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Hedge Fund and Investment Law Securities are regulated under Regulation D of the Securities Act of 1933. However, there is an exemption that allows you to make a private placement of your hedge fund without having to register the security with the SEC and each state (an expensive and time-consuming process). The attorneys that create your offering documents will ensure that the disclosures in the documents will allow you to achieve this exemption. The exemption is great news, and all the states honor this exemption from registration. If you desire the exemption, you probably want to form what is known as a Section 3(c)(1) fund (from the Investment Company Act of 1940). That kind of a fund allows you to have fewer than 100 investors, up to 35 of whom can be non-accredited investors. A typical hedge fund manager has only one client - the hedge fund. The individuals that buy into the hedge fund are the investors. Hedge funds and their advisers are governed primarily by the Investment Company Act of 1940, the Securities Act of 1933 and the Investment Advisers Act of 1940.
Investment Company Act of 1940 This Act regulates the organization of companies, including mutual funds, that engage primarily in investing, reinvesting, and trading in securities, and whose own securities are offered to the investing public. The regulation is designed to minimize conflicts of interest that arise in these complex operations. The Act requires these companies to disclose their financial condition and investment policies to investors when stock is initially sold and, subsequently, on a regular basis. The focus of this Act is on disclosure to the investing public of information about the fund and its investment objectives, as well as on investment company structure and operations. It is important to remember that the Act does not permit the SEC to directly supervise the investment decisions or activities of these companies or judge the merits of their investments. Most hedge funds have substantial investments in securities that would cause them to fall within the definition of investment company under the Investment Company Act. Hedge funds, however, typically rely on one of two statutory exclusions from the definition of investment company, which enables them to avoid the regulatory provisions of that Act.
Section 3(c)(1) Exclusion Section 3(c)(1) of the Investment Company Act excludes from the definition of investment company any issuer whose outstanding securities are beneficially owned by not more than 100 investors and which does make a public offering of its securities. Hedge funds relying on Section 3(c)(1) may not make a public offering. These hedge funds must comply with Section 4(2) of the Securities Act, and frequently do so by relying on the safe harbor available under Regulation D under that Act. Consequently, hedge funds may offer their securities only to “accredited investors,” and may not engage in any general solicitation or general advertising of their shares.
Section 3(c)(7) Exclusion Section 3(c)(7) of the Investment Company Act excludes from the definition of investment company any issuer whose outstanding securities are owned exclusively by persons who, at the time of acquisition of such securities, are “qualified purchasers,” and which is not making a public offering of its securities. A hedge fund relying on Section 3(c)(7) may accept an unlimited number of qualified purchasers for investment in the fund. As a practical matter, however, most funds relying on Section 3(c)(7) have no more than 499 investors in order to avoid the registration and reporting requirements of the Securities Exchange Act of 1934 (“Exchange Act”).
Section 3(c)(7) Qualified Purchasers Section 2(a)(51) of the Investment Company Act generally define qualified purchaser” to be: (1) any natural person who owns not less than $5 million in investments; (2) any family-owned company (as described in that section) that owns not less than $5 million in investments; (3) any other trust the trustee and settlor(s) of which are qualified purchasers that was not formed for the specific purpose of acquiring the securities of the Section 3(c)(7) fund; and (4) any person acting for its own account or the accounts of other qualified purchasers, that owns and invests on a discretionary basis not less than $25 million in investments.
Securities Act of 1933 Often referred to as the "truth in securities" law, the Securities Act of 1933 has two basic objectives: require that investors receive financial and other significant information concerning securities being offered for public sale; and prohibit deceit, misrepresentations, and other fraud in the sale of securities. Section 5 of the Securities Act mandates the registration with the SEC of public securities offerings and the delivery to purchasers of a prospectus containing specified categories of information about the issuer and the securities being offered, unless there is an available exemption from the registration requirements. Since limited partnership, LLC and other interests offered to investors in the case of a typical hedge fund fall within the definition of the term “securities” for purposes of the federal securities laws, the hedge funds must either register the offer and sale of the securities or rely on an exemption from registration. Offerings of hedge fund securities in the United States generally rely on the private offering exemption in Section 4(2) of the Securities Act or Rule 506 promulgated under that Section to avoid the registration and prospectus delivery requirements of Section 5.
The Private Offering Exemption of the Securities Act Section 4(2) of the Securities Act exempts from the registration and prospectus delivery requirements of Section 5 any “transactions by an issuer not involving any public offering.” The Section 4(2) exemption, commonly known as the “private offering” or “private placement” exemption, requires no notice or other filing or regulatory approval as a prerequisite for its availability.
Regulation D and Rule 506 Rule 506 of Regulation D under the Securities Act is a set of requirements promulgated by the SEC to govern private offerings. Although compliance with the Rule 506 requirements is not required to establish the availability of a private offering exemption, satisfaction of the conditions of the rule entitles an issuer to claim the Section 4(2) exemption. In this sense, Rule 506 establishes “safe harbor” criteria for the private offering exemption, but is not the exclusive means of establishing entitlement to the exemption. Because of a degree of uncertainty as to the availability of the Section 4(2) exemption, many hedge funds tailor their offering and sale procedures to the criteria specified in Rule 506.
Offerings to Accredited Investors The safe harbor protection most often relied upon by hedge funds under Rule 506 exempts offerings that are made exclusively to “accredited investors.” While Rule 506(b)(2)(i) limits the number of purchasers in a Rule 506 transaction to 35, this numerical limitation becomes irrelevant if the offering is made only to “accredited investors” because Rule 501(e)(1)(iv) provides that “accredited investors” are not counted for purposes of determining whether the issuer has exceeded the 35-purchaser limit. Issuers are permitted under these provisions to sell securities to an unlimited number of “accredited investors.” In addition, if the offering is made only to accredited investors, no specific information is required to be provided to prospective investors.
Investment Advisers Act of 1940 This law regulates investment advisers. With certain exceptions, this Act requires that firms or sole practitioners compensated for advising others about securities investments must register with the SEC and conform to regulations designed to protect investors. Since the Act was amended in 1996, generally only advisers who have at least $25 million of assets under management or advise a registered investment company must register with the SEC. Hedge Fund Startup Process and Procedures You should know how the hedge fund startup process works. We provide an initial consultation, create a detailed business plan, provide state and SEC filings, draft your offering documents, handle compliance issues, prepare your policies and procedures manual (if needed), advise on your operating structure, offer Chief Compliance Officer training, and a marketing plan for your business. Call (307) 213-4732 for a consultation to discuss your needs. In this consultation, you will speak to Hannah Terhune, a veteran hedge fund and tax attorney.
CapitalManagementServicesGroup.com is recognized by discriminating fund managers and businessmen as being the foremost tax and legal authority in the business. Attorney Hannah Terhune's education and experience are unsurpassed in the area of hedge funds creation and management platforms, and the complex body of related tax laws. Ms. Terhune's extensive knowledge and experience have made her an indispensable resource for serious hedge fund and business professionals. Ms. Terhune's articles on the subjects have appeared in over 100 publications worldwide. Chances are, if you have read about the above matters, Ms. Terhune has written about them.
Give us the opportunity to use that knowledge and experience for you. We have both regulatory experience and the understanding of the foreign exchange and securities markets. We know how to navigate the compliance with rules and regulations in the United States as well as in regulated jurisdictions such as United Kingdom, Singapore, Hong Kong, Canada and the British Virgin Islands. Each client receives personalized attention from our attorneys and staff. No client is too large or small though because of our boutique size. We pride ourselves in providing personal attention to each client.
CMSG provides the best services and support needed for hedge funds and business projects. No need to coordinate work between different firms--we handle the entire business process from start to finish. We offer accounting, tax planning services, tax return preparation, business consulting, and U.S. and international company formation services. Our professionals provide the highest 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. Read our Leading Media Articles, Customer Testimonials and learn more About Us.
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. As a result, you can anticipate that the return on your investment will far outweigh the costs associated with our unsurpassed services. Ms. Terhune's credentials reflect an invaluable resource that combines a well-informed professional practitioner with sound ethical judgment that cannot be over-estimated. The expertise required to recommend best solutions and provide sound 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 (307) 213-4732 orClick Here to Request Services.
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Why Hire Us? When you engage us for hedge fund you get a unique combination of securities, tax, and international experience, focused on the trader niche. We have established a leadership position with traders. We are one destination for all your very special hedge fund and trader tax needs. We think we have the best set of offering documents based on the current and ever changing federal, state and offshore securities, commodities, and tax laws. We aim and 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 into your hedge fund vehicle (for the benefit of the manager and their investors) and your management company. Investors value tax-savings strategies and we utilize all our special knowledge and ideas in this area. Our customers value our one-stop relationship. We will help you start your business and continue to assist you. Our tax services division handles accounting, software, and tax compliance, including all tax matters (tax planning and tax returns). Only one thing counts with us and that's our customer relationships!
