Hedge Funds – Maintaining the Private Placement Exemption 对冲基金–保持私募发行豁免

1、 Copyright, Briggs and Morgan, Professional Association, 2006-2008Hedge Funds Maintaining the Private Placement Exemption Advanced2008 NSCP Midwest Membership MeetingChicago, IllinoisApril 28, 2008 Copyright, Briggs and Morgan, Professional Association, 2006-2008DisclaimerThis publication is circula

2、ted to bring useful and timely information to our clients and colleagues. The publication is for general information purposes only and is not legal advice. You should not rely on any information or views contained in the publication in evaluating any specific legal issues you may have. Please consul

3、t your Briggs and Morgan attorney for specific legal advice. Any U.S. Federal tax advice contained in this communication (whether distributed by mail, email or fax) is not intended or written to be used, and it cannot be used by any person for the purpose of avoiding U.S. Federal tax penalties or fo

4、r the purpose of promoting, marketing or recommending any entity, investment plan or other transaction. (The foregoing legend has been affixed pursuant to U.S. Treasury Regulations governing tax practice.) Copyright, Briggs and Morgan, Professional Association, 2006-2008Summary Introduction to Hedge

5、 Funds Maintaining Private Placement Exemption Marketing Copyright, Briggs and Morgan, Professional Association, 2006-2008ResourcesPrinciples and Best Practices for Hedge Fund Investors Report of the Investors Committee to the Presidents Working Group on Financial Markets April 15, 2008Best Practice

6、s for the Hedge Fund Industry Report of the Presidents Working Group on Financial MarketsAlternative Investment Management Association (AIMA) AIMAs Guide to Sound Practices for Hedge Fund Valuation, March 2007International Organization of Securities Commissions (“IOSCO”) Principles for the Valuation

7、 of Hedge Fund Portfolios, March 2007Hedge Fund Working Group January 28, 2008, Hedge Fund Standards: Final Report. Copyright, Briggs and Morgan, Professional Association, 2006-2008What is a Hedge Fund?D.C. Circuit: “Entity that holds a pool of securities or other investments that does not register

8、its offerings under the Securities Act, and is not registered under the Investment Company Act.”PWG: Pooled investment vehicle (i) not marketed to general public; (ii) investors are limited to high net worth individuals and institutions; (iii) not registered as an investment company; (iv) profession

9、al asset manager; (v) investing in liquid portfolio of securities and other assets; (vi) periodic but restricted or limited redemption rights. (MFA, Sound Practices for Hedge Fund Managers, 2007). Copyright, Briggs and Morgan, Professional Association, 2006-2008Hedge Funds, cont. Alternative investm

10、ent vehicle Trades in stock, securities, other instruments Free of regulatory constraints Originally, designed to reduce market risk through “hedging” Hedge funds “market” inefficiencies No longer market neutral Often employ “straddles” that bet whether trading ratio will contract or expand between

11、two securities Copyright, Briggs and Morgan, Professional Association, 2006-2008Hedge Funds, cont. Wide varieties Long and short investments in equities, fixed income securities, currencies, commodities, and their derivatives Leveraged Usually managed through a combination of long and short position

12、s to limit exposure Counterparty risks Copyright, Briggs and Morgan, Professional Association, 2006-2008Hedge Fund v. Private Equity Fund Hedge Fund is NOT a private equity fund Liquidity Hedge fund has more liquidity Private equity investor is long term Hedge fund should have a perpetual life Hedge

13、 fund investor disposes of investment in a single transaction Hedge fund has a broader investment mandate Private equity funds often look to buy stakes in companies Copyright, Briggs and Morgan, Professional Association, 2006-2008Hedge Fund v. Mutual Fund Hedge fund is not a mutual fund Both invest

14、in marketable securities Both have liquidity Hedge fund tries to generate positive returns in all environments Mutual fund return is compared to “benchmarks” Different in market risk, investors, fees, diversification, leverage and regulation Copyright, Briggs and Morgan, Professional Association, 20

15、06-2008Differences: Hedge Fund v. Mutual Fund Fees Hedge fund manager charges fee as a fixed percentage of gain Mutual fund cannot Mutual Funds are registered under 33 Act Hedge funds are not registered Exempt from registration, 4(2) of the Act Most hedge funds exempt from 40 Act 3(c)(1), which excl

16、udes funds with 100 or less investors 3(c)(7), which excludes funds with “qualified purchasers” Copyright, Briggs and Morgan, Professional Association, 2006-2008Advantages of not registering By not registering as investment company Avoids leverage constraints on open ended fund Avoids 18(f) limits f

17、und in issuing senior securities Avoids 12(a)(i) and (3) limitation on short selling and margin Portfolio manager did not register as an Advisor under the Advisors Act of 1940 203(b)(3) exempts a manager with less than 15 clients Each hedge fund is a client Carry can be charged under the Advisors Ac

18、t for “qualified clients” Copyright, Briggs and Morgan, Professional Association, 2006-2008SEC Release IA-2333 SEC endeavored to amend Rules to require “look through” hedge fund to count all the investors Required portfolio manager to register as an advisor under the Advisors Act June 23, 2006 D.C.

19、Circuit reversed finding that the term “client” of a manager could not include an investor in hedge fund December 13, 2006: SEC proposed new anti-fraud rules that would prohibit making of false of misleading statements. Applies to all portfolio managers Effective on September 13, 2007: Rule 206(4)-8

20、 Copyright, Briggs and Morgan, Professional Association, 2006-2008Rule 206(4)-8Applies to both registered and unregistered Investment AdvisersApplies to pooled investment vehicles exempt from 40 Act 3(c)(1) or 3(c)(7)Does not matter whether malfeasance occurs when selling, offering or redeemingInclu

21、des RFP processRule prohibits advisers from Making false or misleading statements to investors or prospective investors in hedge funds and other pooled investment vehiclesOtherwise defraud these investors “Rule clarifies that an advisers duty to refrain from fraudulent conduct under the federal secu

22、rities laws extends to the relationship with the ultimate investors in the fund”Commission may bring enforcement actions against investment advisors who defraud investors in those pooled investment vehiclesIntent is to prohibit all fraud, without proving scienterNo private right of action Copyright,

23、 Briggs and Morgan, Professional Association, 2006-2008Fund Structures Structures of Hedge Funds Single Entity Master-Feeder Parallel Multi-Manager Single Entity Partnership or Limited Liability Company Manager or GP receives a carried interest Fixed percentage of the net gains of the fund However,

24、must be alert to effective carried interest May have two entities that manage the fund Divide between the manager and the portfolio manager Reduces tax burden Copyright, Briggs and Morgan, Professional Association, 2006-2008Master-Feeder Funds Taxable investors, tax-exempt investors and foreign inve

25、stors Foreign feeder is a holding company Tax-exempt and foreign investors make contribution here Organized in low-tax jurisdiction as a corporation for tax purposes Avoids Unrelated Business Taxable Income But, will be subject to federal tax if it engages in a United States trade or business If it

26、“trades” or “invests”, exempt Acts to increase after tax returns to feeder and its shareholders Copyright, Briggs and Morgan, Professional Association, 2006-2008Parallel Funds Mirrors the Master-Feeder Two members of a hedge fund complex populated by same investors Parallel entity is created in a lo

27、w-tax jurisdiction Invests in tandem with on-shore fund Copyright, Briggs and Morgan, Professional Association, 2006-2008Fund of Funds Invests in different hedge funds Gives exposure to different market segments Investor may not have time or qualifications to diversify Copyright, Briggs and Morgan,

28、Professional Association, 2006-2008Types of Funds Arbitrage Funds Errors in market price Often long and short positions in same stock Profit based upon whether profit exceeds loss Distressed Securities Funds Invests in debt securities of bankrupt, insolvent or troubled company Participates in restru

29、cturing Takes over company by controlling debt Futures Funds Futures market Copyright, Briggs and Morgan, Professional Association, 2006-2008Types of Funds Event Funds Anticipates certain corporate events, often spin-offs Short one stock and purchased other Sandell Asset Management Opportunistic Fun

30、ds Broad discretion to manager Macro Funds Invests based upon macro events Short or long asset classes Market Timing Funds Copyright, Briggs and Morgan, Professional Association, 2006-2008Investors Individuals Public companies Tax-exempt investors; e.g., Pension Funds Issue of fiduciary responsibili

31、ty UBTI issues Foreign Investors Tax issues Copyright, Briggs and Morgan, Professional Association, 2006-2008Private Placement 4(2) of the Securities Act Secrecy Reg. D Accredited investors Sophisticated investors No general solicitations Adverse tax issues: Market Rules (no violations) Secondary Ma

32、rket Rule (includes redemption) See, Fortress Investment Group Holdings Registration Statement Limited transferability of interests State regulation Copyright, Briggs and Morgan, Professional Association, 2006-2008Disclosure Private Placement Memorandum Effort to achieve disclosure required by Regis

33、tration Statement Although exempt from registration, still subject to anti-fraud provisions Disclosure may be governed by Securities Act of 1933 Securities Exchange Act of 1934 Investment Company Act of 1940 Investment Advisors Act of 1940 State statutes Copyright, Briggs and Morgan, Professional As

34、sociation, 2006-2008Disclosure PPM Annual audited financial statements Performance information Investor communications Guidelines for disclosing conflicts of interest Qualifications of fund investors Disclosure to counterparties Copyright, Briggs and Morgan, Professional Association, 2006-2008PPMGen

35、eral Investment philosophy, strategies, products, risks Made in advance of the offer to subscribe New investments: supplement when a material shcnage has occurred Review at least annually Updated PPM should be provided to all fund investors Copyright, Briggs and Morgan, Professional Association, 200

36、6-2008PPMSpecificLegal structureObjectives and strategiesManagementTermsWithdrawal or redemption rightsFeesTrade allocation policiesLiability and indemnification of MgrInformation frameworkValuation framework: GAAP and NAVThird partiesValuation policy and oversightMethodologiesSide Pocket arrangemen

37、ts Copyright, Briggs and Morgan, Professional Association, 2006-2008PPMSpecific, cont.Risks Incentive fee Key personnel Lack of assurance of success Strategies Valuation Liquidity and restrictions on withdrawal Leverage and margin Broker and other counterparty risk Foreign investments Regulatory ove

38、sight (or lack thereof) Conflict of interestOther Tax, regulatory and other Third Party Administrators Prime Brokers Copyright, Briggs and Morgan, Professional Association, 2006-2008Trading Limited Accredited Investors QIBs Copyright, Briggs and Morgan, Professional Association, 2006-2008Ongoing Inf

39、ormatioin Updated material information Risk Reports Performance related financial information Investment Related Financial Information FAS 157 GAAP Copyright, Briggs and Morgan, Professional Association, 2006-2008FAS 157 Fair value is market-based measurement Value based upon highest and best use fo

40、r the asset or liability Principal market be used to determine fair value (if such a market exists) Principal market = largest volume and activity Three tier valuation hierarchy Tier I quoted price on active market Tier II Market observable inputs used to price Tier II Significant unobservable input

41、s needed to determine fair value Additional financial statement disclosure to be included here Copyright, Briggs and Morgan, Professional Association, 2006-2008FAS 157, cont Discounts can no longer taken when valuing a large block of securities Securities must be valued at quoted price Single broker

42、 quote in a non-liquid security may fall within Tier II if the broker will trade at such price Indicative price, then Tier III Fund of funds are required to determine whether NAVs provided by underlying funds are “fair value” If underlying fund has limited liquidity, should a discount be taken? Copy

43、right, Briggs and Morgan, Professional Association, 2006-2008FINRA Rule 2210(d) Content Standards Member communications with the public shall be based on principles of fair dealing and good faith, must be fair and balance, and must provide a sound basis for evaluating the facts. No member may omit a

44、ny material fact or qualification, if the omission, in the light of the context of the material presented would cause the communication to be misleading. No false, exaggerated, unwarranted or misleading statements or claims No distributioni of statement that the member knows or who has reason to kno

45、w is false or misleading Copyright, Briggs and Morgan, Professional Association, 2006-2008FINRA Legend only in event that such placement would not inhibit investors understanding No prediction of performance May use hypothetical illustration of mathematical performance, provided that it does not pre

46、dict performance of the proposed strategy No testimonials unless the person making it has the experience and knowledge Copyright, Briggs and Morgan, Professional Association, 2006-2008FINRA Altegris Investments & Risk Disclosure Speculative Nature Leverage Loss of Investment Lack of Diversification Lack of Liquidity Limited Transferability Volatility Foreign E