FAQs on Offering Documents
I recently read an article by a hedge fund administration firm which discussed hedge fund offering documents and start up hedge fund expenses. I thought this was an interesting topic and one which is popular with many of my start up clients. Below I discuss some of the common questions regarding the offering documents and also provide reasons why a start up manager should use my law firm for starting a hedge fund.
Offering documents are just boilerplate – why are they so expensive?
This is a common misperception. Offering documents (if done correctly) are not merely boilerplate where the attorney pops in the fund name and the address – offering documents are a tailored to the specific needs of the client based on the client’s investment program and fund structure.
For instance, there are at least 12 different questions related to the management fee and performance fee/ performance allocation. There are at least 22 different questions related to the fund’s contribution periods and withdrawal periods. This level of customization does not come from a boilerplate form. Furthermore, many of these questions or options may have specific implications for the manager’s business either from a legal standpoint or a business standpoint. Many times the lawyer will need to have an in-depth discussion with the manager to help the manager determine which option is right for the fund.
Why are offering documents so long?
Offering documents are long – there is no getting around it. The structure of the offering documents are determined by the federal and state securities laws and thus there is not really any wiggle room. While it is often said that the hedge fund industry is “not regulated” or “lightly regulated” there are many hedge fund laws and regulations which managers must follow. These laws dictate many aspects of the documents and are why offering documents are so long (and also why offering documents from different firms are structured so similarly).
In this prior post, discussing “Prospectus Creep” we discussed the length of offering documents:
4. Is the Prospectus written for the Manager or the Investor?
Castle Hall discusses the interesting phenomenon of “Prospectus Creep” or basically the lengthening of hedge fund offering documents as hedge fund lawyers add more clauses to the documents which are designed to protect the managers. Castle Hall notes that “today’s offering documents are typically drafted to give maximum freedom of action for the manager and often permit unrestricted investment activities. Investors are also faced with offering documents which list every possible risk factor in an attempt to absolve the manager from responsibility under virtually all loss scenarios.”
HFLB: We agree that offering documents can be long and that often they contain a long list of risk factors associated with the investment program. The purpose of the offering documents is to explain the manager’s investment program and if the manager truly has a “kitchen sink” investment program, then all of the disclosures and risk factors are a necessary part of the offering documents. However we also feel that hedge fund offering documents should accurately describe the manager’s proposed investment program and that if the manager has a very specific strategy, he should provide as much detail to the investors as possible.
Can I draft offering documents myself? I have a friend who has some documents I think I can modify.
No. You should never draft offering documents yourself. I have seen countless examples of people who have tried to draft their own offering documents based on another fund. Many times these people will ask me to “check the documents.” Ninety-five percent of the time a brief skim of the documents will reveal major errors that cannot simply be fixed with a 2 hour review. In most all occasions the documents will need to be completely scrapped.
Are all law firm offering documents the same?
No, but law firm documents are all very similar.
It is an interesting phenomenon in the hedge fund legal world that attorneys are always interested in (or obsessed with) reading the other law firms offering documents. As one of those lawyers that is very interested in the differences between the offering documents, I have studied the documents from most all of the major hedge fund law firms including the firms listed below which are considered to be the best in the industry.
- Sidley Austin
- Shartsis Friese
- Seward & Kissel
- Kleinberg, Kaplan, Wolff & Cohen
- Katten Muchin Rosenman
- Schulte Roth & Zabel
- Akin Gump Strauss Hauer & Feld
- K&L Gates
I have probably read through 500 different offering documents (many from the same large law firms) and have found most documents to be quite similar. For the most part with a name brand firm you are going to get a quality product that is probably pretty equal to another large or name brand law firm. These documents will very likely protect you in all of the necessary ways.
However, that is not to say that all large law firm offering documents are perfect. I have seen offering documents which cost over $70,000 with typos and errors. Many times expensive offering documents are sloppy in certain respects – I expect this is because many large law firms use inexperienced associate attorneys to draft the offering documents.
Does price equal quality?
Not necessarily. While you are less likely to receive white glove service from a document shop, BigLaw does not necessarily equate to fine quality – especially for small and start up managers. In a large law firm you are going to probably initially talk with a partner about your program who will then relay the information to an associate who will be in charge of your project. This means that your offering documents are likely drafted by an overworked associate who has relatively little experience.
I always recommend a start up manager ask the law firm who will be drafting the offering documents and how much experience the person has. Many large law firms will say that an associate will draft the documents but the partner will review prior to finalization. I find it hard to believe that a partner will review offering documents – many times this is not true.
Low cost offering documents – are you getting less quality?
In some cases yes, but in the case of my law firm documents the answer is a resounding NO. While my firm will charge around $13,000 to $18,000 for offering documents (considered to be on the lower end), this does not mean that the quality of my work is less than any other firm.
As I have mentioned before on this site, I have worked with a substantial number of start up hedge funds and have drafted the offering documents or worked on around 150 funds. Also, I have spent a great deal of time dissecting offering documents from a large number of firms. My dedication to completely understanding the offering documents, along with my passion for the industry and helping managers with their business issues makes my services a compelling alternative to other firms which may cost more.
Additionally, I value the client relationship and always strive to return emails and phone calls promptly.
While the offering documents are the tangible item which you receive from your hedge fund lawyer, it is not the only part of the representation. The offering documents are not valuable as objects, but really as a representation of the prior experience of the attorney who prepared those documents for your fund, based on your needs.
Bart Mallon, Esq. runs hedge fund law blog and has written most all of the articles which appear on this website. Mr. Mallon’s legal practice is devoted to helping emerging and start up hedge fund managers successfully launch a hedge fund. If you are a hedge fund manager who is looking to start a hedge fund, or if you have questions about becoming registered as a CPO or CTA, please call Mr. Mallon directly at 415-296-8510.