act. The removal of this restriction is expected to broaden the range of co-investment opportunities available to Regulated Funds, particularly in light of the expansive and interconnected nature of modern asset management businesses.
• Expanded Participation in Follow-on Deals: Under the new streamlined co-investment relief, participation in follow-ons alongside affiliates will be subject to the same conditions as any other co-investment; i.e., a Regulated Fund will be able to participate in a follow-on investment even if it did not join the original transaction, as long as the “required majority” of the Regulated Fund’s board provides the required pre-approval, unless the Regulated Fund already holds the same security as the affiliated entity; and (ii) the Regulated Fund and each affiliated entity that are participating in the transaction are doing so pro-rata; or (iii) the disposition is a sale of a “tradable security.” This revision is especially relevant for newly launched funds, late entrants to an investment, and funds purchasing in the secondary market.
• Reduced Board Approval Thresholds: Under prior exemptive relief, board approval was required for every new co-investment by a Regulated Fund and any follow-on investments and dispositions by a Regulated Fund, unless the transaction was allocated “pro rata” or limited to “tradeable securities.” Under the new exemptive relief, board approval is only required where a follow-on transaction is not effected pro rata based on current holdings, or an affiliated entity is an existing investor in the issuer and the Regulated Fund is not an existing investor in the same class of issuer’s securities, as discussed above. New co-investments, pro-rata dispositions, and pro-rata follow-on acquisitions where an affiliated entity and a Regulated Fund are existing investors in the same security of an issuer and participate in the follow-on acquisition on a pro-rata basis, will no longer require board approval.
• This narrowing in the scope of situations requiring formal board sign-off will reduce friction and potential delays in deal execution.
• Broader Definition of Eligible Affiliates: Historical co-investment relief extended only to investments alongside affiliated entities that were exempt from the Investment Company Act under Sections 3(c)(1), 3(c)(5)(C) or 3(c)(7). The new exemptive relief will broaden the scope of affiliated entities covered to include all entities that would be an investment company but for Section 3(c) of the Investment Company Act and Rule 3a-7, as well as Regulated Fund joint venture subsidiaries, among others. This expansion of entities that will be able to co-invest with Regulated Funds will also include collective investment trusts, which typically rely on an Investment Company Act Section 3(c)(11) exemption. As a result, this expansion should also be taken into account when considering expanding private markets access in the defined contribution space.
• Streamlined Compliance and Reporting: Adviser compliance teams will benefit from a leaner reporting model under the new, streamlined, co-investment relief. Instead of prescriptive documentation for each co-investment transaction, the new co-investment relief will require periodic board summaries and an annual compliance overview highlighting any material changes or notable exceptions.

There is hope in the industry that the SEC may in the future address other pain points in this space that remain unresolved. For example, the industry would greatly benefit from: (1) the adoption of a safe harbor or other relief from the requirement of same terms, same price, same class, and same security condition; (2) principal transaction relief involving portfolio companies that are classified as downstream affiliates; and (3) expansion of co-investment relief to open-ended funds.

Multi-Share Class Exemptive Relief: A New Frontier for BDC Distribution

In April 2025, the SEC took another step forward by granting multi-share class relief to private BDCs. This expansion of the multi-share class relief will allow, for the first time, a private BDC to offer multiple share classes featuring differentiated distribution and servicing fees tailored to specific distribution channels, such as registered investment advisers, broker-dealers, and institutional investors.

This shift will bring several advantages:

• Market Reach Expansion: Private BDCs will be able to reach a broader investor audience and distribution networks, which is expected to increase AUM growth. Historically, private BDCs were limited to issuing only one share class and, as a result, were unable to offer share classes based on specific distribution needs.
• Alignment with Industry Norms: Multi-share class capability brings private BDCs closer to distribution parity with other retail vehicles.
• Operational Efficiency: By offering multiple share classes within a private BDC structure, BDC sponsors can avoid the unpredictable, and often Kafkaesque state-level approval process associated with launching a non-traded BDC.

Minimum Investment-Based Accredited Investor Verification: A New Fundraising Opportunity

On March 12, 2025, the SEC Staff issued interpretive guidance confirming that the following minimum investment thresholds can satisfy “accredited investor” verification requirements for Rule 506(c) offerings:

• $1,000,000 for entity investors and
• $200,000 for natural person investors.

This much-needed guidance should increase the ability of a fund (including a privately offered Regulated Fund) to raise additional capital from investors that many fund sponsors previously had difficulty accessing due to onerous verification steps that they and fund intermediaries were reluctant to undertake. The interpretive guidance also confirms that investment minimums are not the only methods that may be used to satisfy Rule 506(c); issuers may continue to use other reasonable methods.

While this recent SEC guidance is a welcome addition to the fundraising tool kit, industry participants continue to hope for future expansion of the “accredited investor” definition to further promote capital formation.

Implications and Outlook

Together, these updates reflect a significant recalibration of the SEC’s posture toward revising its regulatory positions in response to marketplace modernizations. By removing outdated constraints, simplifying compliance, and enhancing flexibility, the SEC is signaling regulatory innovation and design in the Regulated Fund space while maintaining focus on core investor protections. And while certain challenges remain, the current direction is promising. With further expansion and broader application, these and future updates could significantly bolster growth and competitiveness in the asset management space by attracting new asset management entrants to the retail market.

Private Equity Report Spring 2025, Vol 25, No 1