Tag Archives: registered hedge fund

Illinois Hedge Fund Law – Various Laws and Regulations

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Perhaps not surprising, Illinois has a very well developed Securities Division website which provides its investment advisors (and potential investment advisors) with many informative articles.  In this article we have reprinted three separate resources which we found helpful for potential hedge fund managers located in Illinois.

The first resource provides a basic overview of investment advisors and the separation of regulatory jurisdiction between the federal government and the states.  This resource is glib on whether hedge fund managers in Illinois need to register as investment advisors with the state – generally they do not.  For those managers which are registered with Illinois, the second resource provides an overview of the potential for on-site examinations of the manager’s business.  The final resource provides an overview of the different fees which an advisor registered (or notice filed) in Illinois will need to pay. Continue reading →

South Carolina Hedge Fund Law – Investment Advisor Registration and Form D Filings

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Below we have provided two separate sources from the South Carolina Securities Division Website.  First, we have reproduced a very short blurb from their website which explains that investment advisors who have a place of business in South Carolina must generally be registered as an investment advisor.  Second, we have reproduced their schedule and instructions for the state blue sky filings which need to be made by the hedge fund manager after the first sale of securities in the state.  In general hedge fund interests are sold in accordance with a Regulation D 506 hedge fund offering.  States generally have the authority to require Form D filings when a sale under 506 is made to residents of the state.  In South Carolina the requirement is to make the Form D filing within 15 days of the first sale in South Carolina.  The hedge fund manager will also need to send in a check for $300.  Continue reading →

Georgia Hedge Fund Law – Investment Advisor Registration Exemption

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Georgia Hedge Fund Managers Generally Exempt From Registration

Below we have provided two separate sources from Georgia’s Securities Division Website.  First, we have reproduced their frequently asked questions on investment advisor registration.  Specifically it should be noted that Geogia based hedge fund managers do not generally need to register as investment advisors with the state of Georgia if they only manage one fund.  While managers are not required to be registered, they still will need to make sure that they follow all necessary compliance rules which the hedge fund lawyer can remind them of. Continue reading →

Massachusetts Hedge Fund Law – Investment Advisory Registration Renewals

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Unfortunately for hedge fund managers who are located in Massachusetts, there is generally a requirement to be registered as an investment advisor with the Massachusetts Securities Division.   One of the good things about the Massachusetts Securities Division is that they are generally knowledgeable and the division’s website posts good information for registered investment advisors.  The posts below deal with (1) Massachusetts investment advisor renewals for 2009 and (2) a discussion of the submission requirements for ADV part II through the IARD system.

While these posts are helpful, Massachusetts hedge fund managers are urged to discussion any questions with a hedge fund attorney.  Continue reading →

Florida Hedge Fund Law – Investment Advisor Registration Information

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Florida is a very popular jurisdiction for hedge fund formation.  Along with New York, Connecticut, California, and Texas, Florida ranks as one of the most popular hedge fund jurisdictions.  I have included below a description of the investment advisor provisions from the Florida Securities Division website.  One thing to note, as with all Securities Division websites, is that the information below is not the full picture.  For instance, the notice below does not mention a common provision which exempts Florida hedge fund managers from investment advisor registration with the state. Continue reading →

Wisconsin Based Hedge Funds – Wisconsin Investment Advisory Rules

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One of the key issues which hedge fund managers will need to determine early in the hedge fund formation process is whether the management company will need to be registered as an investment adviser with the state securities commission (or potentially with the SEC).  Generally the lawyer advising the management company will survey the state laws to determine whether or not registration is necessary.  While the lawyer will look directly to the state statutes through some sort of online legal database such as Lexis Nexis (to ensure that the most current and up to date information is provided to the client), the hedge fund manager can also check with his state securities commission to see if registration is required.  Sometimes states, such as Wisconsin, will include their registration information on their website.  The notice below is typical of such a practice. Continue reading →

Question: hedge fund investor and qualification requirements

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Question: I wanted to inquire as to legalities for a new hedge fund formation. My question is can I get by the limit of 500 investors and qualification requirements. I mean is there another type of fund to start with same freedom and lack of regulation with breadth of trading types, but that can accept investors with net worth under $250,000…and more than 500 of them?

Answer: Let’s break down your question first:

“…can I get by the limit of 499 investors and qualification requirements”

A little preliminary background on hedge fund laws may be helpful. Hedge funds are investment vehicles which, by definition, would be subject to the registration requirements of the federal Investment Company Act of 1940. This means that, absent an exemption from registration, these funds would need to be regulated as mutual funds under the ICA. Many funds do not want to be registered as such because the regulations under the ICA are extremely onerous.

Luckily, the ICA contains two different exemptions for hedge funds – the Section 3(c)(1) exemption and the Section 3(c)(7) exemption. Under the 3(c)(1) exemption a hedge fund manager can accept investments from up to 99 outside investors. Generally these investors will need to be “accredited investors” and may also need to be “qualified clients” (these requirements come from other federal securies acts, and state laws, as appropriate). Under the 3(c)(7) exemption, a hedge fund manager can accept investments from an unlimited amount of “qualified purchasers.” A “qualified purchaser” is a very high net worth individual or institution (generally those persons who own $5 million in “investable” assets, which does not include a person residence). Because of other federal rules, a 3(c)(7) fund will often limit the amount of qualified purchaser investors to 500. Because many beginning hedge fund managers do not have a rolodex filled with “qualified purchaser” contacts, many of these start-up managers will initially begin a 3(c)(1) fund.

To your question, assuming you run a 3(c)(7) fund, you can “get by” the 499 investor limit but you would be subject to other federal laws. The 499 investor limit is in place because of the Securities Exchange Act of 1934 (“34 Act”). While most hedge funds do not need to register their securities because of the private offering exemption (Regulation D) under the Secutities Act of 1933, the hedge fund would still potentially be subject to registration under the 34 Act. The 34 Act requires an issuer (the hedge fund) to register its securities if (1) it has $10 million or more in total assets as of the end of a fiscal year and (2) has a class of equity interests which are owned by 500 or more persons. Generally a 3(c)(7) fund will have no problem meeting the first requirement and therefore the limit to 499 investors keeps such a fund from the registration provisions of the 34 Act.

So the answer to the first part of the question is yes – if you want to register your fund under the 1934 Act.

The second part of the question is no – unless you want to register under the ICA.

The next question you asked was:

I mean is there another type of fund to start with same freedom and lack of regulation with breadth of trading types, but that can accept investors with net worth under $250,000…and more than 500 of them?

Yes, you can start a registered fund – either (1) a mutual fund or (2) a fund registered under the 1933 Act. As noted above mutual funds are very highly regulated and a hedge fund manager probably does not want to start a mutual fund. The considerations involved in starting a mutual fund are considerable, and the legal costs to establish a mutual fund will be anywhere from about $50,000 to $150,000, whereas the legal costs to establish a hedge fund will be anywhere from $15,000 – $45,000 depending on the strategy. When establishing a mutual fund there are other considerations such as distribution and administration which can quickly escalate all costs.

If you only trade forex and certain types of futures, you may be able to do a registered fund (under the 1933 Act), but that is a longer and more expensive process than a traditional hedge fund. The legal costs to establish a fund registered under the 1933 act will be similar to the costs to establish the mutual fund. Additionally, the distribution and administration costs will need to be considered.

Please feel free to email any hedge fund questions you have through our contacts page. I will attempt to answer all questions and may post yours on this site.