USA Law and Practice Contributed by: Bill Sturman, Matthew Holt, Steven Starr and Cliff Cone, Clifford Chance
terminate before the maturity of its stock, inves - tors will lose projected gains. 3.1.2 Common Process for Setting Up Investment Funds To register with the SEC, open-end funds and ETFs use Form N-1A, while closed-end funds and BDCs register using Form N-2 when regis - tering their shares under the Securities Act. Both forms require the submission of a prospectus, a statement of additional information (SAI) and a section for other information such as corporate organisational documents, compliance policies, and certain material contracts. The prospectus summarises the fund’s investment objectives and strategies and describes its fees and costs. The SAI provides an in-depth description of the fund’s management and compensation struc - ture. UITs register using Form S-6 and Form N-8B-2. These forms include a prospectus and exhibits similar to the N-1A and N-2, but do not require an SAI. Privately owned BDCs register under the Exchange Act using Form 10, which calls for a description of the company’s business, a list of officers and directors, and other financial information pursuant to Regulation S-K under the Exchange Act. Once the registration statements have been filed, the SEC reviews and provides comments to which the retail fund must respond. Once the SEC decides it has gathered enough informa - tion, it will declare the registration of the fund to be effective. Open-end funds must update their registration statements each year in the form of a post-effective amendment to the Form N-1A, while closed-end funds are exempt from this requirement if they provide informative share - holder reports yearly. Setting up a retail fund is generally an expensive and time-consuming
process, which can be further exacerbated based on the extent of comments from the SEC. 3.1.3 Limited Liability All retail funds offer limited liability to their inves - tors, as investors will not be subject to losses greater than the amount they have invested. 3.1.4 Disclosure Requirements Under the Investment Company Act, open-end funds must provide annual and semi-annual reports to shareholders that are “visually engag - ing” and provide information that investors would want to know when monitoring their portfolios. ETFs are also required to provide a daily disclo - sure of their portfolios’ holdings. Closed-end funds must also provide annual and semi-annual reports to shareholders. BDCs report like normal reporting companies under the Exchange Act (ie, quarterly financial results on Form 10-Q, annual financial results on Form 10-K and periodic material updates on Form 8-K). As of 2020, closed-end funds must also provide an annual management discussion of the fund’s performance to the SEC under the Small Busi - ness Credit Availability Act and the Economic Growth, Regulatory Relief, and Consumer Pro - tection Act. 3.2 Fund Investment 3.2.1 Types of Investors in Retail Funds There are multiple types of investors in retail funds, including the general public investing through online brokerage platforms, as well as institutional investors, such as banks, insurance companies, pension plans, and other private or public funds.
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