In the ever-evolving and developing age of virtual currencies, fund managers of digital asset-focused funds have the additional challenge of not just trying to keep up with securities regulations on the state and federal levels, but proactively anticipating new regulations, through the guidance of their legal counsel, in order to maintain their fund’s compliance long-term. Investors in Bitcoin and other forms of digital assets find themselves at the distinct disadvantage of having to navigate through a convoluted set of rules, adding to the already complex process of fund formation and investment management.

On December 8, 2020, final amendments to the Securities and Exchange Commission’s (“SEC”) accredited investor definition will go into effect. What does this mean for private fund managers? It depends. Continue reading for an overview of several noteworthy adoptions to the SEC’s definition expansion.

John Lore, managing partner of Capital Fund Law Group, joined Alyne on The Reg Tech Report to discuss investment strategies and the current investment ecosystem in RegTech, specifically in the U.S.  

During this informative Podcast, Mr. Lore offers insights on PE and VC investment activity and strategies, from broad activity to specific tech segments, and how the compliance industry continues to grow as regulations continue to expand.

We ask hedge fund managers five main questions to determine who can invest in their fund. Many prospective fund managers mistakenly believe that the “accredited investor” standard is the only required investor accreditation standard for their investors. This standard is typically based on financial threshold, which, for individuals, must have a $1 million individual or joint net worth (excluding the primary residence), or $200k annual income ($300k with a spouse), for the previous two years, with the expectation to meet or exceed this standard for the current year. However, with the recently updated expansion to the accredited investor definition, an individual may qualify as this investor standard, regardless of net worth, dependent upon meeting other specific requirements. Read our article discussing these updates here. 

As part of the hedge fund formation process, the attorney works closely with the fund sponsor to craft the terms to which the fund and its investors will be bound. When properly structured, hedge fund offering documents contain terms that adequately protect the fund sponsor and are attractive to investors. Hedge fund terms are driven by a combination of the market trends and investor appetite within the fund’s specific asset class and the particular needs and objectives of the fund.

The following is a brief survey of categories of some of the most common hedge fund terms.

A Private Placement Memorandum (“PPM”), also known as a private offering document and confidential offering memorandum, is a securities disclosure document used in a private offering of securities by a private placement issuer or an investment fund (collectively, the “Issuer”). From an investor’s point of view, the purpose of the PPM is to obtain needed information about the Issuer and its securities, both good and bad, to make an informed decision about whether to purchase the security. The investor wants to know the parameters of investing in the Issuer and the potential rights, risks, and rewards of its investment. For the Issuer, the purpose of the PPM is to provide the necessary disclosures about the risks, strategies, management team, investment criteria and other information about its securities to protect itself and its managers against claims of misstatements or omissions.

Your hedge fund attorney will prepare six core documents, which are necessary to launch the fund: (i) a private placement memorandum, (ii) a limited partnership agreement, (iii) a subscription agreement, (iv) an investment management agreement, and (v) a general partner operating agreement, and (vi) a management company operating agreement. 

Other services and documents that are also generally completed include the formation services of the limited partnership, the management company and the general partner; drafting the management company operating agreement; preparing and filing the Edgar registration; drafting and filing state and federal Form D notice filings; and as necessary, preparing and filing any state or federal registrations or exemptions (or other necessary fund formation documentation).

Hedge fund strategies encompass a broad range of risk tolerance and investment philosophies within a wide array of investments, including debt and equity securities, commodities, currencies, derivatives, real estate, and other investment vehicles. The horizon of hedge fund investment strategies has seen unprecedented expansion in recent years. Hedge fund investment terms are driven in large part by the fund’s strategy and its level of liquidity. To learn more about forming and operating a hedge fund, we encourage you to read our eBook, Forming and Operating a Hedge Fund. 

New York houses many of the world's largest real estate private equity funds and is among the most cities for real estate fund managers. Nearly one-fourth of the largest 100 real estate fund managers globally are headquartered in New York City (PERE June 2019 Report).

In June of 2019 we presented the Global Regulation of Digital Asset Funds, in partnership with Harneys, a leading Cayman law firm, with which we have worked extensively in structuring global digital asset funds.  Our June symposium featured a panel of leading authorities on various aspects of global digital asset regulation, including securities law, taxation, and anti-money-laundering compliance.

One of the most important aspects of forming a real estate fund is to set the terms of the investment. When properly structured, real estate fund offering documents contain terms that adequately protect the fund sponsor and are attractive to investors.  Real estate fund terms are driven by the fund’s strategy, the market trends within the fund’s specific asset class, and the particular needs and objectives of the fund. It is crucial that the investment fund legal counsel have an in-depth understanding of current investment market trends and how those trends affect the strategy the fund will employ.

As is the case with investment funds in general, real estate funds are trending toward higher levels of specialization. Specialization may be by asset class, strategy, or both. Examples of asset class-specific firms can include office, retail, medical, industrial, agricultural, storage, or hospitality. Real estate fund strategies can be loosely categorized into one or more of the following groups:

The early focus by the SEC and CFTC in the crypto asset space was primarily focused on preventing fraud and assessing risks to investors and the market.  In cases not involving fraud, initial enforcement of digital asset investments were somewhat tempered, as regulators exercised a degree of forbearance to allow the budding industry to evolve.  This period of early forbearance for digital asset market participants appears to be quickly coming to a close. Crypto asset hedge fund managers should not interpret past forbearance as an indication of current regulatory intent.  

Digital asset fund managers face substantial risk in the disclosure of their investment fund strategy and have limited precedent in preparing those disclosures.  As an emerging asset concept, distributed ledger technology presents a myriad of potential regulatory considerations, technological complexities, and market uncertainties with few analogous instruments. As with any fund offering disclosure, digital asset fund managers are advised to err on the side of thoroughness and caution in disclosing the breadth of the investment strategy and its potential risks.

Investment into digital assets facilitates anonymity and has the potential to be used by investors to mask various illegal transactions, including money laundering, funding of terrorist activities, and numerous regulatory violations.  In addition to the AML procedures that token issuers and various intermediaries must perform, hedge funds must carefully comply with AML regulations when accepting crypto tokens from investors in lieu of fiat capital as an in-kind contribution.