USA Law and Practice Contributed by: Scott Naidech, Basil Godellas, Olga Loy and Beth Kramer, Winston & Strawn
Also, its state courts are highly experienced in resolving complex business disputes and gener - ally known for respecting the freedom to contract. Other US states or non-US jurisdictions will be used where appropriate to accommodate particular tax, regulatory or other legal needs. • General Partner or Other Managing Entity (eg, Managing Member or Manager): They have the legal power to act on behalf of the fund. Depend - ing on the structure and tax characteristics, this entity also typically receives the “carried interest” or “incentive/performance allocation” (although it is not unusual for the profits interests to be allocated to a special purpose vehicle). • Management Company or Investment Adviser: They are appointed to provide investment advi - sory services to the fund, employ the investment team, provide management or investment advisory services and generally manage the day-to-day operations of the fund. This entity typically receives a management fee for its services. • Other related entities may be formed to accom - modate the tax, regulatory and other legal needs of the investment adviser or the fund and its inves- tors. 2.2 Regulatory Regime for Funds Alternative funds and investment advisers are subject to a variety of regulations under US federal and state laws. The below outlines the basic US federal regula - tory regime for alternative funds; depending on the facts and circumstances, other rules may apply. U.S. Securities Act of 1933 (the “Securities Act”) Alternative funds are subject to the US rules concern - ing private placements when interests are offered to US persons, or via US jurisdictional means. Offers and sales of securities in the United States may only be made pursuant to a registration statement filed with, and declared effective by, the SEC, or in accordance with an exemption from these registration require - ments. Alternative funds typically rely on the regis - tration exemption provided by Section 4 (a)(2) of the Securities Act, and the “safe harbour” provided by Rule 506 under Regulation D under the Securities Act (“Regulation D”). Section 4 (a)(2) is a private place - ment exemption available to issuers for sales of their securities “not involving any public offering.” Section
4 (a)(2) does not expressly provide details of what con - stitutes a valid private placement, so most alternative funds rely on the safe harbour provisions set forth in Regulation D. Rule 506 (b) of Regulation D generally requires: • Limitation on Manner of Offering: There should be no general advertising or “general solicitation”. • Limitations on Resale: (a) Offering materials should include special leg - ends regarding US selling and transfer restric - tions. (b) Each purchaser should represent in the fund’s subscription agreement that it is acquiring the interests for its own account and not with a view to resale or distribution thereof, and each purchaser should further undertake that it will only resell the interests in accordance with the Securities Act and the fund’s transfer restric - tions. • Nature of and Limitation on Number of Purchas - ers: Offers and sales of interests should only be made to institutions and individuals that qualify as “accredited investors” (“accredited investors”), as defined in Regulation D. Rule 506 (b) does allow for offers and sales to up to 35 financially sophis - ticated investors so long as those non-accredited investors are provided with disclosures that are similar to what would be required in a public/regis - tered offering. • “Bad Actor” Disqualification: The fund, the general partner or the management company can be sub - ject to disqualification if they have committed “bad acts”. The fund itself can be disqualified if more than 20% of its securities are owned by investors who are “bad actors”. • SEC Filing: Form D must be filed with the SEC within 15 days of the fund’s first sale of securities, and any annual amendments thereto must be filed while the offering is ongoing. Rule 506 (c) is a separate safe harbour that has no restrictions on the use of general advertising or gen - eral solicitation, but all investors must be “verified” as accredited investors. Like Rule 506 (b), Rule 506 (c) has the same limitations on resale and is subject to “bad actor” disqualification. The overwhelming major - ity of alternative funds rely on Rule 506 (b).
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