USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
ing agreement and the investor’s qualification to invest under applicable securities laws. • Side Letters: It is fairly common for the fund sponsor to negotiate separate side let - ter agreements with certain investors that modify the terms of the operating agreement as applied to the applicable investor. Side letters are used frequently to address special regulatory, policy, or tax matters applicable to specific investors, and may also cover preferential economic terms, reporting and transparency rights, and representations and warranties. Timeline and Costs While the process of launching an alternative fund is far more streamlined than a public offering, the fundraising process can still require significant time and costs. Various factors will impact the length and cost of the process, including the complexity of the fund’s investment strategy, the size and diversity of the fund’s investor base, the strength of the fund sponsor’s track record and investor relationships, and general economic conditions. Although these factors vary greatly from fund to fund, it is not uncommon for the fund’s operating documents to provide a fund - raising period of twelve or more months for the fund sponsor to raise enough capital to reach its target size. 2.1.3 Limited Liability Provided they do not participate in the manage - ment or control of the fund, investors in alter - native funds formed as limited partnerships or LLCs do not have any personal liability to the fund, to the other partners or members of the fund, or to the fund’s creditors for the debts, liabilities, or other obligations of the fund. As a result, an investor’s liability is generally limited to the amount of its capital commitment to the fund, except to the extent the fund’s govern -
ing documents require investors to contribute amounts in excess of their capital commitments in order to fund certain expenses, liabilities, or other obligations of the fund, subject to the limits and conditions agreed between investors and the fund sponsor. 2.1.4 Disclosure Requirements Alternative funds are generally subject to mini - mal disclosure and reporting obligations relative to registered funds and public companies. As noted in 2.1.2 Common Process for Setting Up Investment Funds , there is no prospectus requirement with respect to offerings solely to accredited investors. With the exception of the Form D filing requirement discussed in 2.1.2 Common Process for Setting Up Investment Funds , the securities laws follow a principles- based approach with respect to regulation of what fund sponsors can and cannot say to inves - tors in the course of a fund offering to ensure that investors receive all material information relevant to making a decision to invest and that the information disclosed is not misleading. After the alternative fund has admitted investors, ongoing disclosure and reporting requirements are primarily dictated by the operating agree - ment negotiated between the fund sponsor and investors. Typically, fund terms will include a requirement for the fund sponsor to delivery quarterly reports to investors as well as annual financial statements that have been audited by a reputable audit firm. These disclosures are not provided to regulators and are not generally made publicly available. Additionally, the investment adviser to the fund may be required to make an annual filing via Form ADV, which generally contains biographi - cal information about the adviser’s business,
498 CHAMBERS.COM
Powered by FlippingBook