Pre-Launch Services

Pre-Launch Liability Concerns

Pre-launch discussions can present significant liability, especially when such discussions extend to written communication and presentation material. Many prospective fund managers fail to appreciate the extent to which US regulation applies to pre-formation communication.

It is not uncommon to encounter fund managers who, before engaging with legal counsel, have actively prepared and presented pitch decks, executive summaries, and in extreme cases, even websites, in efforts to garner interest in the fund prior to launch. Most often, these include inadequate legal disclaimers, stating that the communication is not a solicitation, that the fund has yet to launch, and investors should not rely upon any information conflicting with the subsequent fund launch.  

These well-meaning disclaimers fall far short of the requirements that should be met when engaging in communications with investors. US securities laws do not provide a safe harbor for communications intended only to garner investor interest. In reality, any communication involving an intent to raise capital will almost assuredly be deemed by US securities law as communication in furtherance of soliciting an offer to purchase securities and should be approached with caution. Individuals can face liability for verbal and written communication that does not meet strict federal and state regulatory requirements.

• Unique Pre-Launch Liability for Managers of Pooled Investments

  Managers of pooled investment vehicles (fund managers) face potential liability in pre-launch offering material at a scope beyond that of an operating company raising direct capital in a private placement offering. For example, the Investment Advisers Act imposes liability on managers of pooled investment vehicles for omissions or misstatements, even when the error was not willful, and even if the statement was not made in connection with an actual sale to an investor, and could include statements made to investors who never ultimately invest. Moreover, marketing material, even prior to launch, is subject to regulatory review, even for funds that are exempt from various registration requirements.

  Commonly, many marketing materials, fund managers will include many disclaimers, such as “this is not an offering", “performance results may vary”, etc., believing that this will alleviate them from liability in their marketing materials., however, the SEC has certain disclosure materials that must be included in such materials. In addition, fund managers have a fiduciary duty to provide accurate, compliant, and factual materials to potential investors. 

  The extent of necessary pre-launch disclosures corresponds to the scope of the fund manager’s pre-launch communications. As securities attorneys often repeat: “you don’t always have to open your mouth, but once you do, you have to open it all the way.” The more details a fund manager provides in pre-launch communications, the more robust the necessary disclosures must be.

client-tailored pre-Launch Services

Capital Fund Law Group provides pre-launch fund managers with the needed advice and disclosure documentation to enable managers to engage with potential investors to obtain pre-launch soft commitments properly. In addition to assisting with the necessary documentation, Capital Fund Law Group assists prospective fund managers with setting appropriate structures and investment terms that can be critical to the success of the future fund. Our pre-launch services include, but are not limited to:

• review of pre-launch communication and promotional material;
• advise on the pre-launch memorandum of disclosure document; and
• investment management company formation or incubator fund structuring (additional information on incubator fund formation services here)

1. Review of Communication and Promotional Material

Any communication, whether verbal or written that indicates a potential intent to raise capital should be carefully discussed with securities legal counsel. Legal counsel should review all written communication and presentation material in advance of any discussion with potential fund managers. This is especially crucial when a fund prepares written material in advance of the preparation of comprehensive fund offering documents.

Disclaimers added to marketing materials, while necessary and helpful, do not neutralize the effects of non-compliant statements or make up for omissions that should have been included in light of the scope of communication. When reviewing the communications, legal counsel must take the time to gain an in-depth understanding of the intended structure, strategy, manager background, and potential investor base to be able to identify the problematic language and the scope of needed pre-launch disclosure.

Common Mistakes

• improper identification of the status of the future fund and management company;
• inappropriate statements or wording that could be considered representations or warranties;
• potentially misleading, incomplete, or overstated management bios;
• improper disclosure and identification of investment returns and forecasts;
• potentially misleading photographs, graphical representations, and data summary; and
• inaccurate or premature discussions of investment terms and structure.

2. Pre-Launch MEMorandum of disclosure Services

Managers engaging in more than general discussions about a potential fund strategy should accompany all communication with carefully prepared pre-launch disclosure language.  Most commonly, this is accomplished through the preparation of full offering documents, including a private placement memorandum.  However, some emerging managers, particularly those of closed-end vehicles, such as real estate funds, as well as hedge fund managers that need to develop momentum leading up to the fund launch, can benefit from preparing offering documents in stages.

• Memorandum of Disclosure

  The memorandum of disclosure (the "MOD") provides a stepping stone to funds that are in the early process of launching a fund and are solely seeking soft commitments. Once the fund is ready to secure binding capital commitments or contributions, fund counsel can complete the more time-intensive process of providing full offering documents and preparing the required regulatory filings. The scope of the MOD may vary, depending on the scope of the manager’s pre-launch communications, but generally includes a summary of anticipated investment terms, an investment strategy overview, a truncated disclosure of risk factors, fund manager bios, and disclosures and disclaimers surrounding key regulatory issues.

  In connection with the preparation of the MOD, Capital Fund Law Group assists with the formation of the investment management and fund entities, together with the associated governing documents. Prospective fund managers should consult with investment fund legal counsel on entity formation timing, as the use of legal entities in connection with pre-launch communication can have significant securities law consequences.

• Critical Timing Issues for Closed-End Funds

  Starting with an adequate base of pre-identified potential investors is especially critical for closed-end vehicles, such as real estate private equity funds.  Open-end funds are able to gradually grow assets under management (AUM) over time and are able to scale up their investments year over year as additional investment comes into the fund.  Closed-end funds, on the other hand, have restricted time periods to secure investment capital (via binding commitments and/or escrowed capital contribution).

  The timeline for raising capital for a closed-end fund, including a real estate fund, differs markedly from that of an open-end fund, or “evergreen fund.”  Open-end funds, such as hedge funds trading liquid market assets, are able to grow their AUM over time within a single fund. Startup hedge funds with a relatively modest initial asset base can scale up their strategy as they add investors, year over year.  By contrast, sponsors of illiquid assets, such as real estate assets, generally operate multiple closed-end vehicles with a finite size within a family of funds, which generally have a projected duration of 5-7 years (typically with two-year extensions). Closed-end real estate sponsors grow their AUM over time by adding additional fund vehicles, ideally with an increasingly larger AUM.

3. Forming an Incubator Fund

Our incubator fund service includes the preparation of all necessary formation documents and governing agreements to operate an incubator fund.  An incubator fund provides a cost-effective solution for an emerging manager to develop a marketable trading record and test performance before launching a fully operative fund.

Read more about our incubator fund formation services here.