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Fund Legal Documents DOCUMENTS AND FILINGS NEEDED TO FORM A FUND

Capital Fund Law Group

John S. Lore, Esq. | Managing Partner

To effectively start an , the sponsor must safely navigate the complex regulatory structures that govern the fund’s operations. Unintentionally deviating from regulatory disclosure requirements can result in serious consequences for the issuer and its directors, officers, and managers. Experienced legal counsel plays a vital role in guiding managers through their various responsibilities and can help managers avoid devastating mistakes as they launch a new fund.

This white paper lays out some of the key documents and filings that legal counsel will prepare for either an open-ended fund () or closed-ended fund (/ real estate fund). When properly prepared, the offering documents and regulatory filings set forth the framework to enable the fund to:

• properly structure the fund in a tax efficient way;

• meet the appropriate statutory requirements and exemptions;

• set -appropriate investment terms;

• make the proper securities disclosures to avoid potential liability; and

• raise and deploy capital in compliance with regulatory structures. HEDGE FUND STRUCTURAL CONSIDERATIONS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

WHAT DOCUMENTS Fund Structural Considerations MUST BE PREPARED?

There are four categories of documents that The structure for an investment fund is the investment fund attorney will prepare dependent on a number of tax, regulatory, to launch a fund: and financial considerations. Fund structure (i) formation documents; (ii) offering is driven in large part by the fund’s strategy documents; (iii) internal documents; and and the type of that the fund (iv) certain regulatory filings. will pursue. The fund structure should be based on careful and thorough analysis with the assistance of an experienced fund attorney. Among the Formation documents are the documents decisions that should be made in structuring filed with the appropriate government the fund include whether to: authority to establish the existence of the entities, including the fund, the general partner and company. These include certificates and • structure the fund as a closed-end or articles. The formation documents are open-end fund; among the most basic of the fund documents. • rely on Section 3(c)(1) or 3(c)(7) as an exemption from the Investment Because of the simplicity of filing Company Act--real estate funds typically formation documents, some clients make rely on Section 3(c)(5)(C); and the mistake of forming entities before consulting with legal counsel. Formation • establish an or a documents should be filed only after domestic only fund. thoroughly considering the appropriate legal structure of the fund. These issues and others have bearing on what entities should be formed, how many entities are needed, and in what jurisdiction the formation documents should be filed. For a more detailed discussion of structural issues, please refer to the following white papers: For hedge funds: Hedge Fund Structural Considerations. For real estate funds: Forming a Real Estate Fund--Strategy, Structure and Investment Terms.

Call 212.203.4300 for a free consultation HEDGE FUND STRUCTURAL CONSIDERATIONS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

(ii) The Offering Documents

The offering documents are the documents Similar to a prospectus in a public that are provided to a prospective offering, a PPM provides potential prior to the investor making an investment in with specific information about the fund. These documents include: the terms of the fund, the structure of the investment, background of the (i) a fund disclosure document in the form managers and other disclosure issues. of a memorandum; The private placement memorandum contains risk factors that an investor (ii) the governing documents of the fund, should consider prior to making an in the form of a limited partnership investment in the fund. A thoroughly agreement or operating agreement prepared private placement memorandum (depending on whether the fund is formed as should protect a fund sponsor from investor a limited partnership or LLC; and claims of lack of disclosure. For examples of the contents and level of thoroughness that (iii) investment purchase documents, in the a private placement memorandum should form of a subscription agreement, which have, refer to our PPM sample excerpts. includes an investor questionnaire to determine investor qualification. Limited Partnership Agreement "A thoroughly prepared The limited partnership agreement (or in the private placement case of an LLC-based fund, an operating memorandum should agreement) is the legal governing document of the fund. The limited partnership protect a fund sponsor from agreement outlines the terms of the fund and investor claims of lack of the rights of an investor and fund manager. In contrast with the private placement disclosure." memorandum, which is written in plain Private Placement Memorandum English (accessible to non-legally trained readers), the fund’s limited partnership A private placement memorandum (PPM) is agreement is a lengthy and complex legal a securities disclosure document that provides document. Among the terms of the limited investors with material information about the partnership agreement are: fund to enable an investor to make an informed investment decision.

Call 212.203.4300 for a free consultation HEDGE FUND STRUCTURAL CONSIDERATIONS KEY DECISIONS WHEN SETTING UP A DOMESTIC OR OFFSHORE FUND

• the powers and activities of the general Subscription Agreement/Investor partner; Questionnaire A subscription agreement provides investors • fees and expenses, including with a description of the steps necessary to management, performance or other purchase limited partnership interests (or for potential fees as well as legal startup an LLC-based fund, membership interests) costs, brokerage, administration, and in a fund and provides fund managers audit expenses; with eligibility information about the • allocations and distributions of profits to investor. This is the investor’s contract with all partners, including how profits are the fund, which specifies the subscription calculated and the timing of distributions; amount and outlines the terms under which the investment is being made. • withdrawal provisions, including For fund managers, this document minimum and maximum withdrawal requires investors to attest that they meet certain eligibility standards, such as amounts, lock-up periods, gates, and being an “” or distribution dates; and “qualified client,” as required by SEC regulations and state law. • a designation of power of attorney, which (iii) The Internal Documents authorizes the fund manager to act on the limited partner’s behalf for such purposes Some fund documents, vital to the fund’s as voting the fund’s securities, buying and operations, are neither filed with the selling fund securities, admissions of new government nor provided to investors, but limited partners, and amendments to fund kept on file with the fund. These internal formation documents and other documents agreements set forth the rights and necessary for continued fund activity. responsibilities among the individuals sponsoring the fund and between the fund and investment manager. These include the To become a limited partner of a fund, an operating agreements of the general partner investor must sign a countersignature page and management company, as well as the to the limited partnership agreement, in investment management agreement. which he or she agrees to be bound by its terms.

Call 212.203.4300 for a free consultation INVESTMENT FUND LEGAL DOCUMENTS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

Operating Agreements Since the fund manager and the fund are controlled by the same individuals, the The fund manager and general partner investment management agreement is operating agreements are the legal typically signed by the same individuals governing documents that provide for the on both sides. rights of the founders of the fund. These documents specify how ownership of the (iv) The Regulatory Filings fund is divided among the principals of the fund, how voting is decided, how the Regulatory filings are documents that need company will wind up upon dissolution to be filed with the federal and state and other important internal provisions. jurisdictions (in addition to formation The management company and general documents) that are needed to satisfy certain partner operating agreements and their securities law structures, registration contents are generally not disclosed to exemptions and rules applicable to the investors. investment instruments traded.

Investment Management Agreement Among these filings are:

The investment management agreement is • The SEC and state Form D filings (which are an agreement between the fund and the required whenever there is a US investor); investment management company (often the same entity as the general partner). It • Investment advisor registration (depending defines the services that a fund manager on the state in which the fund managers are will provide. It also delegates to the fund located, the amount of assets under manager authority over the fund’s assets, management and the type of investment); and and gives the fund manager the broad discretionary authority to manage such • Registration with the Commodities Futures investor funds and securities in a Trading Commission (CFTC) (applicable to manner that the fund manager certain hedge funds that invest in commodities, believes is consistent with the of the fund. futures, swaps, currencies and similar instruments).

John S. Lore, Esq. is the managing partner of Capital Fund Law Group, a boutique law firm providing expertise focused on the industry. Call 212.203.4300 or email us to schedule a consultation to discuss your fund.

Call 212.203.4300 for a free consultation