How One “Simple” Investor Transfer Can Unravel 506(c) Compliance

Some sponsors assume that a transfer from an investor’s individual name to a trust is straightforward. After all, it’s still the same person—right?

Wrong.

That single move can trigger a compliance nightmare in 506(c) deals if not handled properly. In a recent internal conversation at InvestNext, Brad—one of our go-to experts on deal compliance—shared what really happens behind the scenes when investors initiate transfers. What he revealed is critical for every GP running a 506(c) raise.

Let’s break down what you need to know.

Why Transfers Happen in the First Place

Many investors begin with simple ownership—just their name on the subscription documents. But once their financial picture matures, they’re often advised by CPAs or wealth managers to move that investment into a trust for estate planning purposes.

That’s when the emails start coming in. “Hey, I want to transfer these units into a trust.”

Seems harmless. But for sponsors, it opens up a set of regulatory obligations you can’t afford to ignore.

The Hidden Risk: Transfers in 506(c) Require More Than You Think

Here’s the hard truth: even if the ownership shift is internal (individual to trust), you’re now dealing with a new entity. And under 506(c), every entity must be independently accredited.

Most investors—and even many sponsors—don’t realize this. And it leads to gaps like:

• No transfer or assignment documentation
  
• No record of the transfer date
  
• No proof that the new entity is accredited
  

That’s not just sloppy. It’s risky.

If you get audited and can’t produce the paperwork or accreditation tied to that transfer, your deal’s exemption could be at stake.

A Better Way to Manage Transfers

At InvestNext, we’ve introduced a smarter workflow to keep these compliance edges sharp. Not only can a sponsor send a link to the investor to have them complete KYC/AML (if required by the firm) they can now allow the investor to obtain accreditation conveniently from the Investor Portal. The system now enables:

• The sponsor can guide the investor through the accreditation process via the investor portal.
  
• The sponsor can provide the investor with a direct link to complete the KYC/AML verification.
  
• The sponsor facilitates the transfer in accordance with the transfer/assignment documentation.
  
• The sponsor has the ability to upload the necessary transfer/assignment paperwork.

This approach not only reduces sponsor-side errors but also gives investors clarity on what’s needed—without needing to “guess” at the steps.

What About Accrued Pref? That’s a Whole Other Problem

Another often-overlooked detail: what happens to unpaid preferred returns during a transfer?

Here’s where things get nuanced:

• If you’re transferring to your own trust, it’s not a huge deal where the accrued pref lands—it’s still “you.”
  
• But if you’re selling the units to someone else, the document should define who keeps the pref—the seller or the buyer.
  

This should be built into the transfer and assignment agreement, but too often it’s either:

• Missing entirely, or
  
• Handled informally
  

If distributions go to the wrong party, you’re in for clawbacks, confusion, and reputational risk.

Sponsor Best Practices: Your 5-Step Transfer Checklist

To protect yourself (and your investors), here’s a process we recommend:

1. Require Transfer & Assignment Paperwork
   
   • Include dates, dollar amounts, parties, and payment instructions
     
2. Treat Every New Entity as a New Investor
   
   • Yes, even if it’s the same person with a trust
     
3. Re-verify Accreditation
   
   • This is non-negotiable in a 506(c) offering
     
4. Clarify Treatment of Accrued Pref
   
   • Who keeps it? Document it clearly.
     
5. Store and Link Documentation in One Place
   
   • Keep your audit trail clean and centralized
     

Final Thoughts

Transfers may be a small part of the fundraising lifecycle, but they carry big implications. What looks like a minor administrative move is actually a legal and compliance checkpoint—one that requires precision.

By treating every transfer with the same rigor as a new subscription, you’ll save yourself the headache later—and maintain trust with your LPs along the way.

If you’re a GP navigating these waters, and you want a compliant, streamlined way to manage transfers, let’s talk.