USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
including high-level information on the fund and its service providers. 2.2 Fund Investment 2.2.1 Types of Investors in Alternative Funds The investor base for alternative funds has historically been primarily composed of large, institutional investors – eg, government and cor - porate pension plans, university endowments, non-profit organisations, sovereign wealth funds, insurance companies, and family offices. High net worth individuals may also invest in alter- native funds provided they meet the applicable qualification standards imposed by the fund. 2.2.2 Legal Structures Used by Fund Managers Sponsors of alternative funds typically organise a special purpose vehicle (usually a limited part - nership or LLC) to serve as the general partner or managing member of an alternative fund. The general partner or managing member exercises day-to-day control of the fund and is frequently the party entitled to receive any carried interest or similar profits interest with respect to the fund. The fund then separately engages the sponsor’s investment adviser entity (which is also typically structured as a limited partnership or LLC) to serve as the investment adviser to the fund. The investment adviser, rather than the general partner or managing member of the fund, typi - cally receives the management fee payable by the fund. 2.2.3 Restrictions on Investors Securities Act Under Regulation D of the Securities Act of 1933 (the “Securities Act”), interests in an alternative fund may be offered to an unlimited number of investors that qualify as “accredited investors” and up to 35 non-accredited sophisticated
investors (ie, investors that have knowledge and experience in financial and business matters and are capable of evaluating the merits and risks of the prospective investment). In practice, many alternative funds choose to exclude non-accred - ited investors in order to avoid being subject to additional disclosure obligations that apply only to non-accredited investors. See 2.3.7 Market- ing of Alternative Funds for a discussion of additional conditions applicable to alternative funds seeking to rely on Regulation D. Additionally, an alternative fund will be disquali - fied from relying on the Regulation D exemption under the “bad actor” rule if any investor that owns 20% or more of the total voting power of the fund is considered a “bad actor” as a result of being subject to a criminal conviction, regula - tory or court order, or other disqualifying event covered by the rule. Investment Company Act Alternative funds offered through a private placement will also typically rely on one of sev - eral available exemptions from registration as an investment company under the Investment Company Act of 1940 (the “Investment Com - pany Act”) (which would subject the fund to requirements applicable to registered funds, as summarised in 3.3.9 Post-marketing Ongoing Requirements ). The two primary exemptions used by alternative funds under the Investment Company Act require the alternative fund to either: • limit the number of investors so that the fund is not owned by more than 100 persons; or • limit investors to only those that have suf- ficient investible assets to be considered “qualified purchasers”.
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