Which laws apply to a hedge fund, and which part of the fund does each one cover?
Beginners · Video 5 of 12 · 1:12 ·
Three federal laws, each landing on a different piece of the fund. The Securities Act of 1933 covers selling fund shares: under Rule 506(b) there's no public advertising, with any number of accredited investors and up to 35 sophisticated investors who aren't; under Rule 506(c) you can advertise, but every investor must be accredited and verified. The Investment Company Act of 1940 covers the Fund LLC: under Section 3(c)(1) it isn't a mutual fund if it has 100 investors or fewer and sells privately, and a Regulation D offering, even under 506(c), counts as private. The Investment Advisers Act covers the manager, and depends on size: under $100 million your state is usually the regulator, from $100 million you may register with the SEC, and an adviser only to private funds is exempt from SEC registration until $150 million.
Everything here is for educational purposes only and is not legal, tax or investment advice, or an offer to buy or sell any security. Laws and thresholds change and depend on your facts, so talk to a qualified attorney before acting.
Key facts
- Securities Act (the sale): Rule 506(b) bans general solicitation and allows unlimited accredited investors plus up to 35 sophisticated non-accredited investors.
- Rule 506(c) allows general solicitation if every purchaser is accredited and the fund takes reasonable steps to verify it.
- Investment Company Act (the fund): Section 3(c)(1) needs 100 or fewer beneficial owners and no public offering; a Rule 506 offering, including 506(c), is not a public offering.
- Advisers Act (the manager): under $100 million, advisers generally register with their state, or rely on a state exemption.
- From $100 million an adviser may register with the SEC, and generally must at $110 million unless exempt (Rule 203A-1).
- An adviser only to private funds is exempt from SEC registration below $150 million (Rule 203(m)-1).
Transcript
Founder: I'm starting a fund. What's the one form I file?
Operator: There isn't one. There are three laws, and each one lands on a different piece of your fund.
Operator: Law one, from 1933, is about the arrow: selling fund shares to investors. Most funds use Rule 506(b).
Founder: Which means what, exactly?
Operator: No public advertising. Any number of accredited investors, plus up to 35 who aren't, if they understand the risks.
Operator: Or Rule 506(c). You can advertise publicly, but every investor has to be accredited, and you have to verify it.
Operator: Law two, from 1940, is about the fund itself. Under 3(c)(1), it isn't a mutual fund if it has 100 investors or fewer and sells privately.
Founder: Even if I advertised under 506(c)?
Operator: Still private. A Reg D offering doesn't count as a public one.
Operator: Law three, the Advisers Act, lands on the manager. That's you. Under $100 million, the SEC usually isn't your regulator. Your state is, and many states exempt private fund managers.
Founder: And when I grow?
Operator: From $100 million, you can register with the SEC. If you only advise private funds, you're exempt until $150 million. Then you must. Three laws, three pieces, three answers.
Founder: So, the one form I file...