USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
Generally, an investor will be considered a “qual - ified purchaser” if it falls into one of a few enu - merated categories, including if it is (i) a natural person that has at least USD5 million of invest - ments or (ii) an entity that has at least USD25 million of investments. Exchange Act An alternative fund relying on Regulation D and the qualified purchaser exemption would not be subject to a cap on the number of investors under the Securities Act or the Investment Com - pany Act. However, the Securities Exchange Act of 1934 (the “Exchange Act”) separately pro - vides that an alternative fund with 2,000 or more investors would be subject to onerous public reporting and record-keeping requirements. As a result, alternative funds will generally seek to limit the number of investors to 1,999 or less. 2.3 Regulatory Environment 2.3.1 Regulatory Regime Alternative funds are generally subject to less regulatory scrutiny than their retail fund coun - terparts, and the offering of interests in alterna - tive funds is primarily governed by three legal regimes: the Securities Act, the Exchange Act, and the Investment Company Act. Additionally, investment advisers to alternative funds are gov - erned by the Investment Advisers Act of 1940 (the “Advisers Act”). Securities Act Under the Securities Act, any offering of securi - ties with a US nexus must be registered with the SEC, unless an exemption from registration is available. While public offerings in the United States must be registered under the Securities Act, private placements of securities are exempt from registration and offer funds an opportunity to avoid the costs, restrictions, and compliance burdens associated with registration. A private
placement is an offer or sale of securities that is made in reliance on Section 4(a)(2) of the Securi - ties Act or Regulation D or Regulation S there - under. Exchange Act Rule 10b-5 under the Exchange Act prohibits funds from engaging in fraud, making any untrue statement of a material fact, or omitting to state a material fact necessary in order to make the statements made not misleading. A fact is mate - rial if there is a “substantial likelihood” that a rea - sonable investor would consider it important in its decision-making. In order to avoid potential liability under this rule, the fund and the fund sponsor should ensure that the offering docu - ments and marketing materials are complete, accurate, and truthful. The Exchange Act also governs the activities of registered broker-deal - ers, who act as placement agents to funds and All entities that fall under the definition of an “investment company” that issues securities to US persons, whether publicly or privately, must either register as an investment company under the Investment Company Act or find an exemp - tion from such registration. An issuer who falls under the definition of “investment company” and cannot rely on an available exemption would be required to register with the SEC, and, accordingly, be subject to an array of substan - tive requirements, including, among other things, public filings and financial reporting, limits on affiliate transactions, limits on capital structure (ie, asset coverage restrictions), and compliance and record-keeping burdens. their investment advisers. Investment Company Act Alternative funds typically rely on one of the explicit exclusions from the definition of “invest - ment company” available under Section 3(c) of
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