{ "type": "practice-guide", "canonical": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds", "links": [ { "rel": "self", "href": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds.json", "type": "application/json" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds", "type": "text/html" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds/markdown", "type": "text/markdown" }, { "rel": "alternate", "href": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds/json", "type": "application/json" }, { "rel": "license", "href": "https://creativecommons.org/licenses/by/4.0/", "type": "text/html", "external": true, "title": "CC BY 4.0" } ], "data": { "topic": "fund-formation", "state": "hedge-funds", "frontmatter": { "title": "Hedge Fund Formation: Limited Partnership Agreements and Private Placement Memoranda", "description": "A plain-language guide for hedge fund managers, and for the smaller investors they admit, to a U.S. hedge fund's limited partnership agreement and private placement memorandum, covering parties, performance fees, withdrawals, manager protections, offering exemptions, investor eligibility, disclosures, and filings.", "state": "United States", "lastReviewed": "2026-09-01", "license": "CC BY 4.0", "authors": [ "steven-obiajulu" ], "about": [ "Hedge fund limited partnership agreements", "Hedge fund private placement memoranda", "Regulation D offerings", "Investment Company Act private-fund exclusions", "Investment Advisers Act performance compensation" ], "eyebrow": "Fund Formation Practice Guide", "coverage": "U.S. hedge funds, meaning open-end private funds that take capital up front and let investors withdraw periodically, with Delaware limited-partnership law and federal securities-law overlays; private equity and other closed-end drawdown funds are not covered" }, "questions": [ { "slug": "hedge-fund-limited-partnership-agreement-purpose", "label": "Purpose of a hedge fund LPA", "heading": "What is the purpose of a hedge fund limited partnership agreement?", "answerText": "A hedge fund limited partnership agreement (LPA) is the contract that sets the fund's key legal terms and mechanics, including how profits are split between the general partner and the investors, what management fees are charged, and when investors may withdraw.", "sources": [ { "id": "sec-lpa", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”", "citation": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff says an LPA documents key fund terms and mechanics.", "verbatimQuote": "For example, if you structure your private fund as a limited partnership, a limited partnership agreement, or LPA, will document the fund’s key legal terms and mechanics. This may include how the general partner may call for capital commitments, how profits are split between the general partner and the limited partners, any management fees, and the extent to which limited partners may withdraw from the fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-lpa" }, { "id": "sec-private-definition", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”", "citation": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff describes a private fund as pooled investor money outside investment-company registration.", "verbatimQuote": "A private fund is an entity created to pool money from multiple investors that is not required to be registered or regulated as an investment company under the Investment Company Act.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-private-definition" }, { "id": "inv-hedge", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov Glossary: Hedge Funds", "citation": "Investor.gov Glossary: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/glossary/hedge-funds", "proposition": "Investor.gov describes hedge funds as investment pools.", "verbatimQuote": "Like mutual funds, hedge funds pool investors’ money and invest the money in an effort to make a positive return.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-hedge" }, { "id": "sec-hedge", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Hedge Fund", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20hedge%20fund%20is%20a,investment%20strategies%20than%20mutual%20funds.", "proposition": "The SEC staff defines a hedge fund as a type of private fund.", "verbatimQuote": "A hedge fund is a type of private fund that generally invests in a diverse range of securities and typically has more flexible investment strategies than mutual funds.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-hedge" }, { "id": "delaware-lpa-contract-policy", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-1101(c), 6 Del. C. § 17-1101(c)", "citation": "6 Del. C. § 17-1101(c).", "url": "https://delcode.delaware.gov/title6/c017/sc11/index.html", "proposition": "6 Del. C. § 17-1101(c) states Delaware's policy of giving maximum effect to freedom of contract and to the enforceability of partnership agreements.", "verbatimQuote": "It is the policy of this chapter to give maximum effect to the principle of freedom of contract and to the enforceability of partnership agreements.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-lpa-contract-policy" }, { "id": "delaware-lpa-duty-terms", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-1101(d), 6 Del. C. § 17-1101(d)", "citation": "6 Del. C. § 17-1101(d).", "url": "https://delcode.delaware.gov/title6/c017/sc11/index.html", "proposition": "6 Del. C. § 17-1101(d) permits the partnership agreement binding the partners to expand, restrict, or eliminate their duties, but not the implied contractual covenant of good faith and fair dealing.", "verbatimQuote": "To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner’s or other person’s duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-lpa-duty-terms" } ] }, { "slug": "hedge-fund-limited-partnership-agreement-parties", "label": "Parties to a hedge fund LPA", "heading": "Who are the parties to a hedge fund limited partnership agreement?", "answerText": "A hedge fund limited partnership agreement binds the fund's general partner, which manages the fund, and its limited partners, the investors who commit capital to it.", "sources": [ { "id": "sec-lp", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Limited Partner", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20limited%20partner%20is%20an,by%20a%20Limited%20Partnership%20Agreement.", "proposition": "The SEC staff describes the limited partner and its LPA relationship.", "verbatimQuote": "A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-lp" }, { "id": "sec-gp", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: General Partner", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20general%20partner%20is%20an,in%20and%20manages%20the%20fund.", "proposition": "The SEC staff describes the general partner of a private fund.", "verbatimQuote": "A general partner is an individual or an entity—typically affiliated with a venture capital firm, private equity firm, or other investment firm—that raises money from limited partners for a private fund organized as a limited partnership and that both invests in and manages the fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-gp" }, { "id": "delaware-lpa-classes", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-302(a), 6 Del. C. § 17-302(a)", "citation": "6 Del. C. § 17-302(a).", "url": "https://delcode.delaware.gov/title6/c017/sc03/index.html", "proposition": "6 Del. C. § 17-302(a) permits a partnership agreement to create classes or groups of limited partners with the relative rights, powers, and duties the agreement provides.", "verbatimQuote": "A partnership agreement may provide for classes or groups of limited partners having such relative rights, powers and duties as the partnership agreement may provide, and may make provision for the future creation in the manner provided in the partnership agreement of additional classes or groups of limited partners having such relative rights, powers and duties as may from time to time be established, including rights, powers and duties senior to existing classes and groups of limited partners.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-lpa-classes" }, { "id": "sec-adviser", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”", "citation": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff says a fund may have a separate adviser.", "verbatimQuote": "The fund may have a separate investment adviser that provides investment advice.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-adviser" }, { "id": "sec-ima", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”", "citation": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”.", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff says an investment management agreement often governs adviser responsibilities.", "verbatimQuote": "Documentation often includes an investment management agreement governing the responsibilities of the investment adviser.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-ima" } ] }, { "slug": "hedge-fund-manager-investment-adviser-registration", "label": "Adviser registration", "heading": "Does a hedge fund manager need to register as an investment adviser?", "answerText": "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.", "sources": [ { "id": "adviser-registration-baseline", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Private Funds Building Block: Adviser registration status", "citation": "SEC Office of the Advocate for Small Business Capital Formation, Private Funds, The Adviser.", "url": "https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/private-funds", "deepLink": "https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/private-funds#:~:text=Private%20fund%20advisers%20are%20generally,as%20an%20exempt%20reporting%20adviser).", "proposition": "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.", "verbatimQuote": "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).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-adviser-registration-baseline" }, { "id": "private-fund-adviser-exemption", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.203(m)-1(a): United States private-fund-adviser exemption", "citation": "17 C.F.R. § 275.203(m)-1(a)(1)-(2).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.203(m)-1", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-private-fund-adviser-exemption" }, { "id": "sec-glossary-exempt-reporting-adviser", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Exempt Reporting Adviser", "citation": "SEC Small Business Glossary, Exempt Reporting Adviser (SEC staff resource).", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=While%20exempt%20reporting%20advisers%20are,state%20filing%20or%20registration%20requirements.", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-glossary-exempt-reporting-adviser" } ] }, { "slug": "hedge-fund-performance-fees", "label": "Performance fees", "heading": "What should a hedge fund agreement say about performance fees?", "answerText": "A hedge fund agreement states the performance fee, which a limited partnership agreement filed with the SEC for Third Point Enhanced sets at 20 percent of each investor's net increase after the management fee and any loss-recovery balance, reallocated to the general partner.", "sources": [ { "id": "third-point-filed-performance-allocation", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Third Point Enhanced LP, Amended and Restated Exempted Limited Partnership Agreement (2018), § 4.1.2.2", "citation": "Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.", "url": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm#:~:text=Subject%20to%20Section%204.1.2.3%20and,General%20Partner%20(the%20%E2%80%9CIncentive%20Allocation%E2%80%9D).", "proposition": "The filed Third Point Enhanced agreement reallocates 20 percent of the defined net increase after deducting the management fee and loss-recovery balance.", "verbatimQuote": "Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-third-point-filed-performance-allocation" }, { "id": "inv-fee", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov describes typical performance fees, high-water marks, and hurdles.", "verbatimQuote": "In addition, they also typically pay a performance fee of 15-20% of the hedge fund’s profit subject to certain measures, such as a high-water mark and a hurdle rate, which can limit when a manager is entitled to performance fees.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-fee" }, { "id": "lion-filed-realized-unrealized", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 1.20(a)", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 1.20(a) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=%E2%80%9CNet%20Profits%E2%80%9D%20and%20%E2%80%9CNet%20Losses%E2%80%9D%20of%20the%20Fund%20shall%20include,with%20respect%20to%20all%20securities%20positions.", "proposition": "The filed Lion Fund II agreement counts realized and unrealized profits and losses on all securities positions in its net profits and net losses.", "verbatimQuote": "“Net Profits” and “Net Losses” of the Fund shall include realized and unrealized profits and losses with respect to all securities positions.", "pullQuoteLocator": "“Net Profits” and “Net Losses” of the Fund shall include|with respect to all securities positions.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-filed-realized-unrealized" }, { "id": "sec-glossary-performance-fees", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Performance Fees", "citation": "SEC Small Business Glossary, Performance Fees (SEC staff resource).", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=Performance%20fees%20are%20compensation%20provided,performance%20of%20a%20client%E2%80%99s%20portfolio.", "proposition": "The SEC staff's glossary defines performance fees as adviser compensation based on the performance of a client's portfolio.", "verbatimQuote": "Performance fees are compensation provided to an adviser based on the performance of a client’s portfolio.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-glossary-performance-fees" } ] }, { "slug": "hedge-fund-hurdles-and-high-water-marks", "label": "Hurdles and high-water marks", "heading": "What should a hedge fund agreement say about hurdles and high-water marks?", "answerText": "A hedge fund agreement states whether the performance fee applies only to gains above a hurdle rate and whether a high-water mark or loss carryforward requires earlier losses to be recovered before a new fee is charged.", "sources": [ { "id": "lion-hurdle-and-loss-carryforward", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 5.02(A)", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.02(A) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=As%20of%20the%20end%20of%20each%20calendar,Accounts%20of%20the%20General%20Partner.", "proposition": "The filed Lion Fund II agreement uses a 25 percent incentive reallocation of its defined increase in net asset value.", "verbatimQuote": "As of the end of each calendar year, with respect to each Limited Partner other than The Lion Fund, L.P., an Incentive Reallocation in an amount equal to 25% of the Net Increase in Net Asset Value, calculated with respect to each Capital Contribution by such Limited Partner, that exceeds the Hurdle Rate with respect to such Capital Contribution and subject to the “Loss Carryforward” (as defined below) is debited from such Limited Partner's Adjusted Capital and Capital Accounts and credited to the Adjusted Capital and Capital Accounts of the General Partner.", "pullQuoteLocator": "As of the end of each calendar|Accounts of the General Partner.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-hurdle-and-loss-carryforward" }, { "id": "third-point-loss-recovery", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Third Point Enhanced LP, Amended and Restated Exempted Limited Partnership Agreement (2018), § 4.1.2.2", "citation": "Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.", "url": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm#:~:text=Subject%20to%20Section%204.1.2.3%20and,General%20Partner%20(the%20%E2%80%9CIncentive%20Allocation%E2%80%9D).", "proposition": "The filed Third Point Enhanced agreement reallocates 20 percent of the defined net increase after deducting the management fee and loss-recovery balance.", "verbatimQuote": "Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-third-point-loss-recovery" }, { "id": "inv-fee-hurdles", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov describes typical performance fees, high-water marks, and hurdles.", "verbatimQuote": "In addition, they also typically pay a performance fee of 15-20% of the hedge fund’s profit subject to certain measures, such as a high-water mark and a hurdle rate, which can limit when a manager is entitled to performance fees.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-fee-hurdles" } ] }, { "slug": "who-can-be-charged-a-hedge-fund-performance-fee", "label": "Who can be charged a performance fee", "heading": "Who can be charged a hedge fund performance fee?", "answerText": "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.", "sources": [ { "id": "qualified-client-statutory-baseline", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Investment Advisers Act of 1940 § 205(a)(1), 15 U.S.C. § 80b-5(a)(1)", "citation": "15 U.S.C. § 80b-5(a)(1).", "url": "https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section80b-5&num=0&edition=prelim", "proposition": "Section 205(a)(1) regulates advisory compensation based on a share of capital gains or capital appreciation.", "verbatimQuote": "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;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-qualified-client-statutory-baseline" }, { "id": "qualified-client-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(a): Qualified-client exemption", "citation": "17 C.F.R. § 275.205-3(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "Rule 205-3 permits a performance-based advisory contract when the client is a qualified client as the rule defines that term.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-qualified-client-rule" }, { "id": "qualified-client-current-order", "authorityType": "regulation", "tier": "primary-source-backed", "title": "SEC Order IA-6961: 2026 qualified-client dollar thresholds", "citation": "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).", "url": "https://www.sec.gov/files/rules/ia/2026/ia-6961.pdf", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-qualified-client-current-order" }, { "id": "qualified-client-pooled-fund-lookthrough", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(b): Identification of the client", "citation": "17 C.F.R. § 275.205-3(b).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-qualified-client-pooled-fund-lookthrough" }, { "id": "advisers-act-205-b-4", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Investment Advisers Act of 1940 § 205(b)(4), 15 U.S.C. § 80b-5(b)(4)", "citation": "15 U.S.C. § 80b-5(b)(4).", "url": "https://uscode.house.gov/view.xhtml?req=granuleid:USC-prelim-title15-section80b-5&num=0&edition=prelim", "proposition": "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).", "verbatimQuote": "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", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-advisers-act-205-b-4" } ] }, { "slug": "hedge-fund-lock-ups-and-withdrawals", "label": "Lock-ups and withdrawals", "heading": "What should a hedge fund agreement say about lock-ups and withdrawals?", "answerText": "A hedge fund agreement states when an investor may first withdraw, how much notice a withdrawal needs, and when the general partner may cap or pause withdrawals.", "sources": [ { "id": "stilwell-filed-lock-up", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Stilwell Value Partners I, L.P., Amended and Restated Limited Partnership Agreement (2008), § 6.3(b)", "citation": "Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 6.3(b) (dated Oct. 1, 2008), filed as Exhibit 10.56.", "url": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm#:~:text=Except%20as%20otherwise%20provided%20in%20this%20Agreement%2C%20Limited,was%20accepted%20into%20the%20Partnership.", "proposition": "The filed Stilwell agreement restricts withdrawals until the second anniversary of the date the investment was accepted.", "verbatimQuote": "Except as otherwise provided in this Agreement, Limited Partners will not be permitted to withdraw any investment until the expiration of the second anniversary of the date such investment was accepted into the Partnership.", "pullQuoteLocator": "Except as otherwise provided in this Agreement, Limited|was accepted into the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-stilwell-filed-lock-up" }, { "id": "solasglas-filed-notice", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Solasglas Investments, LP, Third Amended and Restated Exempted Limited Partnership Agreement (2026), § 5.2(b)", "citation": "Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 5.2(b) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.", "url": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm#:~:text=If%20a%20Limited%20Partner%20wishes,Capital%20Account%20in%20such%20notice.", "proposition": "The filed Solasglas agreement requires at least three business days' written notice for the withdrawal right it describes.", "verbatimQuote": "If a Limited Partner wishes to withdraw funds, it must give written notice to the General Partner at least 3 Business Days prior to the proposed withdrawal date indicating the amount to be withdrawn from such Limited Partner’s Capital Account in such notice.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-solasglas-filed-notice" }, { "id": "apollo-filed-withdrawal-gate", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Apollo IG Core Replacement, L.P., Second Amended and Restated Agreement of Limited Partnership (2026), § 6.02(b)", "citation": "Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 6.02(b) (dated June 30, 2026), filed as Exhibit 3.1.", "url": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm#:~:text=In%20addition%2C%20aggregate%20withdrawals%20during,same%20Investments%20with%20the%20Partnership.", "proposition": "The filed Apollo IG Core Replacement agreement lets the general partner limit aggregate withdrawals in any calendar month to 10 percent of the partnership's net asset value.", "verbatimQuote": "In addition, aggregate withdrawals during any calendar month shall be limited, at the General Partner’s discretion, to 10% (or such higher percentage as the General Partner determines in its sole discretion) of the Net Asset Value attributable to the Partnership as of the last day of the calendar month (the “10% Threshold”); provided that the General Partner, in its sole discretion, may elect to apply the 10% Threshold on an aggregated basis with respect to the Partnership and any corresponding series or class of interests in any Parallel Fund, which series or class of interests is established to facilitate participation by investors on a side-by-side and pro rata basis in the same Investments with the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-apollo-filed-withdrawal-gate" }, { "id": "apollo-filed-suspension", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Apollo IG Core Replacement, L.P., Second Amended and Restated Agreement of Limited Partnership (2026), § 6.07(b)", "citation": "Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 6.07(b) (dated June 30, 2026), filed as Exhibit 3.1.", "url": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm#:~:text=The%20General%20Partner%2C%20in%20its%20sole%20discretion%2C%20may%20suspend,dealings%20are%20restricted%20or%20suspended%3B", "proposition": "The filed Apollo IG Core Replacement agreement lets the general partner suspend withdrawal rights, in whole or in part, during specified market closures and restrictions.", "verbatimQuote": "The General Partner, in its sole discretion, may suspend withdrawal rights, Quarterly Distributions and/or the determination of the Net Asset Value of each Limited Partner’s Capital Account(s), in whole or in part: (i) during any period in which any stock exchange or over-the-counter market on which a substantial portion of the Partnership’s Investments are quoted, traded or dealt in is closed, other than for ordinary holidays and weekends, or during periods in which dealings are restricted or suspended;", "pullQuoteLocator": "The General Partner, in its sole discretion, may suspend|dealings are restricted or suspended;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-apollo-filed-suspension" }, { "id": "inv-redeem", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov describes redemption frequency, lock-ups, and suspensions.", "verbatimQuote": "Hedge funds typically limit opportunities to redeem, or cash in, your shares to four times a year or fewer. They also often impose a lock-up period of one year or more, during which you cannot cash in your shares. Furthermore, hedge funds may charge you a redemption fee before you are allowed to cash in your shares. Hedge funds may also have authority to suspend redemptions under certain circumstances, including in times of market distress or when their investments are not able to be quickly or easily liquidated.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-redeem" }, { "id": "delaware-distribution-solvency-limit", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-607(a), 6 Del. C. § 17-607(a)", "citation": "6 Del. C. § 17-607(a).", "url": "https://delcode.delaware.gov/title6/c017/sc06/index.html", "proposition": "6 Del. C. § 17-607(a) prohibits a limited partnership distribution that would leave specified liabilities exceeding the fair value of partnership assets.", "verbatimQuote": "A limited partnership shall not make a distribution to a partner to the extent that at the time of the distribution, after giving effect to the distribution, all liabilities of the limited partnership, other than liabilities to partners on account of their partnership interests and liabilities for which the recourse of creditors is limited to specified property of the limited partnership, exceed the fair value of the assets of the limited partnership", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-distribution-solvency-limit" } ] }, { "slug": "hedge-fund-capital-accounts-side-pockets-and-new-issues", "label": "Capital accounts, side pockets, new issues", "heading": "What should a hedge fund agreement say about capital accounts, side pockets, and new issues?", "answerText": "A hedge fund agreement keeps a capital account for each partner that records the partner's share of the fund's net profit or loss, and it says how side-pocket investments and initial public offering shares, called new issues, are kept apart from the main portfolio.", "sources": [ { "id": "capital-account-filed-net-increase", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Third Point Enhanced LP, Amended and Restated Exempted Limited Partnership Agreement (2018), § 4.1.2.2", "citation": "Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 4.1.2.2 (dated July 31, 2018), filed as Exhibit 10.33.", "url": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm#:~:text=Subject%20to%20Section%204.1.2.3%20and,General%20Partner%20(the%20%E2%80%9CIncentive%20Allocation%E2%80%9D).", "proposition": "The filed Third Point Enhanced agreement allocates net increase to each limited partner's capital account, debits the management fee from it, and reallocates 20 percent of the resulting amount to the general partner.", "verbatimQuote": "Subject to Section 4.1.2.3 and Section 4.1.2.7, at the end of each Fiscal Year of the Partnership, twenty percent (20%) of the result of (x) the Net Increase, if any, allocated to a Limited Partner’s Capital Account for such Fiscal Year, minus (y) the Management Fee debited from such Capital Account for such Fiscal Year, minus (z) such Partner’s Loss Recovery Account balance for such Fiscal Year, shall be reallocated to the General Partner (the “Incentive Allocation”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-capital-account-filed-net-increase" }, { "id": "capital-account-filed-designated-security", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Solasglas Investments, LP, Third Amended and Restated Exempted Limited Partnership Agreement (2026), § 3.5(b)", "citation": "Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 3.5(b) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.", "url": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm#:~:text=Whenever%20the%20Partnership%20makes%20an,transactions%20involving%20such%20Designated%20Security.", "proposition": "The filed Solasglas agreement requires a sub-account for each partner that participates in an investment designated a Designated Security.", "verbatimQuote": "Whenever the Partnership makes an investment that is in a Designated Security or whenever an existing investment is first designated as a Designated Security by the General Partner, the Partnership shall establish a Sub-Account with respect to each Partner that participates in such Designated Security to reflect such Partner’s Capital Account’s pro rata share of all allocations and distributions attributable to transactions involving such Designated Security.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-capital-account-filed-designated-security" }, { "id": "finra-new-issue-restriction", "authorityType": "regulation", "tier": "primary-source-backed", "title": "FINRA Rule 5130(a)(1): Restrictions on the purchase and sale of initial equity public offerings", "citation": "FINRA Rule 5130(a)(1).", "url": "https://www.finra.org/rules-guidance/rulebooks/finra-rules/5130", "proposition": "Financial Industry Regulatory Authority Rule 5130 generally prohibits the sale of a new issue to an account in which a restricted person has a beneficial interest, subject to the rule's exceptions.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-finra-new-issue-restriction" }, { "id": "sec-pooled", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Pooled Investment Vehicle", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20pooled%20investment%20vehicle%20is,their%20interest%20in%20the%20fund.", "proposition": "The SEC staff says pooled-vehicle investors generally share profits and losses in proportion to their interests.", "verbatimQuote": "A pooled investment vehicle is an entity—often referred to as a fund—that an adviser creates to pool money from multiple investors. Each investor makes an investment in the fund by purchasing an interest in the fund entity, and the adviser uses that money to make investments on behalf of the fund. Investors generally share in the profits and losses in proportion to their interest in the fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-pooled" }, { "id": "lion-filed-performance-allocation-2", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 5.02(A)", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.02(A) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=As%20of%20the%20end%20of%20each%20calendar,Accounts%20of%20the%20General%20Partner.", "proposition": "The filed Lion Fund II agreement uses a 25 percent incentive reallocation of its defined increase in net asset value.", "verbatimQuote": "As of the end of each calendar year, with respect to each Limited Partner other than The Lion Fund, L.P., an Incentive Reallocation in an amount equal to 25% of the Net Increase in Net Asset Value, calculated with respect to each Capital Contribution by such Limited Partner, that exceeds the Hurdle Rate with respect to such Capital Contribution and subject to the “Loss Carryforward” (as defined below) is debited from such Limited Partner's Adjusted Capital and Capital Accounts and credited to the Adjusted Capital and Capital Accounts of the General Partner.", "pullQuoteLocator": "As of the end of each calendar|Accounts of the General Partner.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-filed-performance-allocation-2" }, { "id": "inv-value", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov advises examination of valuation and independent sources.", "verbatimQuote": "Hedge funds may hold investments that are difficult to sell and may be difficult to value. You should understand how a hedge fund determines the value of its holdings and the extent to which a fund’s holdings are valued by independent sources.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-value" }, { "id": "lion-filed-new-issues", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 5.06", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 5.06 (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=In%20the%20event%20that%20the,permitted%20under%20the%20FINRA%20Rules.", "proposition": "The filed Lion Fund II agreement allocates new-issue profits and losses in a manner permitted under Financial Industry Regulatory Authority rules.", "verbatimQuote": "In the event that the Fund invests in securities that are considered to be \"New Issues\", as that term is defined in the Rules of the Financial Industry Regulatory Authority, Inc., as may be amended from time to time (the \"FINRA Rules\"), the General Partner shall be permitted to take all such actions as it deems are necessary to ensure that the profits and losses from New Issues are allocated among the Partners in a manner permitted under the FINRA Rules.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-filed-new-issues" }, { "id": "lion-filed-realized-unrealized-2", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 1.20(a)", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 1.20(a) (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=%E2%80%9CNet%20Profits%E2%80%9D%20and%20%E2%80%9CNet%20Losses%E2%80%9D%20of%20the%20Fund%20shall%20include,with%20respect%20to%20all%20securities%20positions.", "proposition": "The filed Lion Fund II agreement counts realized and unrealized profits and losses on all securities positions in its net profits and net losses.", "verbatimQuote": "“Net Profits” and “Net Losses” of the Fund shall include realized and unrealized profits and losses with respect to all securities positions.", "pullQuoteLocator": "“Net Profits” and “Net Losses” of the Fund shall include|with respect to all securities positions.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-filed-realized-unrealized-2" }, { "id": "solasglas-filed-new-issues", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Solasglas Investments, LP, Third Amended and Restated Exempted Limited Partnership Agreement (2026), § 3.5(a)", "citation": "Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 3.5(a) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.", "url": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm#:~:text=Notwithstanding%20the%20provisions%20of%20Section,on%20a%20pro%20rata%20basis.", "proposition": "The filed Solasglas agreement does not allocate new-issue items to restricted capital accounts except to the extent permitted by Financial Industry Regulatory Authority rules.", "verbatimQuote": "Notwithstanding the provisions of Section 3.4 above, to enable the Partnership to invest in New Issues, the Partnership shall not allocate any items of income, gain, loss, deduction and credit that relate to investments in New Issues to Restricted Capital Accounts except to the extent permitted by the FINRA Rules, and shall instead allocate such items among the other Capital Accounts on a pro rata basis.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-solasglas-filed-new-issues" } ] }, { "slug": "hedge-fund-manager-duties-exculpation-and-indemnification", "label": "Duties and protections", "heading": "What should a hedge fund agreement say about duties, exculpation, and indemnification?", "answerText": "A hedge fund agreement states the manager's duties, when exculpation excuses the manager from paying damages, and which claims the fund pays through indemnification, within Delaware's limits on modifying duties and liability.", "sources": [ { "id": "delaware-duty-modification", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-1101(d), 6 Del. C. § 17-1101(d)", "citation": "6 Del. C. § 17-1101(d).", "url": "https://delcode.delaware.gov/title6/c017/sc11/index.html", "proposition": "6 Del. C. § 17-1101(d) permits a partnership agreement to expand, restrict, or eliminate duties, including fiduciary duties, but states that it may not eliminate the implied contractual covenant of good faith and fair dealing.", "verbatimQuote": "To the extent that, at law or in equity, a partner or other person has duties (including fiduciary duties) to a limited partnership or to another partner or to another person that is a party to or is otherwise bound by a partnership agreement, the partner’s or other person’s duties may be expanded or restricted or eliminated by provisions in the partnership agreement; provided that the partnership agreement may not eliminate the implied contractual covenant of good faith and fair dealing.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-duty-modification" }, { "id": "delaware-liability-limitation", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Delaware Revised Uniform Limited Partnership Act § 17-1101(f), 6 Del. C. § 17-1101(f)", "citation": "6 Del. C. § 17-1101(f).", "url": "https://delcode.delaware.gov/title6/c017/sc11/index.html", "proposition": "6 Del. C. § 17-1101(f) permits a partnership agreement to limit or eliminate liabilities for breach of contract and breach of duties, but not liability for a bad-faith violation of the implied contractual covenant of good faith and fair dealing.", "verbatimQuote": "A partnership agreement may provide for the limitation or elimination of any and all liabilities for breach of contract and breach of duties (including fiduciary duties) of a partner or other person to a limited partnership or to another partner or to an other person that is a party to or is otherwise bound by a partnership agreement; provided, that a partnership agreement may not limit or eliminate liability for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-delaware-liability-limitation" }, { "id": "inv-duty", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov Glossary: Hedge Funds", "citation": "Investor.gov Glossary: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/glossary/hedge-funds", "proposition": "Investor.gov says hedge-fund managers owe a fiduciary duty to their funds.", "verbatimQuote": "Hedge funds, however, are subject to the same prohibitions against fraud as are other market participants, and their managers owe a fiduciary duty to the funds that they manage.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-duty" }, { "id": "carlyle-filed-disabling-conduct", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Carlyle Private Equity Partners Fund, L.P., Amended and Restated Limited Partnership Agreement (2025), § 4.2(a)", "citation": "Carlyle Private Equity Partners Fund, L.P., Am. & Restated Ltd. P'ship Agreement § 4.2(a) (dated Oct. 1, 2025), filed as Exhibit 3.1.", "url": "https://www.sec.gov/Archives/edgar/data/2065337/000206533725000014/exhibit31-cpeparlimitedpar.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2065337/000206533725000014/exhibit31-cpeparlimitedpar.htm#:~:text=Except%20as%20otherwise%20provided%20in,such%20capacity%20with%20gross%20negligence.", "proposition": "The filed Carlyle agreement defines disabling conduct to include fraud, bad faith, willful misconduct, gross negligence, and a willful and material breach of the agreement.", "verbatimQuote": "Except as otherwise provided in the Act, the General Partner shall be subject to all of the liabilities of a partner in a partnership without limited partners to (i) Persons other than the Fund and the Shareholders and (ii) subject to the other provisions of this Agreement, the Fund and the Shareholders; provided that to the fullest extent permitted by law, none of the General Partner, the Investment Advisor, their Affiliates (but excluding any Parallel Fund), members, shareholders, stockholders, unitholders or partners (in each case in their respective capacities as such), officers, directors, employees, Carlyle Operating Executives, advisors, the Directors, the Partnership Representative, the Designated Individual and any other Person who serves at the request of the General Partner on behalf of the Fund as an officer, director, partner, member, senior advisor, operating executive, similar consultant or employee of or advisor to any other entity (each, an “Indemnified Party”), shall be liable to the Fund or to any Shareholder for (i) any act performed or omission made by such Indemnified Party in connection with the conduct of the business and affairs of the Fund or otherwise in connection with this Agreement or the matters contemplated herein, unless such act or omission resulted from “Disabling Conduct,” which shall mean fraud, bad faith, willful misconduct, gross negligence, a willful and material breach of this Agreement or the Advisory Agreement by such Indemnified Party or (ii) any mistake, negligence, dishonesty or bad faith of any broker or other agent of the Fund unless such Indemnified Party was responsible for the selection or monitoring of such broker or agent and acted in such capacity with gross negligence.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-carlyle-filed-disabling-conduct" } ] }, { "slug": "hedge-fund-expenses-valuation-and-reporting", "label": "Expenses, valuation, reporting", "heading": "What should a hedge fund agreement say about expenses, valuation, and reporting?", "answerText": "A hedge fund agreement identifies which expenses the fund pays and any cap on them, who values the portfolio, and which financial reports investors receive.", "sources": [ { "id": "third-point-filed-expense-cap", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Third Point Enhanced LP, Amended and Restated Exempted Limited Partnership Agreement (2018), § 8.2(b)", "citation": "Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 8.2(b) (dated July 31, 2018), filed as Exhibit 10.33.", "url": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm#:~:text=Notwithstanding%20anything%20herein%2C%20unless%20otherwise,such%20excess%20to%20the%20Partnership.", "proposition": "The filed Third Point Enhanced agreement requires reimbursement when specified operational expenses exceed 1.75 percent of average net assets for a fiscal year.", "verbatimQuote": "Notwithstanding anything herein, unless otherwise approved in writing by the Board, to the extent the aggregate amount of the Expenses payable by the Partnership for any Fiscal Year (which, for purposes of this Section 8.2(b), Expenses shall exclude, (A) any Expenses incurred pursuant to Section 8.2(a)(vii) and Section 8.2(a)(xvii), (B) use of “soft dollars,” (C) any indemnification payments made pursuant to Section 6.5 and that may be covered under Section 8.2(a)(viii) and (D) the Management Fee) exceed the product of (x) 0.0175 and (y) the average Net Assets (calculated as the average Net Assets as of each calendar month end) for such Fiscal Year, then the Investment Manager shall reimburse the amount of such excess to the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-third-point-filed-expense-cap" }, { "id": "solasglas-filed-general-partner-valuation", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Solasglas Investments, LP, Third Amended and Restated Exempted Limited Partnership Agreement (2026), § 7.2(a)", "citation": "Solasglas Investments, LP, Third Am. & Restated Exempted Ltd. P'ship Agreement § 7.2(a) (dated May 1, 2026), filed as Exhibit 10.1 to Greenlight Capital Re, Ltd.", "url": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1385613/000138561326000098/a3rdarlpaforsolasglasinves.htm#:~:text=The%20General%20Partner%20shall%20value%20or,selected%20by%20the%20General%20Partner.", "proposition": "The filed Solasglas agreement requires the general partner to value, or have valued, the partnership's securities and other assets as of the end of each fiscal period and on other dates it selects.", "verbatimQuote": "The General Partner shall value or have valued the Securities and other Assets of the Partnership as of the close of business on the last day of each Fiscal Period and on any other date selected by the General Partner.", "pullQuoteLocator": "The General Partner shall value or|selected by the General Partner.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-solasglas-filed-general-partner-valuation" }, { "id": "apollo-filed-quarterly-statements", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Apollo IG Core Replacement, L.P., Second Amended and Restated Agreement of Limited Partnership (2026), § 9.03", "citation": "Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 9.03 (dated June 30, 2026), filed as Exhibit 3.1.", "url": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm#:~:text=The%20Partnership%20shall%20also%20provide,calendar%20day%20of%20such%20quarter.", "proposition": "The filed Apollo IG Core Replacement agreement requires quarterly performance information, portfolio valuation information, and net asset value and capital account statements for limited partners.", "verbatimQuote": "The Partnership shall also provide periodic unaudited performance information, no less frequently than quarterly, to the Limited Partners, including (i) a report and summary of the Investments of the Partnership, (ii) portfolio valuation information and (iii) a statement of the Net Asset Value of the Partnership and a statement of the Capital Account balance of each Limited Partner, as of the last calendar day of such quarter.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-apollo-filed-quarterly-statements" }, { "id": "endowment-filed-expense-cap", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Endowment PMF Master Fund, L.P., Amended and Restated Agreement of Limited Partnership (2014), § 3.11(b)", "citation": "The Endowment PMF Master Fund, L.P., Am. & Restated Agreement of Ltd. P'ship § 3.11(b) (dated Feb. 18, 2014), filed as Exhibit 99.A.1.", "url": "https://www.sec.gov/Archives/edgar/data/1597218/000119312514060638/d667770dex99a1.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1597218/000119312514060638/d667770dex99a1.htm#:~:text=The%20Partnership%20shall%20not%20enter,the%20Partnership%E2%80%99s%20business%20(%E2%80%9CExcluded%20Expenses%E2%80%9D).", "proposition": "The filed Endowment master agreement requires fee waiver and expense reimbursement to limit total partnership expenses to 1.25 percent of net assets, subject to stated exclusions.", "verbatimQuote": "The Partnership shall not enter into an Investment Advisory Agreement with any Adviser unless such Adviser, pursuant to such Investment Advisory Agreement or otherwise, agrees to waive and/or reimburse the Partnership for its Management Fee and, to the extent necessary, reimburse the Master Fund for expenses incurred, solely to the extent necessary to limit the total expenses of the Partnership in each Fiscal Year to an amount equal to 1.25% of the Partnership’s Net Assets, excluding fees and expenses directly charged by underlying investment funds and underlying investment fund managers, borrowing and other trading and execution costs and fees, taxes, litigation and indemnification expenses, judgments and other extraordinary expenses not incurred in the ordinary course of the Partnership’s business (“Excluded Expenses”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-endowment-filed-expense-cap" }, { "id": "risk-expense", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed expenses contrary to fund agreements.", "verbatimQuote": "Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-expense" }, { "id": "risk-value", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed valuation contrary to disclosures and consequent overcharges.", "verbatimQuote": "Valuation. The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff observed that this failure to value a private fund’s holdings in accordance with the disclosed valuation process led to overcharging management fees and carried interest because such fees were based on inappropriately overvalued holdings.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-value" }, { "id": "ilpa-definition", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026)", "citation": "Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026).", "url": "https://ilpa.org/wp-content/uploads/2026/05/ILPA-2026-Organizational-Expense-Guidance.pdf", "proposition": "ILPA describes organizational expenses as fund-formation legal, administrative, and compliance costs historically borne by limited partners.", "verbatimQuote": "However, the rapid growth and maturation of the PE space have also created inherent structural challenges in the form of spiraling organizational expenses—the legal, administrative, and compliance costs incurred during the formation of a new investment fund—costs that have historically been borne by LPs alone.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-ilpa-definition" }, { "id": "ilpa-cap", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026)", "citation": "Institutional Limited Partners Association, The Alignment Gap: Rethinking Costs in Private Equity Fund Formation (May 2026).", "url": "https://ilpa.org/wp-content/uploads/2026/05/ILPA-2026-Organizational-Expense-Guidance.pdf", "proposition": "ILPA recommends a private equity formation-cost cap at the lower of five basis points or $10 million.", "verbatimQuote": "To meaningfully constrain cost overruns, organizational expenses to be borne solely by LPs should be capped at the lower of 5 basis points of a fund’s target assets under management (AUM) or $10 million in total.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-ilpa-cap" } ] }, { "slug": "hedge-fund-side-letters", "label": "Side letters", "heading": "What should a side letter to a hedge fund limited partnership agreement say?", "answerText": "A side letter to a hedge fund limited partnership agreement is a separate agreement giving one investor rights that other investors do not receive, and limited partnership agreements filed with the SEC expressly permit them.", "sources": [ { "id": "nvca-purpose", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "National Venture Capital Association, 2020 Management Rights Letter", "citation": "National Venture Capital Association, 2020 Management Rights Letter.", "url": "https://nvca.org/document/nvca-2020-management-rights-letter-2/", "proposition": "The NVCA explains why a venture fund seeks portfolio-company management rights letters.", "verbatimQuote": "In order to build a case for an exemption from the ERISA Plan asset rules, a venture fund will generally ask each of its portfolio companies to sign a management rights letter in connection with the fund’s initial investment. An example of such a letter follows.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-nvca-purpose" }, { "id": "third-point-filed-side-letters", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Third Point Enhanced LP, Amended and Restated Exempted Limited Partnership Agreement (2018), § 1.52", "citation": "Third Point Enhanced LP, Am. & Restated Exempted Ltd. P'ship Agreement § 1.52 (dated July 31, 2018), filed as Exhibit 10.33.", "url": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1576018/000157601818000072/exhibit1033amendedandresta.htm#:~:text=%E2%80%9COther%20Agreements%E2%80%9D%20shall%20mean%20side,special%20or%20more%20favorable%20rights.", "proposition": "The filed Third Point Enhanced agreement contemplates side letters that modify the agreement and give an investor special or more favorable rights.", "verbatimQuote": "“Other Agreements” shall mean side letters or similar separate written agreements, the provisions of which may modify the terms of this Agreement, including any agreement with a Limited Partner that provides for special or more favorable rights.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-third-point-filed-side-letters" }, { "id": "erisa-rights", "authorityType": "regulation", "tier": "primary-source-backed", "title": "29 C.F.R. § 2510.3-101(d)(3)(ii)", "citation": "29 C.F.R. § 2510.3-101(d)(3)(ii).", "url": "https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-101", "proposition": "The Labor Department regulation defines management rights.", "verbatimQuote": "The term “management rights” means contractual rights directly between the investor and an operating company to substantially participate in, or substantially influence the conduct of, the management of the operating company.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-erisa-rights" }, { "id": "apollo-filed-other-agreements", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Apollo IG Core Replacement, L.P., Second Amended and Restated Agreement of Limited Partnership (2026), § 11.02", "citation": "Apollo IG Core Replacement, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 11.02 (dated June 30, 2026), filed as Exhibit 3.1.", "url": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2074450/000095014226002263/eh260816275_ex0301.htm#:~:text=Notwithstanding%20anything%20to%20the%20contrary%20in%20this%20Agreement%2C%20or,which%20such%20Interests%20are%20offered.", "proposition": "The filed Apollo IG Core Replacement agreement lets the general partner enter into separate agreements with certain limited partners that establish rights under, or alter or supplement, the agreement's terms.", "verbatimQuote": "Notwithstanding anything to the contrary in this Agreement, or of any Subscription Agreement, the Partners hereto acknowledge and agree that the General Partner on its own behalf or on behalf of the Partnership, in its sole discretion and without prior notice to or further act, approval or consent of any Limited Partner, may enter into agreements (“Other Agreements”) with certain Limited Partners that have the effect of establishing rights under, or altering or supplementing the terms of, this Agreement or of any Subscription Agreement with respect to such Limited Partner, including with respect to the Management Fee, withdrawal rights, information rights, voting rights or other rights or the currency in respect of which such Interests are offered.", "pullQuoteLocator": "Notwithstanding anything to the contrary in this Agreement, or|which such Interests are offered.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-apollo-filed-other-agreements" }, { "id": "risk-side", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed undisclosed preferential liquidity side letters.", "verbatimQuote": "The staff observed private fund advisers that entered into agreements with select investors (“side letters”) that established special terms, including preferential liquidity terms, but did not provide adequate disclosure about these side letters. As a result, some investors were unaware of the potential harm that could be caused if the selected investors exercised the special terms granted by the side letters.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-side" } ] }, { "slug": "amending-a-hedge-fund-limited-partnership-agreement", "label": "Amending a hedge fund LPA", "heading": "What's the process for amending a hedge fund limited partnership agreement?", "answerText": "A hedge fund limited partnership agreement sets the investor vote needed to amend it and may let the general partner make narrower amendments alone.", "sources": [ { "id": "stilwell-filed-amendment-power", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Stilwell Value Partners I, L.P., Amended and Restated Limited Partnership Agreement (2008), § 9.1(a)", "citation": "Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 9.1(a) (dated Oct. 1, 2008), filed as Exhibit 10.56.", "url": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm#:~:text=The%20Partnership%20Agreement%20may%20be,to%20the%20Limited%20Partners%E2%80%99%20interests.", "proposition": "The filed Stilwell agreement lets the general partner amend without investor notice or consent so long as the amendment is not materially adverse to investors.", "verbatimQuote": "The Partnership Agreement may be amended by the General Partner in its sole discretion without notification to, or the consent of the Limited Partners, at any time and without any limitation, so long as such amendment is not materially adverse to the Limited Partners’ interests.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-stilwell-filed-amendment-power" }, { "id": "seidman-filed-amendment-threshold", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Seidman Investment Partnership II, L.P., Second Amended and Restated Agreement of Limited Partnership (2005), § 57", "citation": "Seidman Investment Partnership II, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 57 (dated Oct. 15, 2005), filed as Exhibit 99.5.", "url": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt#:~:text=This%20Agreement%20may%20be%20amended%2C,not%20consented%20to%20such%20amendment.", "proposition": "The filed Seidman agreement requires the general partner and partners holding at least 50 percent of total capital-account value to approve an amendment.", "verbatimQuote": "This Agreement may be amended, in whole or in part, by the written consent of (a) the General Partner, and (b) Partners the value of whose Capital Account constitute not less than fifty percent (50%) of the total value of all Capital Accounts of the Partnership, provided that no such amendment shall affect the allocation of Net Profit or Net Loss to any Partner who has not consented to such amendment.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-seidman-filed-amendment-threshold" }, { "id": "sec-lp-2", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Limited Partner", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20limited%20partner%20is%20an,by%20a%20Limited%20Partnership%20Agreement.", "proposition": "The SEC staff describes the limited partner and its LPA relationship.", "verbatimQuote": "A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-lp-2" }, { "id": "lion-filed-amendment-threshold", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "The Lion Fund II, L.P., Second Amended and Restated Partnership Agreement (2021), § 14.07", "citation": "The Lion Fund II, L.P., Second Am. & Restated P'ship Agreement § 14.07 (dated May 26, 2021), filed as Exhibit 10.1 to Biglari Holdings Inc. Form 8-K.", "url": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1726173/000172617321000019/exhibit101to8-k.htm#:~:text=Amendments%20or%20modifications%20may%20be,amendment%20to%20such%20Limited%20Partner).", "proposition": "The filed Lion Fund II agreement requires amendments to be executed by the general partner and limited partners owning at least 51 percent of limited partners' interests, which may be given by negative consent.", "verbatimQuote": "Amendments or modifications may be made to this Agreement only by setting forth such amendments or modifications in a document duly executed by the General Partner and Limited Partners owning at least fifty-one percent (51%) of the Interests of all of the Limited Partners (which may be in the form of a negative consent, such that a Limited Partner will be deemed to have consented to a proposed amendment if the General Partner does not receive notification of such Limited Partner's objection within ten business days of the General Partner's providing notice of the proposed amendment to such Limited Partner).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-lion-filed-amendment-threshold" } ] }, { "slug": "hedge-fund-dissolution", "label": "Dissolution", "heading": "What should a hedge fund agreement say about dissolution?", "answerText": "A hedge fund agreement says what happens when the fund dissolves, and a limited partnership agreement filed with the SEC for Stilwell Value Partners has the general partner liquidate the fund or appoint a liquidator.", "sources": [ { "id": "stilwell-filed-liquidation-on-dissolution", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Stilwell Value Partners I, L.P., Amended and Restated Limited Partnership Agreement (2008), § 8.2(a)", "citation": "Stilwell Value Partners I, L.P., Am. & Restated Ltd. P'ship Agreement § 8.2(a) (dated Oct. 1, 2008), filed as Exhibit 10.56.", "url": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/1118148/000095012310023944/k48957exv10w56.htm#:~:text=Upon%20dissolution%20of%20the%20Partnership%2C,administrative%20affairs%20of%20the%20Partnership.", "proposition": "The filed Stilwell agreement requires the general partner, on dissolution, to liquidate the partnership's affairs or appoint a liquidator, with a fallback liquidator appointed by limited partners holding more than half of partnership percentages.", "verbatimQuote": "Upon dissolution of the Partnership, the General Partner shall promptly liquidate the business and administrative affairs of the Partnership, or shall appoint a liquidator to do so however, if the General Partner is unable to liquidate the Partnership, or appoint a liquidator, a Person appointed by the holders of more than 50% of the aggregate Partnership Percentages of all Limited Partners shall liquidate the business and administrative affairs of the Partnership.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-stilwell-filed-liquidation-on-dissolution" }, { "id": "sec-lp-3", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Limited Partner", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20limited%20partner%20is%20an,by%20a%20Limited%20Partnership%20Agreement.", "proposition": "The SEC staff describes the limited partner and its LPA relationship.", "verbatimQuote": "A limited partner is an investor who commits capital to a private fund. Unlike a general partner, a limited partner’s participation in the fund’s investment activities is restricted, and its personal liability for fund debt is limited to the amount of money that the limited partner contributed or committed to contribute. The relationship of a limited partner with the fund and the general partner is governed by a Limited Partnership Agreement.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-lp-3" }, { "id": "custody-rule-annual-audit", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-2(b)(4): Pooled-vehicle annual-audit route", "citation": "17 C.F.R. § 275.206(4)-2(b)(4)(i)-(iii).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2", "proposition": "Rule 206(4)-2(b)(4)'s pooled-vehicle annual-audit route requires annual generally accepted accounting principles financial statements distributed within 120 days after fiscal year-end, an independent public accountant meeting the stated PCAOB conditions, and audited statements upon liquidation.", "verbatimQuote": "You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))): (i) At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year; (ii) By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and (iii) Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-custody-rule-annual-audit" } ] }, { "slug": "what-is-a-private-placement-memorandum", "label": "What a PPM is", "heading": "What is a private placement memorandum (PPM), and why do hedge funds use one?", "answerText": "A private placement memorandum (PPM) is the detailed disclosure document a hedge fund gives potential investors in an offering that relies on an exemption from SEC registration, such as Securities Act section 4(a)(2) or Regulation D Rule 506.", "sources": [ { "id": "ppm-private-offering-statute", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 77d(a)(1)-(2): Exempted transactions", "citation": "15 U.S.C. § 77d(a)(1)-(2).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2A-subchapI-sec77d.htm", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-ppm-private-offering-statute" }, { "id": "ppm-rule-506-safe-harbor", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.506(a): Exemption", "citation": "17 C.F.R. § 230.506(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506", "proposition": "Rule 506(a) deems offers and sales that satisfy rule 506(b) or 506(c) to be transactions not involving any public offering within the meaning of section 4(a)(2).", "verbatimQuote": "Offers and sales of securities by an issuer that satisfy the conditions in paragraph (b) or (c) of this section shall be deemed to be transactions not involving any public offering within the meaning of section 4(a)(2) of the Act.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-ppm-rule-506-safe-harbor" }, { "id": "seidman-filed-offering-memorandum-conflict", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Seidman Investment Partnership II, L.P., Second Amended and Restated Agreement of Limited Partnership (2005), § 62(e)", "citation": "Seidman Investment Partnership II, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 62(e) (dated Oct. 15, 2005), filed as Exhibit 99.5.", "url": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt#:~:text=If%20there%20is%20a%20conflict,this%20Agreement%20shall%20be%20controlling.", "proposition": "The filed Seidman agreement makes the partnership agreement control over any conflicting offering memorandum of the partnership.", "verbatimQuote": "If there is a conflict between the terms and conditions of this Agreement and any offering memorandum of the Partnership, this Agreement shall be controlling.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-seidman-filed-offering-memorandum-conflict" }, { "id": "sec-ppm-definition", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”: Capital Raise Considerations", "citation": "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).", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff's private-fund guide describes a private placement memorandum as a detailed disclosure document for potential investors and a subscription agreement as the contract through which investors invest.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-ppm-definition" }, { "id": "ppm-antifraud-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-8: Pooled investment vehicles", "citation": "17 C.F.R. § 275.206(4)-8(a)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-8", "proposition": "Rule 206(4)-8 prohibits an adviser to a pooled investment vehicle from making untrue statements of material fact or misleading omissions to any investor or prospective investor in the vehicle.", "verbatimQuote": "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", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-ppm-antifraud-rule" } ] }, { "slug": "checking-a-hedge-fund-ppm-against-its-limited-partnership-agreement", "label": "Matching a PPM and LPA", "heading": "How can I check that a hedge fund's PPM and limited partnership agreement say the same thing?", "answerText": "A hedge fund's PPM and limited partnership agreement match when the PPM's description of each material term matches the agreement provision that controls it.", "sources": [ { "id": "reconciliation-seidman-conflict", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Seidman Investment Partnership II, L.P., Second Amended and Restated Agreement of Limited Partnership (2005), § 62(e)", "citation": "Seidman Investment Partnership II, L.P., Second Am. & Restated Agreement of Ltd. P'ship § 62(e) (dated Oct. 15, 2005), filed as Exhibit 99.5.", "url": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt", "deepLink": "https://www.sec.gov/Archives/edgar/data/1026081/000113379606000145/cb61088ex995.txt#:~:text=If%20there%20is%20a%20conflict,this%20Agreement%20shall%20be%20controlling.", "proposition": "The filed Seidman agreement makes the partnership agreement control over any conflicting offering memorandum of the partnership.", "verbatimQuote": "If there is a conflict between the terms and conditions of this Agreement and any offering memorandum of the Partnership, this Agreement shall be controlling.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-reconciliation-seidman-conflict" }, { "id": "reconciliation-antifraud-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-8: Pooled investment vehicles", "citation": "17 C.F.R. § 275.206(4)-8(a)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-8", "proposition": "Rule 206(4)-8 prohibits material misstatements and misleading omissions to investors and prospective investors in pooled investment vehicles.", "verbatimQuote": "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", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-reconciliation-antifraud-rule" }, { "id": "risk-rule", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "The SEC staff describes Rule 206(4)-8’s prohibition of material misstatements and misleading omissions.", "verbatimQuote": "In addition, Advisers Act Rule 206(4)-8 prohibits investment advisers to pooled investment vehicles from (1) making any untrue statement of a material fact or omitting 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 engaging 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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-rule" } ] }, { "slug": "rule-506b-vs-rule-506c", "label": "Rule 506(b) and 506(c)", "heading": "How do Rule 506(b) and Rule 506(c) differ?", "answerText": "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.", "sources": [ { "id": "offering-section-4a2", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 77d(a)(1)-(2): Exempted transactions", "citation": "15 U.S.C. § 77d(a)(1)-(2).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2A-subchapI-sec77d.htm", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-section-4a2" }, { "id": "offering-general-solicitation-limit", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.502(c): Limitation on manner of offering", "citation": "17 C.F.R. § 230.502(c).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.502", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-general-solicitation-limit" }, { "id": "offering-rule-506c", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.506(c): Offerings using general solicitation", "citation": "17 C.F.R. § 230.506(c)(2)(i).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506", "proposition": "Rule 506(c) requires all purchasers to be accredited investors.", "verbatimQuote": "All purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-rule-506c" }, { "id": "offering-rule-506c-verification", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.506(c)(2)(ii): Accredited-investor verification", "citation": "17 C.F.R. § 230.506(c)(2)(ii).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506", "proposition": "Rule 506(c) requires the issuer to take reasonable steps to verify purchasers' accredited-investor status.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-rule-506c-verification" }, { "id": "sec-4a2", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Section 4(a)(2)", "citation": "SEC Small Business Glossary.", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=Section%204(a)(2)%20of%20the%20Securities,with%20the%20Section%204(a)(2)%20exemption.", "proposition": "The SEC staff describes the private-offering exemption and Rule 506 pathways.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-4a2" }, { "id": "offering-rule-506b-purchasers", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.506(b)(2)(i)-(ii): Purchaser limit and sophistication", "citation": "17 C.F.R. § 230.506(b)(2)(i)-(ii) & note 1 to paragraph (b)(2)(i).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-rule-506b-purchasers" }, { "id": "offering-nonaccredited-information", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.502(b): Information requirements", "citation": "17 C.F.R. § 230.502(b)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.502", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-nonaccredited-information" }, { "id": "offering-resale-limit", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.502(d): Limitations on resale", "citation": "17 C.F.R. § 230.502(d).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.502", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-resale-limit" }, { "id": "offering-bad-actor-disqualification", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.506(d)(1): Bad-actor disqualification", "citation": "17 C.F.R. § 230.506(d)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.506", "proposition": "Rule 506(d)(1) makes the exemption unavailable when a listed offering participant has a disqualifying event specified by the rule.", "verbatimQuote": "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:", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-offering-bad-actor-disqualification" } ] }, { "slug": "section-3c1-vs-section-3c7-funds", "label": "3(c)(1) and 3(c)(7) funds", "heading": "What is the difference between a 3(c)(1) fund and a 3(c)(7) fund?", "answerText": "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.", "sources": [ { "id": "private-fund-section-3c1", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 80a-3(c)(1): Private-fund exclusion", "citation": "15 U.S.C. § 80a-3(c)(1).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-3.htm", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-private-fund-section-3c1" }, { "id": "private-fund-section-3c7", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 80a-3(c)(7): Qualified-purchaser private-fund exclusion", "citation": "15 U.S.C. § 80a-3(c)(7)(A).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-3.htm", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-private-fund-section-3c7" }, { "id": "fast-company", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Division of Investment Management, Investment Company Registration and Regulation Package", "citation": "SEC Division of Investment Management, Investment Company Registration and Regulation Package.", "url": "https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html", "deepLink": "https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html#:~:text=Section%203(a)(1)(A)%20of%20the%20Investment,reinvesting%20or%20trading%20in%20%E2%80%9Csecurities.%E2%80%9D", "proposition": "The SEC staff describes the Investment Company Act definition.", "verbatimQuote": "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.”", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-fast-company" }, { "id": "fast-private", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Division of Investment Management, Investment Company Registration and Regulation Package", "citation": "SEC Division of Investment Management, Investment Company Registration and Regulation Package.", "url": "https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html", "deepLink": "https://www.sec.gov/investment/fast-answers/divisionsinvestmentinvcoreg121504htm.html#:~:text=Many%20companies%20rely%20on%20one,commonly%20known%20as%20%E2%80%9Chedge%20funds.%E2%80%9D", "proposition": "The SEC staff links the 3(c)(1) and 3(c)(7) exclusions to private investment companies and hedge funds.", "verbatimQuote": "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.”", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-fast-private" }, { "id": "private-fund-section-3c1-lookthrough", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 80a-3(c)(1)(A): Company-investor look-through", "citation": "15 U.S.C. § 80a-3(c)(1)(A).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-3.htm", "proposition": "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.", "verbatimQuote": "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).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-private-fund-section-3c1-lookthrough" }, { "id": "investor-gate-accredited-investor", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.501(a): Accredited investor", "citation": "17 C.F.R. § 230.501(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.501", "proposition": "Rule 501 tests accredited-investor status at the time of sale and includes a reasonable-belief path.", "verbatimQuote": "§ 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:", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-investor-gate-accredited-investor" }, { "id": "investor-gate-qualified-purchaser", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "15 U.S.C. § 80a-2(a)(51)(A): Qualified purchaser", "citation": "15 U.S.C. § 80a-2(a)(51)(A)(i)-(ii).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2D-subchapI-sec80a-2.htm", "proposition": "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.", "verbatimQuote": "(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;", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-investor-gate-qualified-purchaser" }, { "id": "exclusions-qualified-client-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.205-3(a): Qualified-client exemption", "citation": "17 C.F.R. § 275.205-3(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.205-3", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-exclusions-qualified-client-rule" }, { "id": "sec-glossary-private-fund", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Small Business Glossary: Private Fund", "citation": "SEC Small Business Glossary, Private Fund (SEC staff resource).", "url": "https://www.sec.gov/resources-small-businesses/glossary", "deepLink": "https://www.sec.gov/resources-small-businesses/glossary#:~:text=A%20private%20fund%20is%20a,Fund%20or%20a%203(c)(7)%20Fund.", "proposition": "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).", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-glossary-private-fund" } ] }, { "slug": "anti-fraud-rules-for-hedge-fund-offerings", "label": "Anti-fraud rules", "heading": "Do anti-fraud rules apply to a hedge fund offering?", "answerText": "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.", "sources": [ { "id": "sec-antifraud", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Private Funds Building Block", "citation": "SEC Private Funds Building Block.", "url": "https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/private-funds", "deepLink": "https://www.sec.gov/resources-small-businesses/capital-raising-building-blocks/private-funds#:~:text=Antifraud%20provisions%20of%20the%20federal,of%20the%20federal%20securities%20laws.", "proposition": "The SEC staff says antifraud provisions apply broadly to all funds and advisers.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-antifraud" }, { "id": "antifraud-securities-act-section-17a", "authorityType": "primary-law", "tier": "primary-source-backed", "title": "Securities Act of 1933 § 17(a), 15 U.S.C. § 77q(a)", "citation": "15 U.S.C. § 77q(a)(1)-(3).", "url": "https://www.govinfo.gov/content/pkg/USCODE-2023-title15/html/USCODE-2023-title15-chap2A-subchapI-sec77q.htm", "proposition": "Securities Act section 17(a) prohibits the listed fraudulent conduct in the offer or sale of securities.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-antifraud-securities-act-section-17a" }, { "id": "antifraud-rule-10b5", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 240.10b-5: Employment of manipulative and deceptive devices", "citation": "17 C.F.R. § 240.10b-5(a)-(c).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-240/subpart-A/section-240.10b-5", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-antifraud-rule-10b5" }, { "id": "pooled-vehicle-antifraud-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-8: Pooled investment vehicles", "citation": "17 C.F.R. § 275.206(4)-8(a)(1)-(2).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-8", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-pooled-vehicle-antifraud-rule" } ] }, { "slug": "form-d-filing", "label": "Form D", "heading": "What is Form D, and when is it filed?", "answerText": "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.", "sources": [ { "id": "sec-form", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC: Filing a Form D notice", "citation": "SEC: Filing a Form D notice.", "url": "https://www.sec.gov/resources-small-businesses/exempt-offerings/filing-form-d-notice", "deepLink": "https://www.sec.gov/resources-small-businesses/exempt-offerings/filing-form-d-notice#:~:text=A%20company%20must%20file%20this,to%20the%20next%20business%20day.", "proposition": "The SEC describes the Form D deadline and first-sale trigger.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-form" }, { "id": "form-d-filing-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 230.503(a): Filing of notice of sales", "citation": "17 C.F.R. § 230.503(a).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-230/section-230.503", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-form-d-filing-rule" }, { "id": "placement-agent-reg-d-not-exempt", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "SEC Guide to Broker-Dealer Registration: Private placements", "citation": "SEC Division of Trading and Markets, Guide to Broker-Dealer Registration, § II.D.4 (Apr. 2008).", "url": "https://www.sec.gov/about/divisions-offices/division-trading-markets/division-trading-markets-compliance-guides/guide-broker-dealer-registration", "deepLink": "https://www.sec.gov/about/divisions-offices/division-trading-markets/division-trading-markets-compliance-guides/guide-broker-dealer-registration#:~:text=A%20security%20sold%20in%20a,not%20exempt%20from%20broker%2Ddealer%20registration.", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-placement-agent-reg-d-not-exempt" }, { "id": "placement-agent-registration-indicators", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "SEC Guide to Broker-Dealer Registration: Transaction-role and compensation indicators", "citation": "SEC Division of Trading and Markets, Guide to Broker-Dealer Registration, § II.A (Apr. 2008).", "url": "https://www.sec.gov/about/divisions-offices/division-trading-markets/division-trading-markets-compliance-guides/guide-broker-dealer-registration", "deepLink": "https://www.sec.gov/about/divisions-offices/division-trading-markets/division-trading-markets-compliance-guides/guide-broker-dealer-registration#:~:text=Do%20you%20participate%20in%20important,receive%20any%20other%20transaction%2Drelated%20compensation%3F", "proposition": "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.", "verbatimQuote": "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?", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-placement-agent-registration-indicators" } ] }, { "slug": "hedge-fund-ppm-strategy-disclosure", "label": "Strategy disclosure", "heading": "What is the purpose of strategy disclosure in a hedge fund PPM?", "answerText": "Strategy disclosure in a hedge fund PPM explains how the fund seeks returns and which investments or techniques create its main exposures.", "sources": [ { "id": "inv-strategy", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov advises reading an offering memorandum to understand investment risks.", "verbatimQuote": "Read a fund's offering memorandum and related materials. Make sure you understand the level of risk involved in the fund's investment strategies. Consider if the risks are suitable to your personal investing goals, time horizons, and risk tolerance.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-strategy" }, { "id": "inv-leverage", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov says speculative techniques magnify gain and loss.", "verbatimQuote": "The use of these techniques will magnify both the potential gain and the potential loss from an investment.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-leverage" }, { "id": "nfa-cpo-status", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "NFA: Commodity Pool Operator Registration", "citation": "National Futures Association, Commodity Pool Operator (CPO) Registration.", "url": "https://www.nfa.futures.org/registration-membership/who-has-to-register/cpo.html", "proposition": "The National Futures Association states that a commodity pool combines contributed funds to trade specified commodity interests or invest in another commodity pool, and that CPO registration is required unless a CFTC Regulation 4.5 or 4.13 exemption applies.", "verbatimQuote": "A commodity pool operator (CPO) is an individual or organization that operates a commodity pool and solicits funds for that commodity pool. A commodity pool is an enterprise in which funds contributed by a number of persons are combined for the purpose of trading futures or options on futures, retail off-exchange forex contracts, or swaps, or to invest in another commodity pool. CPO registration is required unless the CPO qualifies for one of the exemptions from registration outlined in CFTC Regulations 4.5 or 4.13.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-nfa-cpo-status" }, { "id": "nfa-cta-status", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "NFA: Commodity Trading Advisor Registration", "citation": "National Futures Association, Commodity Trading Advisor (CTA) Registration.", "url": "https://www.nfa.futures.org/registration-membership/who-has-to-register/cta.html", "proposition": "The National Futures Association states that a commodity trading advisor is a person that, for compensation or profit, advises others about trading specified commodity interests.", "verbatimQuote": "A commodity trading advisor (CTA) is an individual or organization that, for compensation or profit, advises others, directly or indirectly, as to the value of or the advisability of trading futures contracts, options on futures, retail off-exchange forex contracts or swaps.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-nfa-cta-status" }, { "id": "nfa-exemption-filing", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "NFA Exemptions System: Electronic filing", "citation": "National Futures Association, Exemptions.", "url": "https://www.nfa.futures.org/electronic-filing-systems/exemptions.html", "proposition": "The National Futures Association states that CPOs and CTAs must file notices of exclusion or exemption from CFTC Part 4 requirements electronically through NFA's Exemptions System.", "verbatimQuote": "Commodity pool operators (CPO) and commodity trading advisors (CTA) must electronically file with NFA notices of exclusion or exemption from CFTC Part 4 Requirements using NFA's Exemptions System. In order to access this system, the firm's security manager(s) must set up EasyFile security.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-nfa-exemption-filing" }, { "id": "nfa-exemption-affirmation", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "NFA Exemptions System: Annual affirmation", "citation": "National Futures Association, Exemptions, Annual Affirmation Process.", "url": "https://www.nfa.futures.org/electronic-filing-systems/exemptions.html", "proposition": "The National Futures Association states that CFTC regulations require specified CPO and CTA exemption or exclusion notices to be affirmed annually within 60 days of calendar year-end.", "verbatimQuote": "CFTC regulations require any person claiming an exemption or exclusion from CPO registration under CFTC Regulation 4.5, 4.13(a)(1), 4.13(a)(2), 4.13(a)(3), 4.13(a)(5) or an exemption from CTA registration under 4.14(a)(8) to annually affirm the applicable notice of exemption or exclusion within 60 days of the calendar year end.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-nfa-exemption-affirmation" } ] }, { "slug": "hedge-fund-ppm-risk-factors", "label": "Risk factors", "heading": "What is the purpose of risk-factor disclosure in a hedge fund PPM?", "answerText": "Risk-factor disclosure in a hedge fund PPM explains how strategy and operations could cause investor loss, with material statements subject to the pooled-vehicle antifraud rule.", "sources": [ { "id": "inv-leverage-2", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov says speculative techniques magnify gain and loss.", "verbatimQuote": "The use of these techniques will magnify both the potential gain and the potential loss from an investment.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-leverage-2" }, { "id": "strategy-antifraud-rule", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-8: Pooled investment vehicles", "citation": "17 C.F.R. § 275.206(4)-8(a)(1).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-8", "proposition": "Rule 206(4)-8(a)(1) prohibits an adviser to a pooled investment vehicle from making untrue statements of material fact or misleading omissions to any investor or prospective investor in the vehicle.", "verbatimQuote": "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", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-strategy-antifraud-rule" } ] }, { "slug": "hedge-fund-ppm-conflicts-of-interest", "label": "Conflicts of interest", "heading": "What is the purpose of conflicts-of-interest disclosure in a hedge fund PPM?", "answerText": "Conflicts disclosure in a hedge fund PPM identifies interests that could pull the adviser away from the fund’s interests and explains them sufficiently for informed consent.", "sources": [ { "id": "risk-conflict", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "The SEC staff describes an adviser’s conflict-disclosure obligation.", "verbatimQuote": "An investment adviser must eliminate or make full and fair disclosure of all conflicts of interest which might incline an investment adviser – consciously or unconsciously – to render advice which is not disinterested such that a client can provide informed consent to the conflict.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-conflict" }, { "id": "risk-alloc", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020)", "citation": "SEC Office of Compliance Inspections and Examinations, Risk Alert: Observations from Examinations of Investment Advisers Managing Private Funds (June 23, 2020).", "url": "https://www.sec.gov/files/Private%20Fund%20Risk%20Alert_0.pdf", "proposition": "SEC examination staff observed inadequate disclosure of allocation conflicts.", "verbatimQuote": "The staff observed private fund advisers that did not provide adequate disclosure about conflicts relating to allocations of investments among clients, including the adviser’s largest private fund clients (“flagship funds”), private funds that invest alongside flagship funds in the same investments (“coinvestment vehicles”), sub-advised mutual funds, collateralized loan obligation funds, and separately managed accounts (“SMAs”) (together, “clients”).", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-risk-alloc" } ] }, { "slug": "hedge-fund-ppm-service-providers", "label": "Service providers", "heading": "What should a hedge fund PPM say about service providers?", "answerText": "A hedge fund PPM names the fund's service providers and says what each one does, as a registered fund's memorandum filed with the SEC does for its administrator and its legal counsel.", "sources": [ { "id": "inv-value-2", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "Investor.gov: Hedge Funds", "citation": "Investor.gov: Hedge Funds.", "url": "https://www.investor.gov/introduction-investing/investing-basics/investment-products/private-investment-funds/hedge-funds", "proposition": "Investor.gov advises examination of valuation and independent sources.", "verbatimQuote": "Hedge funds may hold investments that are difficult to sell and may be difficult to value. You should understand how a hedge fund determines the value of its holdings and the extent to which a fund’s holdings are valued by independent sources.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-inv-value-2" }, { "id": "custody-rule-scope", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-2(a)(1): Scope and qualified-custodian condition", "citation": "17 C.F.R. § 275.206(4)-2(a)(1)(i)-(ii).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2", "proposition": "Rule 206(4)-2 applies its safekeeping conditions to advisers registered or required to be registered under section 203.", "verbatimQuote": "If you are an investment adviser registered or required to be registered under section 203 of the Act (15 U.S.C. 80b-3), it is 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 you to have custody of client funds or securities unless: (1) Qualified custodian. A qualified custodian maintains those funds and securities: (i) In a separate account for each client under that client's name; or (ii) In accounts that contain only your clients' funds and securities, under your name as agent or trustee for the clients.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-custody-rule-scope" }, { "id": "custody-rule-general-partner", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-2(d)(2): Custody includes general-partner capacity", "citation": "17 C.F.R. § 275.206(4)-2(d)(2)(i)-(iii).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2", "proposition": "Rule 206(4)-2(d)(2) states that custody includes possession of client assets, specified withdrawal authority, and, under paragraph (d)(2)(iii), a general-partner or comparable capacity that gives the adviser or a supervised person legal ownership of or access to client assets.", "verbatimQuote": "Custody includes: (i) Possession of client funds or securities (but not of checks drawn by clients and made payable to third parties) unless you receive them inadvertently and you return them to the sender promptly but in any case within three business days of receiving them; (ii) Any arrangement (including a general power of attorney) under which you are authorized or permitted to withdraw client funds or securities maintained with a custodian upon your instruction to the custodian; and (iii) Any capacity (such as general partner of a limited partnership, managing member of a limited liability company or a comparable position for another type of pooled investment vehicle, or trustee of a trust) that gives you or your supervised person legal ownership of or access to client funds or securities.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-custody-rule-general-partner" }, { "id": "custody-rule-annual-audit-2", "authorityType": "regulation", "tier": "primary-source-backed", "title": "17 CFR 275.206(4)-2(b)(4): Pooled-vehicle annual-audit route", "citation": "17 C.F.R. § 275.206(4)-2(b)(4)(i)-(iii).", "url": "https://www.ecfr.gov/current/title-17/chapter-II/part-275/section-275.206(4)-2", "proposition": "Rule 206(4)-2(b)(4)'s pooled-vehicle annual-audit route requires annual generally accepted accounting principles financial statements distributed within 120 days after fiscal year-end, an independent public accountant meeting the stated PCAOB conditions, and audited statements upon liquidation.", "verbatimQuote": "You are not required to comply with paragraphs (a)(2) and (a)(3) of this section and you shall be deemed to have complied with paragraph (a)(4) of this section with respect to the account of a limited partnership (or limited liability company, or another type of pooled investment vehicle) that is subject to audit (as defined in rule 1-02(d) of Regulation S-X (17 CFR 210.1-02(d))): (i) At least annually and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) within 120 days of the end of its fiscal year; (ii) By an independent public accountant that is registered with, and subject to regular inspection as of the commencement of the professional engagement period, and as of each calendar year-end, by, the Public Company Accounting Oversight Board in accordance with its rules; and (iii) Upon liquidation and distributes its audited financial statements prepared in accordance with generally accepted accounting principles to all limited partners (or members or other beneficial owners) promptly after the completion of such audit.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-custody-rule-annual-audit-2" }, { "id": "constitution-administrator", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Administrator", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=The%20Fund%20has%20contracted%20with,certain%20administrative%20and%20accounting%20services.", "proposition": "A registered closed-end fund's private placement memorandum filed with the SEC names its administrator and the services the administrator provides.", "verbatimQuote": "The Fund has contracted with UMB Fund Services, Inc (the “Administrator”) to provide it with certain administrative and accounting services.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-administrator" }, { "id": "constitution-counsel", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Legal Counsel", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=Faegre%20Drinker%20Biddle%20%26%20Reath%20LLP%2C,the%20Adviser%20of%20the%20Fund.", "proposition": "A registered closed-end fund's private placement memorandum filed with the SEC names its legal counsel, gives counsel's address, and states whom counsel represents.", "verbatimQuote": "Faegre Drinker Biddle & Reath LLP, of One Logan Square, Suite 2000, Philadelphia, PA 19103-6996, serves as counsel to the Fund and the Adviser of the Fund.", "pullQuoteLocator": "Faegre Drinker Biddle & Reath LLP,|the Adviser of the Fund.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-counsel" } ] }, { "slug": "hedge-fund-ppm-taxes", "label": "Taxes", "heading": "What should a hedge fund PPM say about taxes?", "answerText": "A hedge fund's private placement memorandum (PPM) describes how the fund expects to be taxed, as a memorandum filed with the SEC does when it states that its fund will be classified as a partnership for U.S. federal income tax purposes.", "sources": [ { "id": "sec-ppm-definition-tax", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”: Capital Raise Considerations", "citation": "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).", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff's private-fund guide describes a private placement memorandum as a detailed disclosure document for potential investors and a subscription agreement as the contract through which investors invest.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-ppm-definition-tax" }, { "id": "constitution-tax-classification", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Certain U.S. Federal Income Tax Considerations", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=The%20Fund%20is%20a%20limited,U.S.%20federal%20income%20tax%20purposes.", "proposition": "A private placement memorandum filed with the SEC states that its fund will be classified as a partnership for U.S. federal income tax purposes.", "verbatimQuote": "The Fund is a limited liability company, and no election will be filed with the IRS to cause it to be classified as a corporation for federal income tax purposes. Accordingly, the Fund will be classified as a partnership for U.S. federal income tax purposes.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-tax-classification" } ] }, { "slug": "hedge-fund-ppm-retirement-plan-investors", "label": "Retirement-plan investors", "heading": "What should a hedge fund PPM say about retirement-plan (ERISA) investors?", "answerText": "A hedge fund PPM explains how the fund treats retirement-plan investors, because a plan investing in the fund can be treated as holding the fund's underlying assets unless an exception applies, such as limited participation by benefit plan investors.", "sources": [ { "id": "erisa-25-percent-test", "authorityType": "regulation", "tier": "primary-source-backed", "title": "29 CFR 2510.3-101(f)(1): Significant benefit-plan-investor participation", "citation": "29 C.F.R. § 2510.3-101(f)(1).", "url": "https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-101", "proposition": "29 C.F.R. § 2510.3-101(f)(1) treats benefit-plan-investor participation as significant when benefit plan investors hold at least 25 percent of the value of any class immediately after the most recent acquisition, disregarding interests held by a non-plan person with discretionary authority or control over the entity's assets or who gives paid investment advice about them, and by that person's affiliates.", "verbatimQuote": "Equity participation in an entity by benefit plan investors is “significant” on any date if, immediately after the most recent acquisition of any equity interest in the entity, 25 percent or more of the value of any class of equity interests in the entity is held by benefit plan investors (as defined in paragraph (f)(2)). For purposes of determinations pursuant to this paragraph (f), the value of any equity interests held by a person (other than a benefit plan investor) who has discretionary authority or control with respect to the assets of the entity or any person who provides investment advice for a fee (direct or indirect) with respect to such assets, or any affiliate of such a person, shall be disregarded.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-erisa-25-percent-test" }, { "id": "plan-assets-look-through", "authorityType": "regulation", "tier": "primary-source-backed", "title": "29 CFR 2510.3-101(a)(2): Plan assets in an investment fund", "citation": "29 C.F.R. § 2510.3-101(a)(2).", "url": "https://www.ecfr.gov/current/title-29/subtitle-B/chapter-XXV/subchapter-B/part-2510/section-2510.3-101", "proposition": "29 C.F.R. § 2510.3-101(a)(2) treats a plan's assets as including an undivided interest in the underlying assets of an entity whose equity is neither publicly offered nor issued by a registered investment company, unless the entity is an operating company or benefit-plan-investor participation is not significant.", "verbatimQuote": "However, in the case of a plan's investment in an equity interest of an entity that is neither a publicly-offered security nor a security issued by an investment company registered under the Investment Company Act of 1940 its assets include both the equity interest and an undivided interest in each of the underlying assets of the entity, unless it is established that— (i) The entity is an operating company, or (ii) Equity participation in the entity by benefit plan investors is not significant.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-plan-assets-look-through" }, { "id": "constitution-erisa-considerations", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), ERISA Considerations", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=In%20accordance%20with%20ERISA%E2%80%99s%20general,and%20diversification%20of%20its%20portfolio.", "proposition": "A private placement memorandum filed with the SEC includes an ERISA considerations section addressed to plan fiduciaries.", "verbatimQuote": "In accordance with ERISA’s general fiduciary standards, before investing in the Fund, a Plan fiduciary should determine whether such an investment is permitted under the governing Plan instruments and is appropriate for the Plan in view of its overall investment policy and the composition and diversification of its portfolio.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-erisa-considerations" } ] }, { "slug": "hedge-fund-ppm-subscriptions", "label": "Subscriptions", "heading": "What should a hedge fund PPM say about subscriptions?", "answerText": "A hedge fund's private placement memorandum (PPM) explains how an investor subscribes, as a memorandum filed with the SEC does when it requires a completed subscription document by the fund's acceptance date and reserves the fund's right to accept or reject any subscription.", "sources": [ { "id": "investment-adviser-aml-delay", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "FinCEN: Investment-adviser AML rule postponed to 2028", "citation": "FinCEN, FinCEN Issues Final Rule to Postpone Effective Date of Investment Adviser Rule to 2028 (Dec. 31, 2025).", "url": "https://www.fincen.gov/news/news-releases/fincen-issues-final-rule-postpone-effective-date-investment-adviser-rule-2028", "proposition": "FinCEN's final-rule announcement states that it moved the investment-adviser AML/CFT program and suspicious-activity-report rule's effective date from January 1, 2026 to January 1, 2028.", "verbatimQuote": "Today, the U.S. Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule to extend the effective date of the rule establishing Anti-Money Laundering/Countering the Financing of Terrorism Program and Suspicious Activity Report Filing Requirements for Registered Investment Advisers and Exempt Reporting Advisers (IA AML Rule) from January 1, 2026, until January 1, 2028.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-investment-adviser-aml-delay" }, { "id": "sec-ppm-definition-subscriptions", "authorityType": "agency-guidance", "tier": "official-source-backed", "title": "SEC Office of the Advocate for Small Business Capital Formation, “What do I need to know before starting a private fund?”: Capital Raise Considerations", "citation": "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).", "url": "https://www.sec.gov/files/starting-private-fund-building-blocks.pdf", "proposition": "The SEC staff's private-fund guide describes a private placement memorandum as a detailed disclosure document for potential investors and a subscription agreement as the contract through which investors invest.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-sec-ppm-definition-subscriptions" }, { "id": "constitution-subscription-deadline", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Subscription Procedure", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=A%20prospective%20investor%20must%20submit,and%20notified%20to%20prospective%20investors.", "proposition": "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.", "verbatimQuote": "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.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-subscription-deadline" }, { "id": "constitution-subscription-discretion", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Subscription Procedure", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=The%20Fund%20reserves%20the%20right%2C,the%20Fund%20at%20any%20time.", "proposition": "A private placement memorandum filed with the SEC reserves the fund's sole discretion to accept or reject any subscription.", "verbatimQuote": "The Fund reserves the right, in its sole discretion, to accept or reject any subscription to purchase Units in the Fund at any time.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-subscription-discretion" }, { "id": "constitution-subscription-qualifications", "authorityType": "commentary", "tier": "lawyer-judgment-backed", "title": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum (2026), Eligible Investors", "citation": "Constitution Capital Evergreen Partnership Fund, LLC, Confidential Private Placement Memorandum, filed as Part A of Form N-2 (Post-Effective Amendment, 2026).", "url": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm", "deepLink": "https://www.sec.gov/Archives/edgar/data/2102111/000121390026044539/ea0285996-01_posami.htm#:~:text=The%20qualifications%20required%20to%20invest,completed%20by%20each%20prospective%20investor.", "proposition": "A private placement memorandum filed with the SEC states that the qualifications required to invest appear in subscription documents each prospective investor must complete.", "verbatimQuote": "The qualifications required to invest in the Fund appear in subscription documents that must be completed by each prospective investor.", "anchor": "https://openagreements.org/practice-guides/fund-formation/us/hedge-funds#src-constitution-subscription-qualifications" } ] } ] } }