Revising Hedge Fund Offering Documents

It is very important that hedge fund managers always provide potential investors with hedge fund offering documents which are current and up to date.* Because of certain changes to the various hedge fund laws within the past few months (and because of the increased likelihood of future rules/regulations changes) a hedge fund private placement memorandum which was current 3 months ago will likely need to be revised.

*As always, hedge fund offering documents should only be drafted by a knowledgeable hedge fund attorney.

Specifically, there are two changes which will need to be implemented immediately – the change of the new issue rule (applicable to most funds) and the abolition of Section 409 (applicable to a small number of hedge funds). This article will detail the changes that will need to be made and will discuss how your hedge fund attorney will go about this.

New “New Issue” Rule

As we mentioned previously on a post about the new “new issue” rule, this rule underwent a couple of changes. As the NASD and the NYSE regulatory bodies merged to form FINRA, the dispirate rulebooks, as well, merged into a new FINRA rulebook. Under the new FINRA rulebook each rule was modified (most very slightly) and given a new number. Thus the former NASD Rule 2790 was changed to FINRA Rule 5130.

Admittedly, this is a very small change; however, it is a detail that an experienced due diligence examiner would find. While it is unlikely to raise eyebrows, it does show a lack of attention to detail. I would imagine we will see FINRA Rule 2790 descriptions in offering documents well into this year. We recommend discussing an update with your hedge fund attorney if your document contains the 2790 language.

Section 409

Section 409 was an Internal Revenue Code provision which allowed managers of offshore hedge funds to defer certain income under certain circumstances. Section 409 was not a widely used provision as many hedge fund managers prefer to take their performance fee or performance allocation on a yearly basis. However, for some hedge fund managers the deferral offered by Section 409 made very good sense from a tax planning perspective.

For more information, see Hedge Fund Taxation by Professor.

The tax advantage of deferral of management fees was eliminated by new Internal Revenue Code Section 457, enacted as part of the Emergency Economic Stabilization Act of 2008. That provision is effective beginning in calendar year 2009. Thus, 2008 will be the last year in which fund managers will benefit from deferral.

Revising the Hedge Fund Offering Documents

Your hedge fund attorney can revise the offering documents for you. Typically this is done on either an hourly rate or on a flat fee basis. It should not cost more than a few hundred dollars to have a hedge fund attorney review your offering documents and make suggested revisions.

As a reminder, it is very important that you only provide offering documents which are correct. This means periodically re-examining the description of the investment program to make sure it complies with the fund’s actual trading practices.

Please contact us if you would like us to review your hedge fund offering documents or if you would like help starting a hedge fund. Other hedge fund law related articles include:

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