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Hedge Fund Offering Documents Operating a hedge fund entails significant legal exposure, with substantial liability for improper disclosure. Even inadvertent mistakes can lead to substantial personal liability. Offering Documents are the key to hedge fund sales and should be created for each hedge fund.  The private placement memorandum (PPM) is a disclosure document that provides potential investors with the terms and conditions of the hedge fund.  This document is similar to a business plan, except that the emphasis is on the disclosure of facts rather than projected results. 

A PPM includes a discussion of the terms of the offering, the allocation of proceeds, and the risk factors inherent in the business and industry.  In general, the memorandum must contain all information about the fund, the investment manager, and the securities offered, as well as any other information that would be considered "material" by a potential investor.  Hedge fund disclosure documents not only require specific disclosures of present information about the fund and its managers, but also requires a recitation of potential risks of the investment (known as risk factors).

Hedge Fund Risk Disclosures Risk factors vary significantly from one fund to another and require the drafting attorney to foresee potential contingencies and assumptions that may result in unfavorable investment outcomes.  The risk factors should be drafted to fit specific risks of the hedge fund.  Use an experienced lawyer like hedge fund lawyer Hannah Terhune so that you do unintentionally making misleading statements and material omissions. A hedge fund PPM requires specific language, drafting style, and disclosures.  Need help?  Contact Us for Assistance

Poor Offering Documents Could Result in Liability for Fraud  The disclosures in a PPM furnished to investors serve as protection to the principals against liability under the anti fraud provisions.  The SEC, the CFTC, the NFA and state securities commissions have a web of regulations with which you have to  comply.  Failure to properly navigate this web exposes you to liability, including personal civil liability and criminal penalties.  

Section 10(b) of the Securities Exchange Act of 1934 imposes liability on a person who misrepresents or omits a material fact in connection with the sale of securities. The primary penalty imposed is a rescission of the investor’s contract to purchase the security.  A rescission of the contract means that the hedge fund, and in some cases an officer or director, has to disgorge profits, repay the purchase price of the investment made, together with interest, attorney fees, and other costs. Payment of the liability under this section can be ordered by the court against the individual directors’ and officers’ personal assets. Learn More About Hedge Fund Regulations

If the SEC proves that the material omissions or misstatements in your offering documents were willful, a court can impose fines on individuals for millions of dollars and/or imprisonment. Similar to the SEC, each state has its own securities laws that impose civil liability on those who misrepresent or omit material facts.  After the SEC is done with you the states can impose additional penalties against the directors and officers of the hedge fund.  Contact Us for Assistance

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) 413-2212, Email Us and Read What Our Client Say About Us on LinkedIn

Would Your Hedge Fund Survive a Fiduciary Audit? PPMs should be written with accountability in mind.  Consider the PPM that states that “the goal of the fund is capital preservation.” Unless capital preservation is clearly defined in terms of asset allocation, one might expect that all of the fund’s assets consist of principal protected investments with specific maturity dates as such investment would most likely preserve capital.  Given this PPMs should not state capital preservation as a goal unless the fund invests in items that return the principal investment.  When used in a PPM, the terms “capital preservation,” “liquidity and marketability,” “risk aversion” need to be defined (and adhered to by the hedge fund manager) with a future audit in mind. In the future, there may be a trend toward investment policy audits (at the top levels of the hedge fund industry).  An investment policy audit evaluates whether the hedge fund manager is in compliance with the statements made in the investment policy and investment strategy section of the PPM.  An asset allocation audit examines whether the fund’s portfolio is within the range of a PPMs stated asset allocations percentages.  Contact Us for Assistance

Private Placement Memorandum (PPM) Checklist

Description of Interests.  Although there are no specific disclosure requirements for offering documents, basic information about the hedge fund’s manager and the hedge fund itself typically, in fact is disclosed.  The information provided is general in nature and it normally discusses in broad terms the hedge fund’s investment strategies and practices.  For example, disclosures generally include the fact that the hedge fund’s manager may invest fund assets in illiquid, difficult to-value securities and that the hedge fund manager reserves the discretion to value such securities as it believes appropriate under the circumstances.

Investment Objective and Strategy

Fees and Expenses.  The fund's offering materials and legal documents must clearly spell out the manager's approach to charging performance and management fees and include a description of the fee schedule; the exact formula used to calculate fees owed, and where appropriate, example calculations.  Hedge fund fees should be calculated based on audited portfolio valuations.  Where the period of audited financial valuations does not coincide with the fee calculation period, investors should familiarize themselves with the hedge fund manager's portfolio valuation methodologies and the processes used to prepare the fee calculation.  Once audited financials become available, the fee calculations should be reviewed and adjusted for any valuation differences.   Performance fees should be based on dollars of value added, not percentage returns or average capital invested for the calculation period.  Performance fees computed as carried interest should be calculated on net value added as opposed to gross value added. Offering documents should adequately define "net value added" upon which performance fees are calculated (gross value added less any other expenses charged to the hedge fund).  Learn More About Hedge Fund Performance Fees 

IMPORTANT GENERAL CONSIDERATIONS

SUMMARY OF OFFERING AND PARTNERSHIP TERMS MANAGEMENT

Role of the General Partner and the Investment Manager
Background of Management
Other Activities of General Partner, Investment Manager and Affiliates
Investments by General Partner and Affiliates

INVESTMENT PROGRAM

Purpose Features of the Partnership’s Trading Strategy

BROKERAGE PRACTICES

Brokerage Arrangements
Soft Dollar Arrangements
Referral of Investors
Broker and Custodian

RISK FACTORS AND CONFLICTS OF INTEREST

Partnership Risks
Market Risks
Regulatory Risks
Conflicts of Interest

ERISA CONSIDERATIONS

General Fiduciary Matters
Plan Assets
Plan Asset Consequences

TAXATION

Introduction
Classification of the Partnership
Taxation of Partnership Operations
Tax-Exempt Investors
Other Taxes
Tax Elections; Returns; Tax Audits
Other Matters
Special Considerations for Limited Partners who are not U.S. Citizens or Residents
State Taxation
Future Tax Legislation
Collection of Investor Information
Disclosure of Nonpublic Personal Information
Protection of Investor Information
Changes to Privacy Policy

EXHIBITS

Limited Partnership Agreement

Subscription Documents.  The PPM is accompanied by a subscription agreement and investor questionnaire.  The subscription agreement is a contract to purchase a specified amount of securities at an agreed price, and contains a statement that the investor has received and reviewed the PPM, is aware of the risk factors, and is a suitable investor.  The investor questionnaire elicits information about the investor's background, employment and investment or business experience.  It is used, in part, to confirm the investor's accreditation and sophistication.  This document should be professionally prepared.

Form ADV Part II of the General Partner

Capital Management Services Group, Inc. is recognized by discriminating business owners as being the foremost tax and legal authority in the hedge fund industry.  Attorney Hannah Terhune's education and experience are unsurpassed in the area of hedge fund creation, development and launch. Ms. Terhune's extensive international tax knowledge and hedge fund experience have made her an indispensable resource for serious hedge fund and business professionals.  Ms. Terhune's numerous articles on the subjects have appeared in over 100 publications worldwide.  Chances are, if you have read anything related to the hedge fund business, Ms. Terhune wrote it.

Why Hire Us?  When you engage us you get a unique combination of securities, tax, and global business experience.  We think we have the best set of offering documents in the industry for hedge funds based on current and ever changing laws.  We aim to deliver quick turnaround times because we understand that our customers want to begin their money management business as soon as possible.  We conceive, structure and deploy the best tax saving strategies for your hedge fund business.  We will help you start your business as soon as possible and continue to assist you. 

Give us the opportunity to use that knowledge and experience for you.  Each client receives personalized attention from our attorneys and staff.  No client is too large or small for us.  We pride ourselves in providing personal attention to each client.  We provide the best services and support needed for hedge funds and business projects.  No need to coordinate work between accounting, administrative and law firms--we handle the entire hedge fund business process from start to finish.  We offer legal services, accounting services, tax planning services, tax return preparation services, business consulting services, and U.S. and offshore company formation services.  We provide high quality services at  competitive rates.  But don't take our word for it, give us a call and let us prove what we can do for you.

Personal Consultations  You get answers to your specific questions by speaking directly to Hannah Terhune, an experienced hedge fund and international tax attorney.  Ms. Terhune's hard-earned knowledge and experience can be put to work to save you unnecessary steps and costly wasted effort.  The consult is an invaluable opportunity to speak to Hannah one-on-one and learn how to achieve more in less time.  Ms. Terhune's credentials and experience gives you access to a well-informed professional practitioner with sound ethical judgment.  The availability of such expertise required to recommend the best solutions to you and provide sound ethical advice should never be taken lightly.  We are confident that when you are finished with your consultation you will be impressed and more informed about your business plans than ever before.  Call +1 (307) 213-4732 or Click Here to Request Services.

Our Commitment  Henry David Thoreau wrote:  "Do not hire a man who works for money, but him who does it for love of it."  We are committed to your business plans and bringing you the best possible options.  We are an established and internationally recognized law firm that serves and educates our clients throughout the industry.  We do this by striving for the best results.  A lawyer is a philosopher and role model.  The ability to improve our clients' lives is a privilege that we do not take lightly.  There is tremendous power in being able to effect a positive change in our clients' lives.  Our aim is to welcome our clients and to provide a comfortable, warm environment for all.  Thanks for visiting our website.  We hope to have the opportunity to serve you.

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