Description
This presentation goes through the entire hedge fund formation process for start up hedge fund managers. Managers will learn the basics of formation including information about the offering documents and how to raise money for a hedge fund.
For 40 minute voice presentation with this presentation, please visit www.hedgefundlawblog.com
Starting a Hedge Fund in 2009
Bart Mallon, Esq. Mallon P.C. [email protected]
Overview
• • • • • • • • • • • • • • • Initial Considerations Fund Characteristics Basic Structure Structural Issues Laws Regulation D Investors Registration Service Providers Timeline Offering Documents Costs Raising Capital Other Issues Disclaimer
2 of 18
© www.hedgefundlawblog.com
Initial Items to Consider
• Who will be your investors?
• How will you get to where you want to go?
3 of 18
Hedge Fund Characteristics
• Trading Strategies
– Traditional – Non-Traditional – Other Pooled Investment Vehicles
• Fees
– 2 and 20
• Taxation
– “pass-through” taxation – tax benefit of “allocation” of performance fees
4 of 18
Basic Fund Structure
Hedge Fund Investors (Limited Partners) Management Company (LLC)
1 Investors make investment in the Fund, payment to the Fund’s bank account* 2 Manager wires money to the Fund’s brokerage account* 3 Fund is managed by the Management Company 4 Fund makes investments 5 Fund pays Management Company a management fee (or may be paid from brokerage account)* 6 Fund allocates Management Company a performance allocation 7 If Investors make withdrawals, the Fund will make a distribution to investors*
1. 7.
5.
6.
Hedge Fund (LP)
(Bank Account) 2. 7. Hedge Fund (LP)
3.
* Indicate where there would likely be wire fees
Fees Allocations Management Movement of money Withdrawal 5 of 18
(Brokerage Account)
4. Investments
Structural Issues
• • • • • • • • • Fund structure/ Investors Minimum Investments
– Initial, Subsequent, In-kind, Maximum
Withdrawal and Contribution Periods
– Monthly, Quarterly, Yearly; Lock-up; Gate Provision; In-kind; Distributions
Fees
– Management and Performance; High Watermark; Hurdle Rate
Management registration status Reports to investors Selling commissions Expenses Asset valuation practices
6 of 18
Hedge Fund Laws
• Securities Act of 1933 – Interest in a fund are “securities” – Regulation D “safe harbor” Securities Exchange Act of 1934 – Funds with 500 investors and $10 million in equity must register Investment Company Act of 1940 – Hedge funds exempted under Section 3(c)(1) and Section 3(c)(7) Investment Advisers Act of 1940 – Requires investment advisers to register with the SEC – Exemption under Section 203(b)(3) for advisers who have less than 15 clients over a 12 month period
•
•
•
•
Commodities Exchange Act – CPO and CTA Registration
Other Laws – Internal Revenue Code of 1986 – “Blue Sky” Laws
•
7 of 18
Regulation D
• Rule 506
– No limit on amount of sales – Generally only sold to “accredited investors” – Can have up to 35 non- “accredited investors”
• Definition of “accredited investor”
– $1 Million Net Worth – $200,000 in income in last 2 years
• No General Advertising
– No newspaper ads – No radio shows
• File Form D with SEC within 15 days of sale
8 of 18
Hedge Fund Investors
Section 3(c)(1) Funds • Limited to 99 investors • Accredited Investor • Qualified Client
– Natural person with a net worth of $1,500,000 – Note: may be dependant on state law
Section 3(c)(7) Funds • Limited to 499 investors • Qualified Purchaser
– Natural person with a liquid net worth of $5,000,000
9 of 18
Registration
• Investment Advisor Registration
– State vs. Federal
• • • Under $25 million – State only $25 - $30 million – SEC or State Over $30 million – SEC Section 203(b)(3) exemption Generally 2-4 weeks Compliance manual Exemption depends on state laws Generally 2-8 weeks Series 65 Potential net capital requirements Compliance procedures including potentially a compliance manual
– SEC
• • •
– State
• • • • •
•
CTA or CPO Registration
– – – – Registration with CFTC through the NFA Potential CTA and CPO Exemptions (but potential state issues) Series 3 Various compliance requirements
10 of 18
Hedge Fund Service Providers
• Lawyer
– drafts offering documents; entity formation; registration; strategic and legal advice
• Administrator
– provides fund NAV calculation; fee calculations; investor reporting; etc.
• Auditor/ Accountant
– provides yearly fund audit; prepares tax forms for the manager and investors
• Prime Broker
– provides execution and/or clearing services for trades; custodian of assets
• Consultant
– provides consulting services to management company re: fund raising, marketing, operational guidance etc
11 of 18
Hedge Fund Timeline
• Week 1
– discuss fund structure in depth, organize legal entities (management company, fund), begin talking with outside service providers
•
Week 2
– receive draft of offering documents, begin thinking about operational issues which may arise – are your computers ready, is office space secured?
•
Week 3
– discussion and revision of offering documents with attorney, begin finalizing outside service provider contracts, establish bank account, establish brokerage account
•
Week 4
– tie up loose ends, finalize offering documents, begin to get ready for trading or selling interests in your fund
•
IA registration and CTA/ CPO registration will affect this timeline – usually add about 2-4 weeks to the schedule assuming that the principals have all required regulatory exams and also provided that there are no prior regulatory actions
12 of 18
Offering Documents
• Private Placement Memorandum (PPM)
– – – – Similar to mutual fund prospectus Discussion of important structural terms Discussion of investment program Information on management company and managers
• Limited Partnership Agreement (LPA)
– Governing legal document
• Subscription Documents
– Subscription agreement – Investor suitability questions
13 of 18
Costs to Start a Fund
• Lawyer
– Range from $17,000 (boutique) to $35,000+ (BigLaw) for a basic domestic long-short fund; registration extra – My firm will be about $13,000 for a basic domestic long-short fund; registration from $3,500 if necessary
•
Administration
– Range from $750 - $1,500 per month; Initial one time set-up fees range from $500 - $1,500 – Larger funds may also pay a fee (x bps) on AUM
•
Audit
– Audit: $5,000 – 15,000 depending on a number of factors including Audit firm – Tax Prep: $4,000 - $10,000 depending on a number of factors including number of investors and the Audit firm
• •
Prime Broker
– Varies depending on strategy, investments, trading volume
Business Expenses – office rent, compliance costs, telephones, computers and IT, office equipment, staff salary, etc.
14 of 18
Raising Capital
• Must be done pursuant to Regulation D • Who
– Friends and Family – Institutional Investors
• Marketing Materials
– Powerpoint Pitchbooks – One Page Tearsheets – Appropriate Disclosures/ Disclaimers
• Outside Marketing
– – – – Hedge Fund Databases Hedge Fund Industry Events Capital Introduction Services Third Party Marketers
15 of 18
Other Issues
• • • • • • • • • “Incubator” hedge funds Offshore hedge funds Taxation ERISA and IRA investments “New Issues” Rule Soft Dollars Side Letters Due Diligence Blue Sky Filings
16 of 18
Disclaimer
• • • • • This presentation was made for informational purposes only. I am not providing legal advice to any user. I am not providing tax advice. Presentation is subject to the Circular 230 Notice on the disclaimer portion of my blog. This presentation does not establish an attorney-client relationship between myself and the user. Any discussion herein is not a substitute for seeking actual legal advice from a licensed attorney with knowledge of the rules and regulations governing the industry.
•
I make no representations, guarantees, or warranties as to the accuracy, completeness, currency, or suitability of the information provided via this presentation.
This may be considered to be “attorney advertising” in some jurisdictions.
17 of 18
•
For Voice Presentation, please see:
www.hedgefundlawblog.com
Please send questions, comments or suggestions to Bart Mallon at [email protected]
© www.hedgefundlawblog.com
doc_807785751.ppt
This presentation goes through the entire hedge fund formation process for start up hedge fund managers. Managers will learn the basics of formation including information about the offering documents and how to raise money for a hedge fund.
For 40 minute voice presentation with this presentation, please visit www.hedgefundlawblog.com
Starting a Hedge Fund in 2009
Bart Mallon, Esq. Mallon P.C. [email protected]
Overview
• • • • • • • • • • • • • • • Initial Considerations Fund Characteristics Basic Structure Structural Issues Laws Regulation D Investors Registration Service Providers Timeline Offering Documents Costs Raising Capital Other Issues Disclaimer
2 of 18
© www.hedgefundlawblog.com
Initial Items to Consider
• Who will be your investors?
• How will you get to where you want to go?
3 of 18
Hedge Fund Characteristics
• Trading Strategies
– Traditional – Non-Traditional – Other Pooled Investment Vehicles
• Fees
– 2 and 20
• Taxation
– “pass-through” taxation – tax benefit of “allocation” of performance fees
4 of 18
Basic Fund Structure
Hedge Fund Investors (Limited Partners) Management Company (LLC)
1 Investors make investment in the Fund, payment to the Fund’s bank account* 2 Manager wires money to the Fund’s brokerage account* 3 Fund is managed by the Management Company 4 Fund makes investments 5 Fund pays Management Company a management fee (or may be paid from brokerage account)* 6 Fund allocates Management Company a performance allocation 7 If Investors make withdrawals, the Fund will make a distribution to investors*
1. 7.
5.
6.
Hedge Fund (LP)
(Bank Account) 2. 7. Hedge Fund (LP)
3.
* Indicate where there would likely be wire fees
Fees Allocations Management Movement of money Withdrawal 5 of 18
(Brokerage Account)
4. Investments
Structural Issues
• • • • • • • • • Fund structure/ Investors Minimum Investments
– Initial, Subsequent, In-kind, Maximum
Withdrawal and Contribution Periods
– Monthly, Quarterly, Yearly; Lock-up; Gate Provision; In-kind; Distributions
Fees
– Management and Performance; High Watermark; Hurdle Rate
Management registration status Reports to investors Selling commissions Expenses Asset valuation practices
6 of 18
Hedge Fund Laws
• Securities Act of 1933 – Interest in a fund are “securities” – Regulation D “safe harbor” Securities Exchange Act of 1934 – Funds with 500 investors and $10 million in equity must register Investment Company Act of 1940 – Hedge funds exempted under Section 3(c)(1) and Section 3(c)(7) Investment Advisers Act of 1940 – Requires investment advisers to register with the SEC – Exemption under Section 203(b)(3) for advisers who have less than 15 clients over a 12 month period
•
•
•
•
Commodities Exchange Act – CPO and CTA Registration
Other Laws – Internal Revenue Code of 1986 – “Blue Sky” Laws
•
7 of 18
Regulation D
• Rule 506
– No limit on amount of sales – Generally only sold to “accredited investors” – Can have up to 35 non- “accredited investors”
• Definition of “accredited investor”
– $1 Million Net Worth – $200,000 in income in last 2 years
• No General Advertising
– No newspaper ads – No radio shows
• File Form D with SEC within 15 days of sale
8 of 18
Hedge Fund Investors
Section 3(c)(1) Funds • Limited to 99 investors • Accredited Investor • Qualified Client
– Natural person with a net worth of $1,500,000 – Note: may be dependant on state law
Section 3(c)(7) Funds • Limited to 499 investors • Qualified Purchaser
– Natural person with a liquid net worth of $5,000,000
9 of 18
Registration
• Investment Advisor Registration
– State vs. Federal
• • • Under $25 million – State only $25 - $30 million – SEC or State Over $30 million – SEC Section 203(b)(3) exemption Generally 2-4 weeks Compliance manual Exemption depends on state laws Generally 2-8 weeks Series 65 Potential net capital requirements Compliance procedures including potentially a compliance manual
– SEC
• • •
– State
• • • • •
•
CTA or CPO Registration
– – – – Registration with CFTC through the NFA Potential CTA and CPO Exemptions (but potential state issues) Series 3 Various compliance requirements
10 of 18
Hedge Fund Service Providers
• Lawyer
– drafts offering documents; entity formation; registration; strategic and legal advice
• Administrator
– provides fund NAV calculation; fee calculations; investor reporting; etc.
• Auditor/ Accountant
– provides yearly fund audit; prepares tax forms for the manager and investors
• Prime Broker
– provides execution and/or clearing services for trades; custodian of assets
• Consultant
– provides consulting services to management company re: fund raising, marketing, operational guidance etc
11 of 18
Hedge Fund Timeline
• Week 1
– discuss fund structure in depth, organize legal entities (management company, fund), begin talking with outside service providers
•
Week 2
– receive draft of offering documents, begin thinking about operational issues which may arise – are your computers ready, is office space secured?
•
Week 3
– discussion and revision of offering documents with attorney, begin finalizing outside service provider contracts, establish bank account, establish brokerage account
•
Week 4
– tie up loose ends, finalize offering documents, begin to get ready for trading or selling interests in your fund
•
IA registration and CTA/ CPO registration will affect this timeline – usually add about 2-4 weeks to the schedule assuming that the principals have all required regulatory exams and also provided that there are no prior regulatory actions
12 of 18
Offering Documents
• Private Placement Memorandum (PPM)
– – – – Similar to mutual fund prospectus Discussion of important structural terms Discussion of investment program Information on management company and managers
• Limited Partnership Agreement (LPA)
– Governing legal document
• Subscription Documents
– Subscription agreement – Investor suitability questions
13 of 18
Costs to Start a Fund
• Lawyer
– Range from $17,000 (boutique) to $35,000+ (BigLaw) for a basic domestic long-short fund; registration extra – My firm will be about $13,000 for a basic domestic long-short fund; registration from $3,500 if necessary
•
Administration
– Range from $750 - $1,500 per month; Initial one time set-up fees range from $500 - $1,500 – Larger funds may also pay a fee (x bps) on AUM
•
Audit
– Audit: $5,000 – 15,000 depending on a number of factors including Audit firm – Tax Prep: $4,000 - $10,000 depending on a number of factors including number of investors and the Audit firm
• •
Prime Broker
– Varies depending on strategy, investments, trading volume
Business Expenses – office rent, compliance costs, telephones, computers and IT, office equipment, staff salary, etc.
14 of 18
Raising Capital
• Must be done pursuant to Regulation D • Who
– Friends and Family – Institutional Investors
• Marketing Materials
– Powerpoint Pitchbooks – One Page Tearsheets – Appropriate Disclosures/ Disclaimers
• Outside Marketing
– – – – Hedge Fund Databases Hedge Fund Industry Events Capital Introduction Services Third Party Marketers
15 of 18
Other Issues
• • • • • • • • • “Incubator” hedge funds Offshore hedge funds Taxation ERISA and IRA investments “New Issues” Rule Soft Dollars Side Letters Due Diligence Blue Sky Filings
16 of 18
Disclaimer
• • • • • This presentation was made for informational purposes only. I am not providing legal advice to any user. I am not providing tax advice. Presentation is subject to the Circular 230 Notice on the disclaimer portion of my blog. This presentation does not establish an attorney-client relationship between myself and the user. Any discussion herein is not a substitute for seeking actual legal advice from a licensed attorney with knowledge of the rules and regulations governing the industry.
•
I make no representations, guarantees, or warranties as to the accuracy, completeness, currency, or suitability of the information provided via this presentation.
This may be considered to be “attorney advertising” in some jurisdictions.
17 of 18
•
For Voice Presentation, please see:
www.hedgefundlawblog.com
Please send questions, comments or suggestions to Bart Mallon at [email protected]
© www.hedgefundlawblog.com
doc_807785751.ppt