In September 2103, the SEC adopted rules allowing private issuers of securities, including hedge funds, to engage in advertising and general solicitation under Regulation D. Until the recent CFTC announcement, hedge funds that include commodities or futures within their portfolios could not engage in general solicitation, since such instruments are regulated by the Commodities Futures Trading Commission (CFTC).

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. Below is a description of some of the more common hedge fund strategies. Note that hedge fund investment terms are driven in large part by the fund’s strategy and its level of liquidity. See our article: Brief Survey of Common Hedge Fund Terms.

A team of experienced and committed hedge fund lawyers play a vital role in guiding hedge fund managers through their various responsibilities and helping managers avoid devastating mistakes.

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. RIAs should work closely with an experienced investment management attorney to maintain compliance with its obligations.

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) a limited partnership agreement, (iii) a subscription agreement, (iv) an investment management agreement, and (v) a management company operating agreement.

Hedge fund manager fees typically consist of (i) an annual management fee and (ii) a performance allocation, also referred to as incentive allocation, or carried interest. The latter is not technically a “fee,” but rather a capital allocation, as will be discussed below. This blog post describes the role of both compensation components.

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. This article addresses Part 1 of ADV. For a discussion of the requirements of Part 2, see our article: Form ADV Part 2.

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 article 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. Form D is not subject to a review or approval by the SEC, but is a required notification document.  The federal Form D must be filed within fifteen days of the first sale to investors, an annual update must be filed as long as the offering remains open. Our firm offers issuers assistance in preparing and filing Form Ds as part of our flat-fee services.  Form D is divided into two parts. The first part requests basic information about the issuer. The second part asks questions about the offering itself.

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. We also know that the most non-invasive means of verifying that an investor is accredited is through obtaining written certification from a licensed professional, (attorney, CPA or broker/dealer) stating that the professional has reviewed documentation demonstrating that the investor meets the accreditation standard, as was set forth by the SEC. See the Capital Fund Law Group post on the adoption of Rule 506(c) here. But where can we find professionals willing to verify accreditation?

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. The rules will take effect 60 days from the date of publication in the Federal Register.