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Fund managers are dealing with Dodd-Frank and the
requirements under the Investment Advisers Act made by the Securities and
Exchange Commission. Of course, a fund manager needs to focus on other areas of
financial regulation and enforcement by the Securities and Exchange Commission.
Fund managers need to keep focused on how they comply with the Investment
3 of the Investment Company Act has this definition:
1. When used in this title, "investment company" means
any issuer which-
A. is or holds itself out as being engaged primarily, or
proposes to engage primarily, in the business of investing, reinvesting, or
trading in securities;
B. is engaged or proposes to engage in the business of
issuing face-amount certificates of the installment type, or has been engaged
in such business and has any such certificate outstanding; or
C. is engaged or proposes to engage in the business of
investing, reinvesting, owning, holding, or trading in securities, and owns or
proposes to acquire investment securities having a value exceeding 40 percentum
of the value of such issuer's total assets (exclusive of Government securities
and cash items) on an unconsolidated basis.
This leaves you with the tricky analysis of whether
your investments are securities. To avoid that mess, most private funds
look to two exemptions from the definition of "investment company": 3(c)1 and 3(c)7.
Under 3(c)(1), the main limitations are that you have one
hundred or fewer holders of beneficial interest in the fund and that you
propose to sell them in a public offering. Under 3(c)(7) you can go beyond the
100 owners, but they need to be "qualified
purchasers." That means they need to have a big wallet.
One challenge for private funds who do not want to
register under the Investment Advisers Act is that private fund is defined as
an "issuer that would be an investment company as defined in Section 3 of
the Investment Company Act, but for section 3(c)(1) and section 3(c)(7) of that
There are other exemption available, but they are harder
to fit under. You may have a trail of paper work stating that you fall under
the section 3(c)(1) or section 3(c)(7) exemption, even though you could claim
to fit under one of the other exemptions.
For example, 3(c)(5) is
available for real estate funds:
Any person who is not engaged in the business of issuing
redeemable securities, face-amount certificates of the installment type or
periodic payment plan certificates, and who is primarily engaged in one or more
of the following businesses: ... (C) purchasing or otherwise acquiring
mortgages and other liens on and interest in real estate.
There are some additional limitations that come with this
based on some SEC No Action letters. I'll put some information together on that
additional commentary on developments in compliance and ethics, visit Compliance Building,
a blog hosted by Doug Cornelius.
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