Investment Fund Law Explained
Filing the ADV and other registration documents is only the beginning of an RIA’s regulatory obligations. Following registration, RIAs and their representatives become subject to a network of complex compliance obligations. This article touches briefly on a few of the many components of RIA compliance, including: annual license renewals, detailed record keeping, investor disclosure, compliance/ethics manual issues, and preparing for audits.
A prime broker is a central broker through whom the fund executes most or all of its trades and who typically acts as custodian to the fund’s assets. When the hedge fund executes trades through other brokers, the prime broker works with the executing brokers to settle and transfer all assets through the prime broker.
Your hedge fund attorney will prepare five core documents, which are necessary to launch the fund:
(i) a private placement memorandum, (ii) limited partnership agreement, (iii) subscription agreement, (iv) investment management agreement, and (v) management company operating agreement.
Individuals and entities that provide securities investment advice for compensation are subject to state and federal investment advisor regulations. Anyone providing investment advice should consult an experienced investment management attorney to determine whether state or federal registration is required.
The central component of state or SEC investment advisor registration is Form ADV. Form ADV is divided into two parts, Part 1 and Part 2. Part 1 is a form requiring specific answers to questions asked, while Part 2 requires a written disclosure in narrative format covering certain required topics, which is ultimately delivered to existing and prospective clients.
Part 2 of Form ADV is a written disclosure statement required for federal and state investment advisor registration Form ADV is divided into Part 1 and Part 2. This articles discusses Form ADV Part 2. See also our article discussing Form ADV Part 1.
Form D is a federal notice of an exempt securities offering and is the only disclosure document that is required to be filed with the SEC. This document discloses biographical information about the offering, the company, use of proceeds, and the principals of the company.
Not all hedge funds are subject to investment advisor registration. To determine whether a fund needs to register, we ask our clients the following four questions:
1. Will the fund invest in “securities?”
2. What will be the size of the fund?
3. In what state is the fund management team physically located?
4. In what states will the investors be located?
The SEC’s adoption of Rule 506(c) to allow general advertising and solicitation for private placement offerings has left us with some questions of practicality. We know from Rule 506(c) that issuers must take “reasonable steps” to verify the accreditation status of investors.
On July 10 the SEC adopted the long-awaited final rules to implement sections of the JOBS Act to lift the ban on general advertising and solicitation for certain Regulation D private placement offerings (as well as 144 offerings). At the same time, the SEC proposed new rules that, if adopted, will require additional regulatory burdens.