This question came to us yesterday:

Question: What happens if a hedge fund doesn’t do proper diligence to ascertain that a client meets the qualified purchaser standards? Does the hedge fund have to register or notify the SEC?

Answer: In practice I don’t know how this would happen unless someone at the hedge fund management company was completely asleep at the wheel.

The job of the hedge fund attorney is to provide the hedge fund offering documents to the manager and to inform the manager of how the offering documents should be completed.  The hedge fund’s subscription documents usually include some sort of investor questionnaire where the investor will need to make certain representations to the hedge fund manager.  One of these representations will be whether the investor is an accredited investor and, if the fund is a 3(c)(7) fund, whether the investor is a qualified purchaser.  When the investor returns the subscription documents (and before the investor has sent a wire to the fund), the manager should make sure that the offering documents have been completed in their entirety and correctly.  If a manager has a question about whether the investor has completed the subscription documents correctly, the manager should bring up such questions or concerns with the hedge fund attorney.  In the event that the manager does not receive properly completed subscription documents, the manager should discuss this issue immediately with the attorney.

I cannot think of any reason why a hedge fund manager would have to register as an investment advisor because of incomplete (or improperly completed) subscription documents.