Hedge fund formation combines entity law, securities law, adviser regulation, tax, and negotiated economics. A hedge fund is an open-end private fund: investors contribute capital when they subscribe and can withdraw it periodically. This guide covers U.S. hedge funds; private equity and other closed-end drawdown funds work differently and are not covered here. It is written first for the manager of an emerging or small hedge fund, who can use it to identify the questions the fund's documents must answer and then work with fund counsel on the answers for the particular fund. It is written second for a smaller investor who may not have counsel of their own: the same questions show what a hedge fund's documents let the manager charge, change, or withhold, and where an investor's rights depend on a notice period, a vote, or the manager's discretion.
Documents. The limited partnership agreement and the private placement memorandum have their own guides: the hedge fund limited partnership agreement guide and the hedge fund private placement memorandum guide. The questions on this page cover the rules that apply across the fund's documents: adviser registration, a manager outside the United States, who can be charged a performance fee, Rule 506(b) and Rule 506(c) offerings, Section 3(c)(1) and 3(c)(7) funds, the anti-fraud rules, Form D, and what the subscription agreement and investor questionnaire should say.
Does a hedge fund manager need to register as an investment adviser?
A hedge fund manager generally must register as an investment adviser with the SEC or a state securities regulator unless an exemption applies, such as the exemption for a U.S. adviser that acts solely for qualifying private funds and manages less than $150 million in private-fund assets.
The SEC's staff states the baseline this way: “Private fund advisers are generally investment advisers that are required to register with the SEC or applicable state securities regulators as a registered investment adviser, unless they are exempt from applicable registration requirements (for example, as an exempt reporting adviser).”
An exempt adviser still has obligations. The SEC's glossary explains: “While exempt reporting advisers are not registered with the SEC, they are still subject to specific reporting requirements and certain other Investment Advisers Act and federal rules, and they also may be subject to state filing or registration requirements.” Whether a manager is registered or required to be registered also decides whether the custody rule and the performance-fee restriction discussed elsewhere in this guide apply to it.
Sources for this answer
The SEC's Private Funds building block states that private fund advisers are generally required to register with the SEC or applicable state securities regulators unless exempt, for example as exempt reporting advisers.
Private fund advisers are generally investment advisers that are required to register with the SEC or applicable state securities regulators as a registered investment adviser, unless they are exempt from applicable registration requirements (for example, as an exempt reporting adviser).
See SEC Office of the Advocate for Small Business Capital Formation, Private Funds, The Adviser.
Rule 203(m)-1(a) requires a United States investment adviser relying on it to advise solely qualifying private funds and manage less than $150 million in private-fund assets.
For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business in the United States is exempt from the requirement to register under section 203 of the Act if the investment adviser: (1) Acts solely as an investment adviser to one or more qualifying private funds; and (2) Manages private fund assets of less than $150 million.
See 17 C.F.R. § 275.203(m)-1(a)(1)-(2).
The SEC staff's glossary says exempt reporting advisers are not registered with the SEC but remain subject to reporting requirements, certain other federal rules, and possibly state filing or registration.
While exempt reporting advisers are not registered with the SEC, they are still subject to specific reporting requirements and certain other Investment Advisers Act and federal rules, and they also may be subject to state filing or registration requirements.
See SEC Small Business Glossary, Exempt Reporting Adviser (SEC staff resource).
What should the fund documents say when the investment manager is outside the United States?
The fund documents should state the manager's status under the Investment Advisers Act, because the performance-fee restriction applies only to an adviser registered or required to be registered with the SEC.
A manager whose principal office and place of business is outside the United States may be registered with the SEC, exempt as a non-U.S. private fund adviser, or exempt as a foreign private adviser. A foreign private adviser has no place of business in the United States and fewer than 15 clients and investors in the United States in its private funds, among other conditions.
For a manager that is neither registered nor required to register with the SEC, the federal performance-fee restriction does not apply, so under federal law a requirement that every investor be a qualified client is a condition of the fund's own choosing. The condition still has a purpose, because Rule 205-3 provides that “section 205(a)(1) of the Act will apply with regard to a natural person or company who was not a party to the contract and becomes a party (including an equity owner of a private investment company advised by the adviser) when the adviser is required to register.” The Hedge Fund Limited Partnership Agreement makes qualified-client status a condition of admission whether or not the rule applies, and lets the general partner waive it by side letter only while the manager is neither registered nor required to register, with the SEC or under a state law that applies the same restriction. The non-U.S. manager subscription documents keep the test and that waiver on the same terms, so an investor admitted after the manager must register is screened as Rule 205-3 requires.
The manager's location does not take it outside the offering's bad-actor rule: Rule 506(d) lists among the covered persons “any investment manager of an issuer that is a pooled investment fund”, together with that manager's general partners, managing members, directors, executive officers, and other officers participating in the offering.
The SEC's Form ADV Part 2A brochure requirements apply to an adviser registered with, or applying for registration with, the SEC, and not to an exempt reporting adviser. For a manager exempt from SEC registration, the non-U.S. manager subscription agreement below has the investor acknowledge receiving, in the memorandum or a written supplement to it, a description of the manager's regulatory status, any regulator that supervises it at home, and where it keeps its books and records.
A non-U.S. manager that relies on the foreign private adviser exemption has to count its investors in the United States. The SEC explained that “A non-U.S. adviser would need to count the same U.S. investors (except for holders of short-term paper with respect to a fund relying on section 3(c)(1)) in order to rely on the foreign private adviser exemption.” Rule 202(a)(30)-1 treats an investor as in the United States when it is a U.S. person under Regulation S, with an exception for certain discretionary accounts.
The Hedge Fund Subscription Agreement (Manager Outside the U.S.) and the Hedge Fund Investor Questionnaire (Manager Outside the U.S.) make these changes to the standard subscription documents. They also have the subscriber acknowledge the privacy notice the manager provides under its home-country law, a notice the manager supplies separately, and extend the anti-money-laundering and sanctions representations to the manager's home jurisdiction.
Sources for this answer
Section 205(a)(1) restricts performance compensation only for an investment adviser registered or required to be registered with the SEC.
No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract- (1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
See 15 U.S.C. § 80b-5(a)(1).
Rule 203(m)-1(b) exempts an adviser with its principal office outside the United States whose only U.S.-person clients are qualifying private funds and whose U.S.-managed assets are private fund assets of less than $150 million.
(b) Non-United States investment advisers. For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business outside of the United States is exempt from the requirement to register under section 203 of the Act if: (1) The investment adviser has no client that is a United States person except for one or more qualifying private funds; and (2) All assets managed by the investment adviser at a place of business in the United States are solely attributable to private fund assets, the total value of which is less than $150 million.
See 17 C.F.R. § 275.203(m)-1(b).
Section 203(b)(3) exempts a foreign private adviser from the registration requirement of section 203(a).
The provisions of subsection (a) shall not apply to- (1) any investment adviser, other than an investment adviser who acts as an investment adviser to any private fund, all of whose clients are residents of the State within which such investment adviser maintains his or its principal office and place of business, and who does not furnish advice or issue analyses or reports with respect to securities listed or admitted to unlisted trading privileges on any national securities exchange; (2) any investment adviser whose only clients are insurance companies; (3) any investment adviser that is a foreign private adviser;
See 15 U.S.C. § 80b-3(b)(1)-(3).
Section 202(a)(30) defines a foreign private adviser by the absence of a U.S. place of business, fewer than 15 U.S. clients and private fund investors, and less than $25 million attributable to them, among other conditions.
The term "foreign private adviser" means any investment adviser who- (A) has no place of business in the United States; (B) has, in total, fewer than 15 clients and investors in the United States in private funds advised by the investment adviser; (C) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25,000,000, or such higher amount as the Commission may, by rule, deem appropriate in accordance with the purposes of this subchapter; and
See 15 U.S.C. § 80b-2(a)(30)(A)-(C).
Rule 205-3(c)(2) leaves contracts and accounts established while an adviser was not required to register outside section 205(a)(1), but applies section 205(a)(1) to a person who becomes a party, including a new equity owner of a private investment company, once the adviser is required to register.
If an investment adviser was not required to register with the Commission pursuant to section 203 of the Act (15 U.S.C. 80b-3) and was not registered, section 205(a)(1) of the Act will not apply to an advisory contract entered into when the adviser was not required to register and was not registered, or to an account of an equity owner of a private investment company advised by the adviser if the account was established when the adviser was not required to register and was not registered; Provided, however, that section 205(a)(1) of the Act will apply with regard to a natural person or company who was not a party to the contract and becomes a party (including an equity owner of a private investment company advised by the adviser) when the adviser is required to register.
See 17 C.F.R. § 275.205-3(c)(2).
Rule 506(d)(1) makes the investment manager of a pooled investment fund, and its general partners, managing members, directors, executive officers, and other officers participating in the offering, covered persons of the issuer.
any investment manager of an issuer that is a pooled investment fund; any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; any general partner or managing member of any such investment manager or solicitor; or any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor:
See 17 C.F.R. § 230.506(d)(1).
The Form ADV General Instructions state that the Part 2A brochure requirements apply to advisers registered with or applying for registration with the SEC and not to exempt reporting advisers.
The requirements in Part 2A apply to all investment advisers registered with or applying for registration with the SEC, but do not apply to exempt reporting advisers.
See SEC, Form ADV General Instructions, Instruction 1.
The SEC explained that a non-U.S. adviser relying on the foreign private adviser exemption must count the same U.S. investors that a fund counts under the Investment Company Act.
A non-U.S. adviser would need to count the same U.S. investors (except for holders of short-term paper with respect to a fund relying on section 3(c)(1)) in order to rely on the foreign private adviser exemption.
See Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers With Less Than $150 Million in Assets Under Management, and Foreign Private Advisers, Advisers Act Release No. IA-3222, § II.C (June 22, 2011).
Rule 202(a)(30)-1 treats a client or investor as in the United States when it is a U.S. person as defined in Regulation S, subject to an exception for certain discretionary accounts.
In the United States means with respect to: (i) Any client or investor, any person who is a U.S. person as defined in § 230.902(k) of this chapter, except that any discretionary account or similar account that is held for the benefit of a person in the United States by a dealer or other professional fiduciary is in the United States if the dealer or professional fiduciary is a related person, as defined in § 275.206(4)-2(d)(7), of the investment adviser relying on this section and is not organized, incorporated, or (if an individual) resident in the United States.
See 17 C.F.R. § 275.202(a)(30)-1(c)(3)(i).
Who can be charged a hedge fund performance fee?
An adviser registered or required to be registered with the SEC may charge a performance fee to an investor in a hedge fund relying on section 3(c)(1) only if that investor is a qualified client under Rule 205-3.
The restriction does not apply to an advisory contract with a fund relying on section 3(c)(7). For contracts governed by the SEC's June 29, 2026 order, a client qualifies with at least $1.4 million under the adviser's management immediately after entering the contract, or with a net worth of more than $2.7 million immediately before. In a private investment company, each equity owner charged the fee is treated as the client, and an owner not charged it is not.
So the rule limits who may be charged. It does not itself require a fund to turn away an investor who will not be charged. Some fund documents, including the Hedge Fund Limited Partnership Agreement, still require every investor to be a qualified client, as a contractual choice rather than a legal requirement. That template lets the general partner waive the contractual screen for a particular investor by side letter, but only where the manager is neither registered nor required to be registered with the SEC, so that section 205(a)(1) does not reach it, and, as further conditions the template itself sets, where no state applies the same restriction to the manager under its own law and where the general partner has confirmed that the manager relies on no state registration exemption conditioned on every investor being a qualified client. If a later change would make charging the performance fee to a waived investor unlawful, the template stops charging it to that investor. The template's offering-eligibility requirement, that an investor be accredited or otherwise eligible under the exemption the offering relies on, may not be waived.
Sources for this answer
Section 205(a)(1) regulates advisory compensation based on a share of capital gains or capital appreciation.
No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract- (1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
See 15 U.S.C. § 80b-5(a)(1).
Rule 205-3 permits a performance-based advisory contract when the client is a qualified client as the rule defines that term.
The provisions of section 205(a)(1) of the Act (15 U.S.C. 80b-5(a)(1)) will not be deemed to prohibit an investment adviser from entering into, performing, renewing or extending an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client, Provided, That the client entering into the contract subject to this section is a qualified client, as defined in paragraph (d)(1) of this section.
See 17 C.F.R. § 275.205-3(a).
SEC Order IA-6961 sets the qualified-client assets-under-management threshold at $1,400,000 and the net-worth threshold at more than $2,700,000 for contracts it governs.
IT IS HEREBY ORDERED that, for purposes of rule 205-3(d)(1)(i) under the Advisers Act [17 CFR 275.205-3(d)(1)], a qualified client means a natural person who, or a company that, immediately after entering into the contract has at least $1,400,000 under the management of the investment adviser; and IT IS FURTHER ORDERED that, for purposes of rule 205-3(d)(1)(ii)(A) under the Advisers Act [17 CFR 275.205-3(d)(1)(ii)(A)], a qualified client means a natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, has a net worth (together, in the case of a natural person, with assets held jointly with a spouse) of more than $2,700,000.
See Order Approving Adjustment for Inflation of the Dollar Amount Tests in Rule 205-3 Under the Investment Advisers Act of 1940, Advisers Act Release No. IA-6961, § IV (Apr. 28, 2026).
Rule 205-3(b) states that, for a private investment company, rule 205-3 treats each equity owner charged gain-based compensation as a client.
In the case of a private investment company, as defined in paragraph (d)(3) of this section, an investment company registered under the Investment Company Act of 1940, or a business development company, as defined in section 202(a)(22) of the Act (15 U.S.C. 80b-2(a)(22)), each equity owner of any such company (except for the investment adviser entering into the contract and any other equity owners not charged a fee on the basis of a share of capital gains or capital appreciation) will be considered a client for purposes of paragraph (a) of this section.
See 17 C.F.R. § 275.205-3(b).
Section 205(a)(1) does not apply to an advisory contract with a company excepted from the Investment Company Act definition under section 3(c)(7).
Paragraph (1) of subsection (a) shall not- (1) be construed to prohibit an investment advisory contract which provides for compensation based upon the total value of a fund averaged over a definite period, or as of definite dates, or taken as of a definite date; (2) apply to an investment advisory contract with- (A) an investment company registered under subchapter I of this chapter, or (B) any other person (except a trust, governmental plan, collective trust fund, or separate account referred to in section 80a–3(c)(11) of this title), provided that the contract relates to the investment of assets in excess of $1 million, if the contract provides for compensation based on the asset value of the company or fund under management averaged over a specified period and increasing and decreasing proportionately with the investment performance of the company or fund over a specified period in relation to the investment record of an appropriate index of securities prices or such other measure of investment performance as the Commission by rule, regulation, or order may specify; (3) apply with respect to any investment advisory contract between an investment adviser and a business development company, as defined in this subchapter, if (A) the compensation provided for in such contract does not exceed 20 per centum of the realized capital gains upon the funds of the business development company over a specified period or as of definite dates, computed net of all realized capital losses and unrealized capital depreciation, and the condition of section 80a–60(a)(4)(B)(iii) of this title is satisfied, and (B) the business development company does not have outstanding any option, warrant, or right issued pursuant to section 80a–60(a)(4)(B) of this title and does not have a profit-sharing plan described in section 80a–56(n) of this title; (4) apply to an investment advisory contract with a company excepted from the definition of an investment company under section 80a–3(c)(7) of this title; or
See 15 U.S.C. § 80b-5(b)(4).
How do Rule 506(b) and Rule 506(c) differ?
Rule 506(b) bars general solicitation of a hedge fund's investors, while Rule 506(c) permits it if every purchaser is accredited and the fund takes reasonable steps to verify that status.
The SEC staff’s glossary calls section 4(a)(2) the private-placement exemption and describes Rule 506(b) and Rule 506(c) as pathways. Rule 506(b) permits up to 35 non-accredited purchasers in a 90-day period when they have the required knowledge or purchaser representative. Selling to a non-accredited purchaser also triggers specified information requirements.
Rule 506(c) allows broader solicitation only with accredited purchasers and reasonable verification. Both Rule 506 paths retain resale restrictions and bad-actor disqualification.
Sources for this answer
Securities Act section 4(a)(2), 15 U.S.C. § 77d(a)(2), exempts transactions by an issuer not involving any public offering from section 5 registration.
The provisions of section 77e of this title shall not apply to— (1) transactions by any person other than an issuer, underwriter, or dealer. (2) transactions by an issuer not involving any public offering.
See 15 U.S.C. § 77d(a)(1)-(2).
Rule 502(c) prohibits general solicitation and general advertising in a Regulation D offering except as rule 504(b)(1) or rule 506(c) provides.
Except as provided in § 230.504(b)(1) or § 230.506(c), neither the issuer nor any person acting on its behalf shall offer or sell the securities by any form of general solicitation or general advertising, including, but not limited to, the following: (1) Any advertisement, article, notice or other communication published in any newspaper, magazine, or similar media or broadcast over television or radio; and (2) Any seminar or meeting whose attendees have been invited by any general solicitation or general advertising; Provided, however, that publication by an issuer of a notice in accordance with § 230.135c or filing with the Commission by an issuer of a notice of sales on Form D (17 CFR 239.500) in which the issuer has made a good faith and reasonable attempt to comply with the requirements of such form, shall not be deemed to constitute general solicitation or general advertising for purposes of this section; Provided further, that, if the requirements of § 230.135e are satisfied, providing any journalist with access to press conferences held outside of the United States, to meetings with issuer or selling security holder representatives conducted outside of the United States, or to written press-related materials released outside the United States, at or in which a present or proposed offering of securities is discussed, will not be deemed to constitute general solicitation or general advertising for purposes of this section.
See 17 C.F.R. § 230.502(c).
Rule 506(c) requires all purchasers to be accredited investors.
All purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.
See 17 C.F.R. § 230.506(c)(2)(i).
Rule 506(c) requires the issuer to take reasonable steps to verify purchasers' accredited-investor status.
The issuer shall take reasonable steps to verify that purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.
See 17 C.F.R. § 230.506(c)(2)(ii).
The SEC staff describes the private-offering exemption and Rule 506 pathways.
Section 4(a)(2) of the Securities Act of 1933, sometimes referred to as the “private placement” exemption, exempts transactions by an issuer that do not involve a public offering from the Securities Act’s registration requirements. Rules 506(b) and (c) of Regulation D, commonly used regulatory pathways for private offerings, are exemptions that a company can rely on to conduct an offering in accordance with the Section 4(a)(2) exemption.
See SEC Small Business Glossary.
Rule 506(b) permits no more than 35 purchasers in any 90-calendar-day period under its counting provisions and requires each non-accredited purchaser to satisfy the stated sophistication condition.
There are no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer in offerings under this section in any 90-calendar-day period. Note 1 to paragraph (b)(2)(i): See § 230.501(e) for the calculation of the number of purchasers and § 230.502(a) for what may or may not constitute an offering under paragraph (b) of this section. (ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.
See 17 C.F.R. § 230.506(b)(2)(i)-(ii) & note 1 to paragraph (b)(2)(i).
Rule 502(b)(1) requires an issuer selling under rule 506(b) to a non-accredited purchaser to furnish specified information a reasonable time before sale.
If the issuer sells securities under § 230.506(b) to any purchaser that is not an accredited investor, the issuer shall furnish the information specified in paragraph (b)(2) of this section to such purchaser a reasonable time prior to sale.
See 17 C.F.R. § 230.502(b)(1).
Rule 502(d) states that, except as rule 504(b)(1) provides, securities acquired under Regulation D have section 4(a)(2) status and cannot be resold without registration or an exemption.
Except as provided in § 230.504(b)(1), securities acquired in a transaction under Regulation D shall have the status of securities acquired in a transaction under section 4(a)(2) of the Act and cannot be resold without registration under the Act or an exemption therefrom.
See 17 C.F.R. § 230.502(d).
Rule 506(d)(1) makes the exemption unavailable when a listed offering participant has a disqualifying event specified by the rule.
No exemption under this section shall be available for a sale of securities if the issuer; any predecessor of the issuer; any affiliated issuer; any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer; any beneficial owner of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power; any promoter connected with the issuer in any capacity at the time of such sale; any investment manager of an issuer that is a pooled investment fund; any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; any general partner or managing member of any such investment manager or solicitor; or any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor:
See 17 C.F.R. § 230.506(d)(1).
What is the difference between a 3(c)(1) fund and a 3(c)(7) fund?
A hedge fund relying on section 3(c)(1) of the Investment Company Act may have no more than 100 beneficial owners, while one relying on section 3(c)(7) may be owned only by qualified purchasers.
Neither exclusion is available to a fund making a public offering. The SEC's glossary defines private funds by these two exclusions: “A private fund is a pooled investment vehicle that is excluded from the definition of investment company by Section 3(c)(1) or 3(c)(7) of the Investment Company Act—commonly referred to as a 3(c)(1) Fund or a 3(c)(7) Fund.”
The SEC staff explains that an investment company includes an issuer primarily engaged in investing, reinvesting, or trading securities. “These companies are commonly known as ‘private investment companies.’ Some private investment companies are commonly known as ‘hedge funds.’” The 3(c)(1) count has a look-through rule for certain company investors.
Accredited investor is a Regulation D sale-eligibility status. Qualified purchaser is the 3(c)(7) ownership status; for a natural person it generally requires at least $5 million in investments. Qualified client is a separate performance-compensation status.
Sources for this answer
Investment Company Act section 3(c)(1) excludes an issuer with no more than 100 beneficial owners, subject to the qualifying-venture-capital-fund provision, when it is not making or proposing a public offering.
Notwithstanding subsection (a), none of the following persons is an investment company within the meaning of this subchapter: (1) Any issuer whose outstanding securities (other than short-term paper) are beneficially owned by not more than one hundred persons (or, in the case of a qualifying venture capital fund, 250 persons) and which is not making and does not presently propose to make a public offering of its securities.
See 15 U.S.C. § 80a-3(c)(1).
Investment Company Act section 3(c)(7)(A) excludes an issuer whose outstanding securities are owned exclusively by persons who were qualified purchasers at acquisition and which is making no public offering, and it deems securities received from a qualified purchaser by gift, bequest, or specified involuntary transfer to be owned by a qualified purchaser.
Any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities. Securities that are owned by persons who received the securities from a qualified purchaser as a gift or bequest, or in a case in which the transfer was caused by legal separation, divorce, death, or other involuntary event, shall be deemed to be owned by a qualified purchaser, subject to such rules, regulations, and orders as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.
See 15 U.S.C. § 80a-3(c)(7)(A).
The SEC staff describes the Investment Company Act definition.
Section 3(a)(1)(A) of the Investment Company Act defines an investment company as an issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting or trading in “securities.”
See SEC Division of Investment Management, Investment Company Registration and Regulation Package.
The SEC staff links the 3(c)(1) and 3(c)(7) exclusions to private investment companies and hedge funds.
Many companies rely on one of the exceptions from the definition of investment company set forth in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act. These companies are commonly known as “private investment companies.” Some private investment companies are commonly known as “hedge funds.”
See SEC Division of Investment Management, Investment Company Registration and Regulation Package.
Investment Company Act section 3(c)(1)(A) generally counts a company as one beneficial owner but looks through to its security holders when the company owns at least 10 percent of the issuer's voting securities and is, or would be but for section 3(c)(1) or 3(c)(7), an investment company.
Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 per centum or more of the outstanding voting securities of the issuer, and is or, but for the exception provided for in this paragraph or paragraph (7), would be an investment company, the beneficial ownership shall be deemed to be that of the holders of such company's outstanding securities (other than short-term paper).
See 15 U.S.C. § 80a-3(c)(1)(A).
Rule 501 tests accredited-investor status at the time of sale and includes a reasonable-belief path.
§ 230.501 Definitions and terms used in Regulation D. As used in Regulation D (§ 230.500 et seq. of this chapter), the following terms shall have the meaning indicated: (a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
See 17 C.F.R. § 230.501(a).
Investment Company Act section 2(a)(51)(A)(i) defines a qualified purchaser to include a natural person who owns not less than $5 million in investments, as defined by the Commission.
(51)(A) "Qualified purchaser" means— (i) any natural person (including any person who holds a joint, community property, or other similar shared ownership interest in an issuer that is excepted under section 80a–3(c)(7) of this title with that person's qualified purchaser spouse) who owns not less than $5,000,000 in investments, as defined by the Commission; (ii) any company that owns not less than $5,000,000 in investments and that is owned directly or indirectly by or for 2 or more natural persons who are related as siblings or spouse (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons;
See 15 U.S.C. § 80a-2(a)(51)(A)(i)-(ii).
Rule 205-3(a) permits an adviser to receive compensation based on a share of a client's capital gains or capital appreciation, notwithstanding section 205(a)(1), when the client is a qualified client.
The provisions of section 205(a)(1) of the Act (15 U.S.C. 80b-5(a)(1)) will not be deemed to prohibit an investment adviser from entering into, performing, renewing or extending an investment advisory contract that provides for compensation to the investment adviser on the basis of a share of the capital gains upon, or the capital appreciation of, the funds, or any portion of the funds, of a client, Provided, That the client entering into the contract subject to this section is a qualified client, as defined in paragraph (d)(1) of this section.
See 17 C.F.R. § 275.205-3(a).
The SEC staff's glossary defines a private fund as a pooled investment vehicle excluded from the investment-company definition by section 3(c)(1) or 3(c)(7).
A private fund is a pooled investment vehicle that is excluded from the definition of investment company by Section 3(c)(1) or 3(c)(7) of the Investment Company Act—commonly referred to as a 3(c)(1) Fund or a 3(c)(7) Fund.
See SEC Small Business Glossary, Private Fund (SEC staff resource).
Do anti-fraud rules apply to a hedge fund offering?
Federal anti-fraud rules apply to a hedge fund offering even though it is exempt from registration, so material misstatements and misleading omissions in its offering documents can create liability.
The SEC’s staff says, “Antifraud provisions of the federal securities laws broadly apply to all funds and advisers, whether or not they are otherwise subject to or required to register under other provisions of the federal securities laws.” Securities Act section 17(a) governs fraud in offers and sales. Exchange Act Rule 10b-5 governs deceptive statements and conduct in purchases or sales. Rule 206(4)-8 separately governs an adviser’s statements to pooled-vehicle investors and prospective investors.
Sources for this answer
The SEC staff says antifraud provisions apply broadly to all funds and advisers.
Antifraud provisions of the federal securities laws broadly apply to all funds and advisers, whether or not they are otherwise subject to or required to register under other provisions of the federal securities laws.
See SEC Private Funds Building Block.
Securities Act section 17(a) prohibits the listed fraudulent conduct in the offer or sale of securities.
It shall be unlawful for any person in the offer or sale of any securities (including security-based swaps) or any security-based swap agreement (as defined in section 78c(a)(78) 1 of this title) by the use of any means or instruments of transportation or communication in interstate commerce or by use of the mails, directly or indirectly— (1) to employ any device, scheme, or artifice to defraud, or (2) to obtain money or property by means of any untrue statement of a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading; or (3) to engage in any transaction, practice, or course of business which operates or would operate as a fraud or deceit upon the purchaser.
See 15 U.S.C. § 77q(a)(1)-(3).
Rule 10b-5 prohibits deceptive devices, material misstatements and omissions, and conduct operating as fraud or deceit in connection with the purchase or sale of a security.
It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails or of any facility of any national securities exchange, (a) To employ any device, scheme, or artifice to defraud, (b) To make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) To engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.
See 17 C.F.R. § 240.10b-5(a)-(c).
Rule 206(4)-8 prohibits material misstatements, misleading omissions, and otherwise fraudulent, deceptive, or manipulative conduct toward investors and prospective investors in pooled investment vehicles.
It shall constitute a fraudulent, deceptive, or manipulative act, practice, or course of business within the meaning of section 206(4) of the Act (15 U.S.C. 80b-6(4)) for any investment adviser to a pooled investment vehicle to: (1) Make any untrue statement of a material fact or to omit to state a material fact necessary to make the statements made, in the light of the circumstances under which they were made, not misleading, to any investor or prospective investor in the pooled investment vehicle; or (2) Otherwise engage in any act, practice, or course of business that is fraudulent, deceptive, or manipulative with respect to any investor or prospective investor in the pooled investment vehicle.
See 17 C.F.R. § 275.206(4)-8(a)(1)-(2).
What is Form D, and when is it filed?
Form D is an SEC notice for a Regulation D offering, ordinarily filed within 15 days after the first investor becomes irrevocably contractually committed to invest.
The SEC states that a deadline falling on a Saturday, Sunday, or holiday moves to the next business day. Rule 503(a) supplies the notice requirement. The SEC staff says a Regulation D offering does not itself exempt a placement agent from broker-dealer registration. Solicitation, negotiation, and transaction-based compensation are among staff registration indicators.
Sources for this answer
The SEC describes the Form D deadline and first-sale trigger.
A company must file this notice within 15 days after the first sale of securities in the offering. For this purpose, the date of first sale is the date on which the first investor is irrevocably contractually committed to invest. If the due date falls on a Saturday, Sunday or holiday, it is moved to the next business day.
See SEC: Filing a Form D notice.
Rule 503(a)(1) requires an issuer relying on rule 504 or rule 506 to file a Form D notice of sales no later than 15 calendar days after the first sale in each new offering, with a weekend or holiday deadline moving to the next business day.
An issuer offering or selling securities in reliance on § 230.504 or § 230.506 must file with the Commission a notice of sales containing the information required by Form D (17 CFR 239.500) for each new offering of securities no later than 15 calendar days after the first sale of securities in the offering, unless the end of that period falls on a Saturday, Sunday or holiday, in which case the due date would be the first business day following.
See 17 C.F.R. § 230.503(a).
The SEC Division of Trading and Markets' Guide to Broker-Dealer Registration states that a person selling securities exempt under Regulation D must nevertheless register as a broker-dealer and that placement agents are not exempt from broker-dealer registration.
A security sold in a transaction that is exempt from registration under the Securities Act of 1933 (the "1933 Act") is not necessarily an "exempted security" under the Exchange Act. For example, a person who sells securities that are exempt from registration under Regulation D of the 1933 Act must nevertheless register as a broker-dealer. In other words, "placement agents" are not exempt from broker-dealer registration.
See SEC Division of Trading and Markets, Guide to Broker-Dealer Registration, § II.D.4 (Apr. 2008).
The SEC Division of Trading and Markets' Guide to Broker-Dealer Registration identifies participation in solicitation, negotiation, or execution and transaction-related compensation as broker-registration indicators.
Do you participate in important parts of a securities transaction, including solicitation, negotiation, or execution of the transaction? Does your compensation for participation in the transaction depend upon, or is it related to, the outcome or size of the transaction or deal? Do you receive trailing commissions, such as 12b-1 fees? Do you receive any other transaction-related compensation?
See SEC Division of Trading and Markets, Guide to Broker-Dealer Registration, § II.A (Apr. 2008).
What should a hedge fund subscription agreement say about subscribing and admission?
A hedge fund subscription agreement is the contract through which an investor agrees to invest, and under Delaware law an investor admitted after the fund's formation becomes a limited partner at the time and on the conditions the partnership agreement provides or, if it is silent, on the consent of all partners.
Because Delaware admits a limited partner as the partnership agreement provides, a subscription agreement that states admission in the partnership agreement's own terms, binds the investor to the partnership agreement on admission, and lets the partnership agreement govern a conflict avoids creating a second admission test that could disagree with the first. As a drafting matter, the same reasoning applies to the other terms the partnership agreement and memorandum already set, such as the fund's name, its general partner and manager, the minimum investment, the subscription dates, withdrawal rights, fees, transfers, and dispute resolution.
One private placement memorandum filed with the SEC, for Constitution Capital Evergreen Partnership Fund, requires a completed subscription document by the acceptance date that fund sets. The points that follow are drafting analysis rather than rules of law: when a fund admits investors on recurring subscription dates, a subscription agreement that is silent on when completed documents and cleared funds must arrive, or that conflicts with the memorandum, leaves the administrator to decide which date an investor's money is invested on. A subscription agreement filed with the SEC for CIFC Direct Lending Evergreen Fund reserves the right to reject a subscription in whole or in part. A subscription that binds the fund only on acceptance, but that the investor cannot revoke once delivered, lets the fund rely on it while it completes its identity and eligibility checks.
Sources for this answer
The SEC staff's private-fund guide describes a subscription agreement as the contract through which investors contract to invest in a private fund.
Documentation for your capital raise may include, among other things: • an offering document—frequently called a private placement memorandum—that acts as a detailed disclosure document for potential investors; and • a subscription agreement through which investors contract to invest in the private fund.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”, Capital Raise Considerations (SEC staff resource).
6 Del. C. § 17-301(b) provides that, after formation, a person is admitted as a limited partner at the time provided in and upon compliance with the partnership agreement or, if it does not provide, on the consent of all partners.
After the formation of a limited partnership, a person is admitted as a limited partner of the limited partnership: (1) In the case of a person who is not an assignee of a partnership interest, including a person acquiring a partnership interest directly from the limited partnership and a person to be admitted as a limited partner of the limited partnership without acquiring a partnership interest in the limited partnership, at the time provided in and upon compliance with the partnership agreement or, if the partnership agreement does not so provide, upon the consent of all partners or as otherwise provided in the partnership agreement;
See 6 Del. C. § 17-301(b)(1).
A private placement memorandum filed with the SEC requires a prospective investor to submit a completed subscription document by the acceptance date the fund sets.
A prospective investor must submit a completed subscription document on or prior to the acceptance date set by the Fund and notified to prospective investors.
See Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).
A subscription agreement filed with the SEC reserves the fund's right to reject a subscription in whole or in part.
The Subscriber understands that the Fund reserves the right to reject the subscription evidenced by this Subscription Agreement in whole or in part for any reason whatsoever (the amount of the capital contribution accepted by the Fund is specified on the Fund’s signature page hereto and is referred to herein as the Subscriber’s “Capital Contribution”).
See CIFC Direct Lending Evergreen Fund, Confidential Subscription Documents, Exhibit 10.5 to Form 10/A (2026)
What should hedge fund subscription documents say about investor eligibility?
Hedge fund subscription documents set out the qualifications required to invest, and where the offering or the partnership agreement requires accredited-investor status, that status is tested at the time of each sale to the investor.
Rule 501(a) defines an accredited investor as a person within one of its categories, or whom the issuer reasonably believes is within one, at the time of the sale of the securities to that person. Rule 506(b) can also admit a limited number of non-accredited purchasers who meet its knowledge requirements, so a fund's own documents decide whether accredited status is required. Because status is tested at each sale, a questionnaire completed on first subscription does not by itself cover a later additional contribution. Each category carries its own conditions: the natural-person net-worth test leaves the primary residence out of assets, the income test has separate individual and joint levels, and an entity of a type the rule does not otherwise list qualifies by owning investments of more than $5,000,000 only if it was not formed to acquire the securities offered. The current categories include holders of professional certifications the SEC has designated, knowledgeable employees of a fund relying on section 3(c)(1) or 3(c)(7), and family offices, so a questionnaire copied from an older form can leave out categories an investor actually meets.
The eligibility conditions come from two places: the exemptions the fund relies on, and the admission conditions of its partnership agreement, which can be stricter than the law. A partnership agreement that requires every investor to be a qualified client, as a contractual choice, is one example; the question on who can be charged a performance fee explains the legal rule. Questions that ask for less than the partnership agreement requires leave a condition unchecked, and questions that ask for more can turn away an investor the partnership agreement would admit.
For a fund relying on section 3(c)(1), the statutory look-through counts the holders of a company investor that owns 10 percent or more of the fund's outstanding voting securities and is, or but for section 3(c)(1) or 3(c)(7) would be, an investment company. A questionnaire therefore asks an entity investor whether it holds 10 percent or more of the fund's voting securities and whether it is, or but for section 3(c)(1) or 3(c)(7) would be, an investment company, with its number of beneficial owners where the look-through applies. As further diligence, it can also ask why the investor was formed, how much of its assets the investment represents, and whether its owners choose individually whether to invest. A subscription questionnaire filed with the SEC asks those questions next to whether any other circumstance requires treating the subscriber as more than one person under section 3(c)(1) or 3(c)(7).
A representation or question that asks only for a legal conclusion, such as that the investor is not a restricted person or not a benefit plan investor, asks the investor to apply a definition it may not know and gives the fund little to rely on when the answer is wrong. Questions about facts the investor knows or can find out, such as an amount, an owner, a license held, a form filed, or an event and its date, leave the general partner to apply the definition, which makes the answers more reliable and an error easier to trace. An investor's facts can also change after admission, so an obligation to report an answer that stops being accurate, and a confirmation or new questionnaire with each additional contribution, keep the facts the fund relies on current.
Sources for this answer
A private placement memorandum filed with the SEC states that the qualifications required to invest appear in subscription documents each prospective investor must complete.
The qualifications required to invest in the Fund appear in subscription documents that must be completed by each prospective investor.
See Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).
Rule 501(a) tests accredited-investor status at the time of the sale of securities to a person and includes a reasonable-belief path.
§ 230.501 Definitions and terms used in Regulation D. As used in Regulation D (§ 230.500 et seq. of this chapter), the following terms shall have the meaning indicated: (a) Accredited investor. Accredited investor shall mean any person who comes within any of the following categories, or who the issuer reasonably believes comes within any of the following categories, at the time of the sale of the securities to that person:
See 17 C.F.R. § 230.501(a).
Rule 506(b) permits no more than 35 purchasers in any 90-calendar-day period under its counting provisions and requires each non-accredited purchaser to satisfy the stated sophistication condition.
There are no more than, or the issuer reasonably believes that there are no more than, 35 purchasers of securities from the issuer in offerings under this section in any 90-calendar-day period. Note 1 to paragraph (b)(2)(i): See § 230.501(e) for the calculation of the number of purchasers and § 230.502(a) for what may or may not constitute an offering under paragraph (b) of this section. (ii) Nature of purchasers. Each purchaser who is not an accredited investor either alone or with his purchaser representative(s) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, or the issuer reasonably believes immediately prior to making any sale that such purchaser comes within this description.
See 17 C.F.R. § 230.506(b)(2)(i)-(ii) & note 1 to paragraph (b)(2)(i).
Rule 501(a)(5) includes a natural person whose net worth exceeds $1,000,000 and excludes the person's primary residence from the assets counted.
(5) Any natural person whose individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000; (i) Except as provided in paragraph (a)(5)(ii) of this section, for purposes of calculating net worth under this paragraph (a)(5): (A) The person's primary residence shall not be included as an asset; (B) Indebtedness that is secured by the person's primary residence, up to the estimated fair market value of the primary residence at the time of the sale of securities, shall not be included as a liability (except that if the amount of such indebtedness outstanding at the time of sale of securities exceeds the amount outstanding 60 days before such time, other than as a result of the acquisition of the primary residence, the amount of such excess shall be included as a liability); and
See 17 C.F.R. § 230.501(a)(5)(i)(A)-(B).
Rule 501(a)(6) sets separate individual and joint income levels for a natural person to qualify as an accredited investor.
(6) Any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse or spousal equivalent in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year; (7) Any trust, with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase is directed by a sophisticated person as described in § 230.506(b)(2)(ii);
See 17 C.F.R. § 230.501(a)(6)-(7).
Rule 501(a)(9) includes as an accredited investor an entity of a type not otherwise listed, not formed to acquire the securities offered, that owns investments of more than $5,000,000.
(9) Any entity, of a type not listed in paragraph (a)(1), (2), (3), (7), or (8), not formed for the specific purpose of acquiring the securities offered, owning investments in excess of $5,000,000; Note 1 to paragraph (a)(9): For the purposes this paragraph (a)(9), “investments” is defined in rule 2a51-1(b) under the Investment Company Act of 1940 (17 CFR 270.2a51-1(b)).
See 17 C.F.R. § 230.501(a)(9).
Rule 501(a)(10) includes as an accredited investor a natural person holding in good standing a professional certification, designation, or credential the SEC has designated.
(10) Any natural person holding in good standing one or more professional certifications or designations or credentials from an accredited educational institution that the Commission has designated as qualifying an individual for accredited investor status.
See 17 C.F.R. § 230.501(a)(10).
Rule 501(a)(11) and (12) include as accredited investors a knowledgeable employee of an issuer that would be an investment company but for section 3(c)(1) or 3(c)(7), and a family office meeting the rule's conditions.
(11) Any natural person who is a “knowledgeable employee,” as defined in rule 3c-5(a)(4) under the Investment Company Act of 1940 (17 CFR 270.3c-5(a)(4)), of the issuer of the securities being offered or sold where the issuer would be an investment company, as defined in section 3 of such act, but for the exclusion provided by either section 3(c)(1) or section 3(c)(7) of such act; (12) Any “family office,” as defined in rule 202(a)(11)(G)-1 under the Investment Advisers Act of 1940 (17 CFR 275.202(a)(11)(G)-1): (i) With assets under management in excess of $5,000,000,
See 17 C.F.R. § 230.501(a)(11)-(12).
A subscription questionnaire filed with the SEC asks an entity subscriber whether it was formed or is operated to acquire the fund's interests, whether its owners have individual discretion over the investment, and whether more than 40% of its assets will be invested in the fund, alongside whether other circumstances require treating it as more than one person under Section 3(c)(1) or 3(c)(7).
was not formed, organized, reorganized, capitalized or recapitalized for the specific purpose of acquiring Units; ☐ is ☐ is not operated for the specific purpose of acquiring Units; ☐ is ☐ is not an investment entity for which the Subscriber’s stockholders, partners, members or other beneficial owners (i) can have individual discretion as to their participation or non-participation through the Subscriber in (a) the Subscriber’s purchase of Units or (b) particular investments made by the Fund or (ii) did contribute or will contribute additional capital (other than previously committed capital) for the purpose of purchasing the Units; ☐ will ☐ will not have more than 40% of the value of the Subscriber’s total assets (or, if the Subscriber is a private investment fund with binding, unconditional capital commitments from the Subscriber’s partners or members, more than 40% of the Subscriber’s committed capital) invested in the Fund upon making this investment; ☐ is ☐ is not aware of any other circumstances that would require the Fund to treat it as more than “one person” for purposes of Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act.
See TCW Specialty Lending IX LLC, Subscription Agreement, Exhibit 10.7 to Form 10 (2026), Investor Questionnaire item 4.
Section 3(c)(1)(A) counts a company investor as one beneficial owner unless it owns 10 percent or more of the issuer's voting securities and is, or but for section 3(c)(1) or 3(c)(7) would be, an investment company.
Beneficial ownership by a company shall be deemed to be beneficial ownership by one person, except that, if the company owns 10 per centum or more of the outstanding voting securities of the issuer, and is or, but for the exception provided for in this paragraph or paragraph (7), would be an investment company, the beneficial ownership shall be deemed to be that of the holders of such company's outstanding securities (other than short-term paper).
See 15 U.S.C. § 80a-3(c)(1)(A).
What should hedge fund subscription documents say about bad actors, new issues, taxes, and money laundering?
Hedge fund subscription documents collect the investor facts behind the fund's compliance screens, including the factual inquiry Rule 506(d) calls for into a 20 percent holder's disqualifying events and the eligibility representation FINRA Rule 5130 requires before a broker-dealer sells the fund a new issue.
Rule 506 is unavailable for a sale if a covered person, which includes a beneficial owner of 20 percent or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power, has a disqualifying event, subject to exceptions that include events before September 23, 2013, a Commission waiver for good cause, written advice from the court or regulator that entered the order, and the issuer's reasonable care. An issuer cannot establish the rule's reasonable-care exception without factual inquiry into whether disqualifications exist. A person can reach the 20 percent level directly or through an investor, so the inquiry reaches each person that would cross it through an investor, with its ownership chain and the dates of any events.
FINRA Rule 5130 generally bars a broker-dealer from selling a new issue to an account in which a restricted person has a beneficial interest, and requires it to obtain, within the twelve months before the sale, a representation that the account is eligible. A fund that buys new issues therefore needs each investor's restricted-person status, and a fund procedure that refreshes the answers often enough lets it give a broker-dealer a representation that falls within that twelve-month window. Rule 5130 defines material support by income and deems immediate family members living in the same household to support each other, so questions about family members collect household facts as well as income. FINRA Rule 5131 separately restricts a broker-dealer's allocations of new issues to accounts in which an executive officer or director of a public company or a covered non-public company, or a person materially supported by one, has a beneficial interest, where the company is, among other circumstances the rule lists, an investment banking client of that broker-dealer, so the questionnaire asks which companies are involved and leaves the broker-dealer to apply the rule, and deems persons living in the same household to support each other, so an investor's Rule 5130 answers do not answer the Rule 5131 question.
The tax, anti-money-laundering, and public-records questions serve the fund's own procedures. Tax forms and self-certifications, kept current, let the fund withhold and report correctly, while withholding itself and the charging of taxes to an investor are partnership-agreement terms. Identity, beneficial-ownership, sanctions, and source-of-funds questions follow the onboarding procedures the fund and its administrator actually use; the question on PPM subscriptions explains the status of FinCEN's investment-adviser rule. Public-records status matters most for public investors, such as a public pension plan or a public university's endowment: knowing which freedom-of-information or public-records law applies lets the general partner decide what confidential information to give that investor and ask for notice of any request for fund information.
Sources for this answer
Rule 506(d)(1) makes the exemption unavailable if a covered person, including a beneficial owner of 20% or more of the issuer's outstanding voting equity securities calculated on the basis of voting power, has a disqualifying event.
No exemption under this section shall be available for a sale of securities if the issuer; any predecessor of the issuer; any affiliated issuer; any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer; any beneficial owner of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power; any promoter connected with the issuer in any capacity at the time of such sale; any investment manager of an issuer that is a pooled investment fund; any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; any general partner or managing member of any such investment manager or solicitor; or any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor:
See 17 C.F.R. § 230.506(d)(1).
Rule 506(d)(2) makes the disqualification inapplicable to events before September 23, 2013, on a Commission good-cause determination, on written advice of the court or regulator, or where the issuer shows it could not have known of the disqualification with reasonable care.
(2) Paragraph (d)(1) of this section shall not apply: (i) With respect to any conviction, order, judgment, decree, suspension, expulsion or bar that occurred or was issued before September 23, 2013; (ii) Upon a showing of good cause and without prejudice to any other action by the Commission, if the Commission determines that it is not necessary under the circumstances that an exemption be denied; (iii) If, before the relevant sale, the court or regulatory authority that entered the relevant order, judgment or decree advises in writing (whether contained in the relevant judgment, order or decree or separately to the Commission or its staff) that disqualification under paragraph (d)(1) of this section should not arise as a consequence of such order, judgment or decree; or (iv) If the issuer establishes that it did not know and, in the exercise of reasonable care, could not have known that a disqualification existed under paragraph (d)(1) of this section.
See 17 C.F.R. § 230.506(d)(2).
The reasonable-care exception to Rule 506(d) requires the issuer to have made factual inquiry into whether disqualifications exist.
An issuer will not be able to establish that it has exercised reasonable care unless it has made, in light of the circumstances, factual inquiry into whether any disqualifications exist.
See 17 C.F.R. § 230.506(d)(2)(iv), instruction.
FINRA Rule 5130 generally prohibits a member from selling a new issue to an account in which a restricted person has a beneficial interest, subject to the rule's exceptions.
A member or a person associated with a member may not sell, or cause to be sold, a new issue to any account in which a restricted person has a beneficial interest, except as otherwise permitted herein.
See FINRA Rule 5130(a)(1).
FINRA Rule 5130(b) requires a member, before selling a new issue to an account, to have obtained in good faith a representation within the prior twelve months that the account is eligible.
Before selling a new issue to any account, a member must in good faith have obtained within the twelve months prior to such sale, a representation from: (1) Beneficial Owners the account holder(s), or a person authorized to represent the beneficial owners of the account, that the account is eligible to purchase new issues in compliance with this Rule; or (2) Conduits a bank, foreign bank, broker-dealer, or investment adviser or other conduit that all purchases of new issues are in compliance with this Rule.
See FINRA Rule 5130(b).
FINRA Rule 5130 defines material support as providing more than 25% of a person's income in the prior calendar year and deems immediate family members living in the same household to support each other.
"Material support" means directly or indirectly providing more than 25% of a person's income in the prior calendar year. Members of the immediate family living in the same household are deemed to be providing each other with material support.
See FINRA Rule 5130(i)(8).
FINRA Rule 5131(b)(1) restricts a member's allocation of new issues to accounts in which an executive officer or director of a public company or covered non-public company, or a person materially supported by one, has a beneficial interest, in the circumstances the rule lists.
No member or person associated with a member may allocate shares of a new issue to any account in which an executive officer or director of a public company or a covered non-public company, or a person materially supported by such executive officer or director, has a beneficial interest: (A) if the company is currently an investment banking services client of the member or the member has received compensation from the company for investment banking services in the past 12 months;
See FINRA Rule 5131(b)(1)(A).
FINRA Rule 5131 defines material support as providing more than 25% of a person's income in the prior calendar year and deems persons living in the same household to support each other.
"Material support" means directly or indirectly providing more than 25% of a person's income in the prior calendar year. Persons living in the same household are deemed to be providing each other with material support.
See FINRA Rule 5131(e)(6).
What should a hedge fund subscription agreement say about the investor's power of attorney and indemnity?
A hedge fund subscription agreement can limit the investor's power of attorney to executing the partnership agreement and its indemnity to breaches of the investor's representations, capped at its commitment, as the ILPA Model Subscription Agreement drafts them.
The SEC staff describes a subscription agreement as the contract through which investors contract to invest in a private fund. What follows is drafting analysis, not a statement of what any law requires. A power of attorney limited to executing a counterpart signature page to the partnership agreement does what a subscription needs. A grant that also reaches amendments and other filings overlaps any power of attorney the partnership agreement itself contains, and can widen it; ILPA's drafting note says that where the partnership agreement has a customary power of attorney there is no reason for the subscription power to extend further. The Hedge Fund Subscription Agreement takes the narrow approach and leaves the power of attorney in the Hedge Fund Limited Partnership Agreement to operate by its own terms.
An indemnity that covers only an investor representation that was false when given, up to the investor's subscription amount, gives the fund recourse for the harm a false eligibility answer causes without exposing the investor to open-ended liability for the fund's own compliance; ILPA's drafting note prefers no indemnity and accepts one limited to representations the investor can reasonably give. An uncapped indemnity for any breach of any covenant goes further and shifts more of that risk to the investor.
A subscription form can also include representations by the fund or its general partner to the investor, about matters such as the fund's formation, its authority, and the offering's compliance, along with most-favored-nation rights and other concessions. A manager-side form can leave those to side letters. Where it does, the memorandum and the partnership agreement are the principal statements from the fund available to the investor before any side letter is agreed, which is why what they say matters to an investor reading the subscription agreement.
Sources for this answer
The SEC staff's private-fund guide describes a subscription agreement as the contract through which investors contract to invest in a private fund.
Documentation for your capital raise may include, among other things: • an offering document—frequently called a private placement memorandum—that acts as a detailed disclosure document for potential investors; and • a subscription agreement through which investors contract to invest in the private fund.
See SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”, Capital Raise Considerations (SEC staff resource).
ILPA's model subscription agreement limits the applicant's power of attorney to executing the partnership agreement on its behalf.
POWER OF ATTORNEY The Applicant hereby irrevocably authorises the General Partner pursuant, and upon acceptance of the Applicant's Commitment in accordance with, this Agreement by the General Partner, to execute the Partnership Agreement on the Applicant's behalf as the Applicant's attorney.
See Institutional Limited Partners Association, Model Subscription Agreement, clause 5 (2018)
ILPA's model subscription agreement notes that where the partnership agreement has a customary power of attorney there is no reason for the subscription power of attorney to extend beyond executing the partnership agreement.
[Provided that the Partnership Agreement contains a customary PoA there should not be any reason for the PoA to extend further than executing the Partnership Agreement. In some jurisdictions – including the US - it is customary for the Agreement to include a signature page to the Partnership Agreement. If that is the case, then it may not strictly be necessary to include any PoA.]
See Institutional Limited Partners Association, Model Subscription Agreement, note 8 (2018)
ILPA's model subscription agreement limits the applicant's indemnity to breaches of its representations and caps it at its commitment.
6.2 To the fullest extent permitted by law (and with the intention that this clause [7] will be enforceable by them), the Applicant hereby irrevocably agrees to hold each Relying Entity harmless from any liability for, and indemnify each of them against, any and all claims, liabilities, demands, losses, damages, costs and expenses whatsoever or howsoever arising as a result of any breach by the Applicant of any representations or warranty given by it in this Agreement, [provided that the aggregate amount that the Applicant can be required to pay pursuant to this clause [6.2] shall not exceed the amount of such Applicant’s Commitment.]
See Institutional Limited Partners Association, Model Subscription Agreement, clause 6.2 (2018)
ILPA's model subscription agreement prefers no investor indemnity and accepts one only if it is limited to breaches of reasonable representations the applicant can give.
[Preference not to include an indemnity at all, however it may be acceptable to include so long as it is limited to breaches of reasonable representations and warranties that the Applicant is confident that it understands and can give. It should not be used to allow the manager to shift the burden and risk of making legal determinations (such as compliance with applicable laws in respect of the formation of the fund, the marketing of interests therein to the Applicant and the admission of Applicant to the fund) onto the Applicant.] 6 6.3 7. All representations and warranties contained herein will survive the execution, delivery and performance of this Agreement. ENTIRE AGREEMENT This Agreement, [the Applicant’s Side Letter]and the Partnership Agreement constitute the entire agreement between the Applicant, the General Partner and the Partnership relating to the Applicant's application for an interest or the interest granted to it in the Partnership. 8. COUNTERPARTS This Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which taken together shall constitute a single agreement. 9. GOVERNING LAW AND JURISDICTION 10 9.1 This Agreement and the rights, obligations and relationships of the parties hereto under this Agreement and in respect of any offering document circulated in relation to the Partnership shall be governed by and construed in accordance with the laws of [insert governing law of the Partnership Agreement]. All the parties irrevocably agree that the courts of [insert governing law of the Partnership Agreement] are to have exclusive jurisdiction to settle any disputes which may arise out of or in connection with this Agreement or the acquisition of Commitments. Accordingly, any suit, action or proceedings arising out of or in connection with this Agreement or the acquisition of Commitments shall be brought in such courts. The parties hereby waive, to the extent not prohibited by applicable law, and agree not to assert by way of motion, as a defence or otherwise, in any such proceeding, any claim that it is not subject personally to the jurisdiction of such courts, that any such proceeding brought in such courts is improper or that this Agreement or any offering document circulated in relation to the Partnership, or the subject matter hereof or thereof, may not be enforced in or by such court. 9.2 IN WITNESS THEREOF, this Agreement has been executed and delivered on the date set forth on the first page of this Agreement. [SIGNATURE PAGES FOLLOW] 10 [Conform to governing law and jurisdiction provisions in the Partnership Agreement.] 7 [INSERT JURISDICTION-APPROPRIATE EXECUTION CLAUSES] EXECUTION CLAUSE FOR THE SUBSCRIPTION AGREEMENT IN RESPECT OF [INSERT NAME OF FUND] FOR THE INVESTOR: Date of application: [__] Executed by: [insert name of investor] acting by: ___________________________ (signature of first director) ___________________________ (signature of second director) ___________________________ (print name of first director) Director ___________________________ (print name of second director) Director 8 EXECUTION CLAUSE FOR THE SUBSCRIPTION AGREEMENT IN RESPECT OF [INSERT NAME OF FUND] FOR THE GENERAL PARTNER: The General Partner hereby accepts the subscription evidenced by this Agreement in respect of a Commitment of [US Dollars] __________________. Executed by: [insert name of general partner] in its capacity as general partner of [insert name of fund] acting by: ___________________________ (signature of first director) ___________________________ (signature of second director) ___________________________ (print name of first director) Director ___________________________ (print name of second director) Director 9 EXECUTION CLAUSE FOR THE SUBSCRIPTION AGREEMENT IN RESPECT OF [INSERT NAME OF FUND] FOR THE PARTNERSHIP: Executed for and on behalf of [insert name of fund] acting by: Executed by: [insert name of general partner] in its capacity as general partner of [insert name of fund] acting by: ___________________________ (signature of first director) ___________________________ (signature of second director) ___________________________ (print name of first director) Director ___________________________ (print name of second director) Director 10 SCHEDULE 1: APPLICANT'S DETAILS 11 [Please complete in block capitals] Name of the Applicant (insert full legal name Applicant) Commitment applied for (insert amount in [US Dollars]) Applicant's postal address of _____________________________________ _____________________________________ _____________________________________ _____________________________________ _____________________________________ Name of principal contact _____________________________________ (All notices sent pursuant to clause [19.10 (Notices)] of the Partnership Agreement or pursuant to this Agreement will be marked for the attention of this person) Telephone number _____________________________________ Fax number _____________________________________ Email address _____________________________________ Tax identification number (if applicable) _____________________________________ United Kingdom Unique _____________________________________ Taxpayer Reference Number ("UTR") (if applicable) 12 Bank account details (distributions will be made to this bank account) (a) Bank: _____________________________________ (b) Branch: _____________________________________ (c) Account Number: _____________________________________ 11 Please note that ILPA has not endorsed a particular investor questionnaire, and this information is included as a placeholder only. Users should feel comfortable to use the ID Register’s Universal Subscription Questionnaire (USQ), or their pre-existing investor questionnaire in place of the relevant sections after the signature page. 12 Please provide your UTR if you have been issued with one. 1 (d) Sort Code: _____________________________________ Legal status of the Applicant (if the Applicant is not a natural person) (a) Legal form of Applicant (i.e. limited company, partnership, limited partnership, limited liability company, corporation, ___________________________ trust, custodial account or other entity): (b) Jurisdiction of organisation: ____________________________ (c) Location of principal place of business: ____________________________ Contact details of person preparing this Agreement (This information will be used along with the address above should there be any issue with this Agreement) (a) Name: ___________________________________________________ (b) Company: ___________________________________________________ (c) Client: ___________________________________________________ (If completing this Agreement on behalf of a client (e.g. you are legal counsel), provide the name of the client) (d) Email address ______________________________________________________ (e) Telephone number ___________________________________________________ 2 SCHEDULE 2: STATUS OF APPLICANT The Applicant hereby represents, warrants and confirms that it has ticked all of the boxes in this Schedule [2] that apply to it at the date of this Agreement and that, at the date of this Agreement and for so long as the Applicant is a Limited Partner: * Under the law of the jurisdiction in which the Applicant is constituted, the Applicant A is deemed to have separate legal personality , and the Applicant will, as a result, be a single partner in the Partnership; *(please consult a legal advisor if unsure as to the answer to this question) B the Applicant will hold its interest in the Partnership as trustee for the following C 1 beneficiaries* the Applicant will hold its interest in the Partnership for itself beneficially; OR Name: __________________________________________________ Address: __________________________________________________ __________________________________________________ __________________________________________________ *Continue on a separate sheet if necessary Where the Applicant has ticked box [C] in this clause [2], the Applicant hereby acknowledges that any and all of the agreements, authorisations, confirmations, representations and warranties given by the Applicant pursuant to this Agreement are given both on behalf of itself and also separately on behalf of each of the beneficiaries and consequently, where appropriate, references to the Applicant in this Agreement shall be read as references to each of the beneficiaries. Further the Applicant confirms that it is duly authorised and qualified to give the agreements, authorisations, confirmations, representations and warranties set forth in this Agreement on behalf of each of the beneficiaries and will provide such other representations and information about such beneficiaries as the General Partner shall reasonably request; the Applicant is NOT a "US Person" NOR was in the "United States" 2 when the D interest in the Partnership was offered to or accepted by it, NOR is the Applicant a [United Kingdom] [Canadian] 3 resident becoming a limited partner in a [United Kingdom] [Canadian] placement, and the Applicant additionally agrees represents, warrants and confirms as set forth in Schedule [3] (Special Investment Conditions for Non-US Applicants); OR the Applicant IS either a "US Person" or was in the "United States" when the interest E in the Partnership was offered or accepted and the Applicant additionally agrees, 1 If you tick box C, please provide details of the beneficiary or beneficiaries of the trust. The terms "US Person" and "United States” are set forth in Appendix 1 to this Agreement. 3 Insert schedules for any jurisdictions that have specific requirements (UK, Canada, Japan, etc.) 2 1 represents, warrants and confirms as set forth in Schedule [4] (Special Investment Conditions for Applicants in US Placements); [OR the Applicant is a [United Kingdom] [Canadian] resident becoming a limited partner F in a [United Kingdom] [Canadian] placement and the Applicant additionally agrees, represents, warrants and confirms as set forth in Schedule [3] (Special Investment Conditions for Non-US Applicants) and Schedule [5] (Special Investment Conditions for Applicants in [United Kingdom] [Canadian] Placements);] 4 the Applicant is a pension, profit sharing, annuity or employee benefit plan (a "Plan") G described in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or a plan or account (including an individual retirement account) described in section 4975 of the Code, whether or not subject to ERISA or section 4975 of the Code, or the Applicant is an entity whose underlying assets include "plan assets" for purposes of ERISA by reason of a Plan's investment in the Applicant; AND if the Applicant HAS ticked box [G] above, the Applicant is a Plan that is subject to H ERISA or a plan or account that is subject to section 4975 of the Code; OR if the Applicant has NOT ticked box [H] above, the Applicant is not purchasing the I interest in the Partnership with funds that constitute the assets of any of the above, AND if the Applicant ticked box [G] in this clause [4], the Applicant hereby additionally agrees, represents, warrants and confirms as set forth in Schedule [6]; 4 [Delete, include and/or update (insert jurisdiction-specific schedules) to the extent necessary specific jurisdictions.] 2 SCHEDULE 3: SPECIAL INVESTMENT CONDITIONS FOR APPLICANTS IN NON-US PLACEMENTS The Applicant hereby represents, warrants and confirms that: the Applicant has a principal address outside the United States and was not in the United States at the time that an interest in the Partnership was offered to the Applicant, and the Applicant was not in the United States at the time such offer was accepted; and the Applicant is not a US Person and the Applicant is not acquiring an interest in the Partnership for the account or benefit of any US Person nor with a view to the offer, sale or delivery, directly or indirectly of any such interest within the United States or to a US Person. 1 SCHEDULE 4: [SPECIAL INVESTMENT CONDITIONS FOR APPLICANTS IN US PLACEMENTS] [Insert US-securities and tax specific representations, drafted as requests for objective facts (i.e., with no determinations as to law) about the Applicant that it can be reasonably be expected to determine without the advice of counsel or accountants.]
See Institutional Limited Partners Association, Model Subscription Agreement, note 9 (2018)
What should hedge fund subscription documents say about an investment manager outside the United States?
Hedge fund subscription documents for a manager whose principal office and place of business is outside the United States reflect its Investment Advisers Act status, which may be SEC registration, the non-U.S. private fund adviser exemption, or the foreign private adviser exemption.
The non-U.S. private fund adviser exemption turns on where the adviser's principal office and place of business is, not where it is organized, and requires that the adviser have no client that is a United States person other than qualifying private funds and that it manage from any U.S. place of business only private fund assets of less than $150 million. A foreign private adviser has no place of business in the United States, fewer than 15 clients and investors in the United States in the private funds it advises, and less than $25 million attributable to them, among other conditions. That count runs across all of the private funds the manager advises, not only this one. As a drafting matter, the questionnaire for a foreign private adviser can therefore ask each investor whether it is in the United States.
Section 205(a)(1) reaches only an adviser registered or required to be registered with the SEC. For a manager that is neither, a qualified-client screen in the subscription documents, if the partnership agreement requires one, is a contractual admission condition rather than a legal one, and its assets-under-management question refers to assets under that manager's management, as Rule 205-3 measures the test. Keeping the screen still matters, because if the manager later becomes required to register, section 205(a)(1) applies to any person who becomes a party after that, including a new equity owner of a private investment company it advises. Rule 506(d) lists any investment manager of a pooled investment fund, and that manager's directors, executive officers, and other officers participating in the offering, among its covered persons, wherever the manager is organized, so the bad-actor inquiry names the manager and reaches an investor, or an investor's principal, who holds such a position with it.
The rest of this answer is drafting analysis, not a statement of any jurisdiction's law. The tax, anti-money-laundering, benefit plan, bad-actor, and new-issue questions depend on the fund and its investors rather than on where the manager is based. The documents' description of the manager can name its home regulator, its status under the Advisers Act and its home law, and where its books and records are kept, and counsel in the manager's home jurisdiction is the source for any notices, such as data-privacy notices, or anti-money-laundering steps that its law may add alongside the fund's U.S. procedures.
Sources for this answer
Rule 203(m)-1(b) exempts an adviser with its principal office outside the United States whose only U.S.-person clients are qualifying private funds and whose U.S.-managed assets are private fund assets of less than $150 million.
(b) Non-United States investment advisers. For purposes of section 203(m) of the Act (15 U.S.C. 80b-3(m)), an investment adviser with its principal office and place of business outside of the United States is exempt from the requirement to register under section 203 of the Act if: (1) The investment adviser has no client that is a United States person except for one or more qualifying private funds; and (2) All assets managed by the investment adviser at a place of business in the United States are solely attributable to private fund assets, the total value of which is less than $150 million.
See 17 C.F.R. § 275.203(m)-1(b).
Section 203(b)(3) exempts a foreign private adviser from the registration requirement of section 203(a).
The provisions of subsection (a) shall not apply to- (1) any investment adviser, other than an investment adviser who acts as an investment adviser to any private fund, all of whose clients are residents of the State within which such investment adviser maintains his or its principal office and place of business, and who does not furnish advice or issue analyses or reports with respect to securities listed or admitted to unlisted trading privileges on any national securities exchange; (2) any investment adviser whose only clients are insurance companies; (3) any investment adviser that is a foreign private adviser;
See 15 U.S.C. § 80b-3(b)(1)-(3).
Section 202(a)(30) defines a foreign private adviser by the absence of a U.S. place of business, fewer than 15 U.S. clients and private fund investors, and less than $25 million attributable to them, among other conditions.
The term "foreign private adviser" means any investment adviser who- (A) has no place of business in the United States; (B) has, in total, fewer than 15 clients and investors in the United States in private funds advised by the investment adviser; (C) has aggregate assets under management attributable to clients in the United States and investors in the United States in private funds advised by the investment adviser of less than $25,000,000, or such higher amount as the Commission may, by rule, deem appropriate in accordance with the purposes of this subchapter; and
See 15 U.S.C. § 80b-2(a)(30)(A)-(C).
Section 205(a)(1) applies to an investment adviser registered or required to be registered with the Commission.
No investment adviser registered or required to be registered with the Commission shall enter into, extend, or renew any investment advisory contract, or in any way perform any investment advisory contract entered into, extended, or renewed on or after November 1, 1940, if such contract- (1) provides for compensation to the investment adviser on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client;
See 15 U.S.C. § 80b-5(a)(1).
Rule 506(d)(1) lists any investment manager of an issuer that is a pooled investment fund among the covered persons whose disqualifying events make the exemption unavailable.
No exemption under this section shall be available for a sale of securities if the issuer; any predecessor of the issuer; any affiliated issuer; any director, executive officer, other officer participating in the offering, general partner or managing member of the issuer; any beneficial owner of 20% or more of the issuer's outstanding voting equity securities, calculated on the basis of voting power; any promoter connected with the issuer in any capacity at the time of such sale; any investment manager of an issuer that is a pooled investment fund; any person that has been or will be paid (directly or indirectly) remuneration for solicitation of purchasers in connection with such sale of securities; any general partner or managing member of any such investment manager or solicitor; or any director, executive officer or other officer participating in the offering of any such investment manager or solicitor or general partner or managing member of such investment manager or solicitor:
See 17 C.F.R. § 230.506(d)(1).
Rule 205-3(c)(2) applies section 205(a)(1) to a person who becomes a party, including a new equity owner of a private investment company, once a previously unregistered adviser is required to register.
(2) Registered investment advisers that were previously not registered. If an investment adviser was not required to register with the Commission pursuant to section 203 of the Act (15 U.S.C. 80b-3) and was not registered, section 205(a)(1) of the Act will not apply to an advisory contract entered into when the adviser was not required to register and was not registered, or to an account of an equity owner of a private investment company advised by the adviser if the account was established when the adviser was not required to register and was not registered; Provided, however, that section 205(a)(1) of the Act will apply with regard to a natural person or company who was not a party to the contract and becomes a party (including an equity owner of a private investment company advised by the adviser) when the adviser is required to register.
See 17 C.F.R. § 275.205-3(c)(2).
Rule 205-3(d)(1)(i) measures the qualified-client assets test by assets under the management of the investment adviser entering the contract.
(1) The term qualified client means: (i) A natural person who, or a company that, immediately after entering into the contract has, under the management of the investment adviser, at least the applicable dollar amount specified in the most recent order; (ii) A natural person who, or a company that, the investment adviser entering into the contract (and any person acting on his behalf) reasonably believes, immediately prior to entering into the contract, either:
See 17 C.F.R. § 275.205-3(d)(1)(i)-(ii).