How to write a hedge fund disclaimer
One of the more unusual requests (in my opinion) that we receive on this site is how to write a hedge fund disclaimer. I think that this is unusual because I would assume that most hedge fund managers would want to make sure that anything with a disclaimer has been reviewed and approved by a hedge fund attorney. If you are a manager who is looking for an “off the shelf” disclaimer, I recommend that you speak with a hedge fund attorney instead. Any hedge fund marketing or promotional materials (including hedge fund websites) should be reviewed by an attorney prior to publishing or dissemination.
Legal Background on Hedge Fund Disclaimers
Regulation D
There are a couple of important reasons why hedge fund offering documents, hedge fund marketing materials and hedge fund websites need to have certain disclaimers. The first set of laws deals with the fact that the interests in a hedge fund are securities and thus need to be registered at the federal level or fall within an exemption from registration. The Regulation D rules provide an exemption from registration and also require that the interests are not part of a public offering. Usually a hedge fund disclaimer will include references to certain parts of the Regulation D rules, specifically Rule 502.
Anti-Fraud Provisions
Another set of laws which influence hedge fund disclaimers are the anti-fraud provisions under the various federal securities laws. These provisions include: (i) Section 206 of the Investment Advisors Act and the rules promulgated thereunder (applicable to both registered and unregistered hedge fund managers); (ii) Rule 10b-5 promulgated under the Securities Exchange Act of 1934 (general anti-fraud provisions); and Section 17(a) under the Securities Act of 1933.
These anti-fraud provisions provide the SEC with many ways to go after a well-intentioned hedge fund manager. Because these provisions are broadly worded, a hedge fund manager should make sure that an attorney reviews all marketing material for compliance.
Creating the Hedge Fund Disclaimer
The hedge fund attorney will work with the hedge fund manager to understand both the words written in the marketing piece as well as the intent behind the words. Sometimes this can lead to longer discussions on the investment strategy and what the manager is attempting to show about the strategy. While at times this process can seem unnecessary or overly-protective, the hedge fund attorney needs to make sure that all of the representations in the marketing piece are accurate.
After a discussion, the hedge fund attorney will be able to craft the disclaimer fairly quickly. The disclaimer may seem to contain a lot of “boilerplate” but the key is knowing which provisions should be included and how those provisions should be modified.
Conclusion
As mentioned above, the hedge fund disclaimer is not something that a manager should take lightly and it is definitely not something that the manager should try to draft himself. If you have any specific questions on the hedge fund disclaimer or would like help starting a hedge fund, please feel free to contact us directly.
Other related hedge fund law articles include: