Offering Legal, Tax, Business & Banking Services to Hedge Funds & Fund Managers Worldwide
Qualified Client Defined Hedge fund managers that are subject to federal or state investment adviser registration may only receive performance based compensation from “qualified clients”. A qualified client generally includes (i) an individual that has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2.1 million at the time the contract is entered into (exclusive of primary residence) or an individual with at least $1 million under management of the investment adviser. The SEC increased the net worth threshold for qualified clients from $2 million to $2.1 million (exclusive of a person's primary residence). The new standard $2.1 million threshold is not retroactive, but advisory or subscription agreements entered into after the August 15, 2016 effective date must comply with the higher standard. See SEC Release No. IA-4421 (June 14, 2016) The increase was pursuant to a 5-year indexing adjustment required by Section 205(e) of the Investment Advisers Act of 1940. See Hedge Fund Law
Qualified Clients & Performance Fees SEC registered (and many state registered-see below) investment managers can charge a performance fee (i.e, incentive allocation or performance allocation) only to qualified clients. For those investment advisers, the performance fee cannot be charged to accredited or non accredited investors. See Hedge Fund Fees
(1) I certify that I am a “qualified client” because I have an individual net worth, including assets held jointly with my spouse, in excess of $2,100,000. As used in the foregoing sentence, “net worth” means the excess of total assets at fair market value over total liabilities; OR
Initial
(2) I certify that I am a “qualified client” because I have at least $1,000,000 under the management of the General Partner; OR
_____ Initial
(3) I certify that I am a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act.
For Entities Which Are Not Investment Funds
Initial
(4) I certify that I am the representative of the Investor, that I qualify as an independent agent[1] (i.e., I personally am not connected with the Partnership or the General Partner or any of their affiliates in any way other than as a representative of an Investor in the Partnership) and that the Investor is a “qualified client” because:
a. the Investor is not (i) a non-publicly offered investment fund with fewer than 100 beneficial owners, (ii) an investment company registered under the Investment Company Act, or (iii) a private business development company as defined in Section 202(a) of the Advisers Act; and
b. the Investor either (i) has a net worth in excess of $2,100,000, (ii) has at least $1,000,000 under the management of the General Partner, or (iii) is a “qualified purchaser” as defined in Section 2(a)(51)(A) of the Investment Company Act. As used in the foregoing sentence, “net worth” means the excess of total assets at fair market value over total liabilities.
[1] “Independent agent” means any person agreeing to act as the subscriber’s agent in connection with this investment other than: (i) the General Partner, an “affiliated person” of the General Partner, an affiliated person of an affiliated person of the General Partner, or an “interested person” of the General Partner; (ii) a person who receives, directly or indirectly, any compensation in connection with this investment from the General Partner, an affiliated person of the General Partner, an affiliated person of an affiliated person of the General Partner or an interested person of the General Partner; or (iii) a person with any material relationship between himself (or an affiliated person of such person) and the General Partner (or an affiliated person of the General Partner) that exists, or has existed at any time during the previous two years.
For Investment Funds
Initial
(5) I certify that I am the representative of the Investor, that I qualify as an independent agent (as defined above) and that the Investor is a qualified client because each and every equity owner of the Investor is a “qualified client” as described in items 1-4, above.
Subscription Agreement Description of Qualified Client The language below is taken from a standard Subscription Agreement used in hedge fund offering documents:
Please check the categories applicable to you indicating whether you qualify as a Qualified Client for purposes of the Advisers Act.
1.Individual or Company with Net Worth In Excess of $2.1 Million. A natural person or company whose net worth, excluding one’s primary residence, (together with assets held jointly with a spouse) which exceeds $2,100,000.
2.Individual or Company with $1,000,000 under Management. A natural person or company who has at least $1,000,000 under the management of the General Partner immediately after entering into this Agreement.
3.Individual or Company who is a Qualified Purchaser under 1940 Act. A natural person or company who is a qualified purchaser as defined in Section 2(a)(51)(A) of the 1940 Act at the time of entering into this Agreement.
4.Executive Officer, Director, Partner etc. of General Partner. A natural person who is an executive officer, director, trustee, general partner, or person serving in a similar capacity, of the General Partner.
5. Employee of General Partner. A natural person who is an employee of the General Partner (other than an employee performing solely clerical, secretarial or administrative functions with regard to the General Partner) who, in connection with his or her regular functions or duties, participates in the investment activities of the General Partner, provided that such employee has been performing such functions and duties for or on behalf of the General Partner, or substantially similar functions or duties for or on behalf of another company, for at least twelve (12) months.
6. Investment Fund Status. Complete if Subscriber is an entity that would be an “investment company” within the meaning of the 1940 Act but for the statutory exemption under Section 3(c)(1) of the 1940 Act (a “3(c)(1) Fund”). Subscriber hereby represents and warrants that (circle all applicable sections):
(a) each of its equity owners is an “Accredited Investor” and a “Qualified Client”.
(b) each of its equity owners is not an “Accredited Investor” and a “Qualified Client”.
Complete if Subscriber is an entity other than a 3(c)(1) Fund. Subscriber hereby represents and warrants that it is an entity that does not rely on the statutory exemption from the definition of “investment company” under Section 3(c)(1) of the 1940 Act and it (circle applicable sections):
(a) has at least $1,000,000 under the management of the Investment Adviser and its affiliates.
(b) has a net worth which exceeds $2,100,000.
(c) is a “Qualified Purchaser” within the meaning of Section 2(a)(51)(A) of the 1940 Act.
Capital Management Service Group, Inc. is dedicated to providing the highest quality of services on a personal level and in a timely manner. We offer flat-fee engagements, which include start-to-finish legal services and counsel with all aspects of launching a domestic or offshore hedge fund. No two funds are identical. We use a client-based approach to our fund structuring and analysis. Our clients routinely comment on the excellence of our personal service and the time we take to properly understand and implement the client’s unique circumstances and objectives. Call Us at +1(307) 213-4732, Email Usand Read What Our Client Say About Us on LinkedIn
Call Us First We are experts in international hedge funds and tax. Click on any reference below to our leading articles:
Strategic Hedge Fund Planning by Hannah Terhune. Wilmott Magazine Ltd. (Volume 2013, Issue 63, pages 8-11 January 2013).
Trading Foreign Index Contracts? Know the Tax Rules Before You Trade by Hannah M. Terhune and Roger D. Lorence. Stocks, Futures and Options (June 2005).
Follow @HannahTerhune
Read leading, cutting-edge articles on hedge funds and taxes by Hannah Terhune, hedge fund and international tax attorney. Her articles are widely published on the Internet and recommended by TheStreet.com and other respected media.
