Fund Structure To start a U.S. hedge fund, you need to form two business entities: the hedge fund and its investment manager. Many factors may be involved in selecting an appropriate state in which to organize a private fund. Some investors prefer some jurisdictions over others. Some states tax a limited liability company (“LLC”) or its non-resident members. Some states also tax non-resident limited partners. Other states, such as New York, may impose other taxes. For these and many other reasons, the U.S. hedge fund is typically set up as either a Delaware Limited Partnership (LP) or Limited Liability Company (LLC). Other types of entities can also be used. Traditionally, private funds offered to individuals have been structured as LPs and, more recently, as LLCs. Both LPs and LLCs offer pass-through tax treatment – that is, unlike a corporation, they are not subject to entity-level taxation. Instead, investors in an LP or LLC generally are taxed on their pro rata share of the income, gains and losses of the LP or LLC, irrespective of whether they receive any distributions from the LP or LLC.
The principal advantage of an LLC over an LP is that the management of the LLC has limited liability for its debts, liabilities and obligations. Under the Delaware Limited Liability Company Act, a member of an LLC, whether a managing member or non-managing member, has no liability beyond the member’s investment in the LLC. Conversely, the general partners of an LP are liable for the debts, liabilities and obligations of the LP, which can exceed the amount of the general partners’ investment. Limited partners are protected from personal liability beyond their investment in the LP provided that they do not participate in its management. An LP can, however, effectively limit the liability of the general partner by creating a corporation to serve as the general partner.
Management Company Structure The investment manager can be set up as a LLC, a limited limited liability partnership (LLP) or limited liability limited partnership (LLLP) or as some other type of business entity in your home state, home country or offshore. Contact Us for Assistance Different states may have significant regulatory provisions affecting private funds, such as provisions requiring private fund advisers to register under state law, restrictions on solicitation activities and accepting performance fees, provisions requiring securities registration and broker-dealer registration provisions.
Delaware Statutory Trusts Delaware statutory trusts (formerly known as “business trusts”) are frequently used by entities (such as banks) to manage investment vehicles without being an equity holder.The trust must have at least one trustee that is a resident or has its principal place of business in Delaware. The trust instrument may provide for classes, groups or series of trustees or beneficial owners and may provide for the taking of any action without the vote or approval of any particular trustee or beneficial owner or any class, series or group of trustees or beneficial owners. Delaware statutory trusts are eligible to receive pass-through tax treatment under the Code the same as LPs and LLCs.
How many investors can invest in a U.S. hedge fund? A Section 3(c)(1) fund is limited to 100 accredited investors (35 of which can be non accredited investors). An Accredited investor (if an individual) must have either (i) a minimum of $1 million net worth or (ii) $200,000 annual income/$300,000 if combined with spouse, or (if an entity or trust) a minimum of $5 million net worth. Most startup hedge funds are structured as 3(c)(1) funds because of the lower investor suitability requirements. Learn More About Accredited Investors A Section 3(c)(7) fund is only open to “qualified purchasers.” A qualified purchaser (if an individual) must have a minimum of $5 million in net investments, or (if an entity or trust) a minimum of $25 million in net investments. In our experience the 3(c)(7) exemption primarily is used by funds backed by institutional investors. Learn More About Hedge Fund Regulations and Contact Hedge Fund Attorney Hannah Terhune for a Consultation
File SEC Form D & State Blue Sky Filings Form D is a notice of an exempt securities offering under Regulation D that is filed with the SEC. Form D discloses information about the fund and the managers. Form D is not subject to a review or approval by the SEC and must be filed within 15 days of the first sale to investors and if the offering is ongoing, the Form D must be filed annually. Contact Us For Help Filing Form D & State Blue Sky In addition to the SEC Form D requirements, each state requires Form D notification filings. Most but not all states require the state notice filing be made within 15 days after a resident of the state invests in your fund. Learn More About Hedge Fund Law and Learn More About SEC Form D & State Blue Sky Hedge Fund Filings
Delaware Hedge Funds U.S. hedge funds are established primarily in Delaware because Delaware offers the most advanced business friendly law in the United States. The reason for this is that Delaware has a sophisticated Court of Chancery that focuses on company law. This Court has reputation for being pro-management and efficient when adjudicating disputes between investors and hedge fund management. Given the depth, predictability and friendliness of Delaware's body of company law decisions and given that hedge fund operations result in a significant division between ownership interests (i.e., investors) and control (i.e. fund management), it makes sense to set up a hedge fund in Delaware. U.S. Government Report cites Delaware as the most secretive state in the United States. Read the GAO 2006 Report of U.S. Company Formations Given the depth, privacy, predictability and pro-business cast of Delaware's company law, it makes good business sense to set up your hedge fund in Delaware. Learn More About U.S. Company Formations and Contact Us For Help Hedge fund sponsors based outside the United States can set up both a hedge fund and investment management company in the United States. Learn More About U.S. Company Formations
Hedge Fund Documents There are four categories of documents that we prepare to help you launch a fund: (i) formation documents; (ii) offering documents; (iii) internal documents; and (iv) certain regulatory filings.
Formation Documentsare the constitutive documents filed with the government to establish the existence of the entities, including the fund, the general partner and investment management company. These include certificates and articles of formation. Some clients make the mistake of forming entities before consulting speaking with us. The legal structure for your fund is dependent on a number of tax, regulatory, and financial considerations. For example, you have to consider whether your fund should be closed-end (i.e., preferable for real estate and venture capital funds) or open-end fund; whether to rely on Section 3(c)(1) or 3(c)(7) as an exemption from the Investment Company Act (i.e. real estate funds typically rely on Section 3(c)(5)(C)); and whether to set up an offshore fund or a U.S. fund.
Operating AgreementsThe fund manager and general partner operating agreements are the legal governing documents that provide for the rights of the founders of the fund. These documents specify how ownership of the fund is divided among the principals of the fund, how voting is decided, how the company will wind up upon dissolution and other important internal provisions. The management company and general partner operating agreements and their contents are generally not disclosed to investors. These documents are neither filed with the government nor provided to investors, but kept on file with the fund. These internal agreements set forth the rights and responsibilities among the individuals sponsoring the fund and between the fund and investment manager. These include the operating agreements of the general partner and management company, as well as the investment management agreement.
Investment Management AgreementThe investment management agreement is an agreement between the fund and the investment management company (often the same entity as the general partner). It defines the services that a fund manager will provide. It also delegates to the fund manager authority over the fund's assets, and gives the fund manager the broad discretionary authority to manage such investor funds and securities in a manner that the fund manager believes is consistent with the investment strategy of the fund.
Fund Offering Documents(PPM) The offering documents are the documents that are provided to a prospective investor prior to investing in your fund. These documents include: (i) a private placement memorandum; (ii) a limited partnership agreement or operating agreement (depending on whether the fund is formed as a limited partnership or LLC; and (iii) a subscription agreement, which includes a purchaser questionnaire to determine investor qualification. A private placement memorandum (PPM) is a document that discloses material information about your fund. A thoroughly prepared PPM should protect you from investor claims of lack of disclosure.
Limited Partnership Agreement (LPA)The LPA (or in the case of an LLC-based fund, an operating agreement) is the legal governing document of your fund. It outlines the terms of the fund and the rights of an investor. Among the terms of the limited partnership agreement are: the powers of the general partner; management, performance or other potential fees (i.e., legal startup costs, brokerage, administration, and audit expenses; allocations and distributions of profits to all partners, including how profits are calculated and the timing of distributions; withdrawal provisions, including minimum and maximum withdrawal amounts, lock-up periods, gates, and distribution dates; and a designation of power of attorney, which authorizes the fund manager to act on the limited partner’s behalf for such purposes as voting the fund’s securities, buying and selling fund securities, admissions of new limited partners, and amendments to fund formation documents and other documents necessary for continued fund activity.
Subscription Agreement A subscription agreement provides your investors with a description of the steps necessary to invest in your fund. It is the investor’s contract with the fund, which specifies the subscription amount and outlines the terms under which the investment is being made. It requires investors to attest that they meet certain eligibility standards, such as being an “accredited investor” or “qualified client” as required by SEC and state law. If your fund is an advertised fund under Regulation D Rule 506(c), it contains an "Accredited Investor Certification Form." Learn More About Advertising Your Fund
Regulatory Filings Regulator filings are documents that need to be filed with the federal and state jurisdictions (in addition to formation documents) that are needed to satisfy certain securities law structures, registration exemptions and rules applicable to the investment instruments traded. Among these filings are: SEC and state Form D filings (which are required whenever there is a US investor); Investment advisor registration (depending on the state in which the fund managers are located, the amount of assets under management and the type of investment); and Registration with the Commodities Futures Trading Commission (CFTC) (applicable to certain hedge funds that invest in commodities, futures, swaps, currencies and similar instruments).
Investment Adviser Registration (RIA) Not all hedge funds are subject to investment advisor registration. Only funds that invest in securities force their managers to register as an investment advisers. The definition of a "security" is very broad and covers investment instruments, schemes and structures. Funds that invest only in commodities, futures, currencies, real estate investments, or certain private equity investments are subject to other rules. Fund managers that advise only venture capital funds, regardless the state of domicile, are generally exempt from state or SEC RIA registration. A securities hedge fund manager that manages over $150 million is required to become a SEC RIA. Learn More About SEC RIA Formation In most states, a hedge fund that invests in securities and has less than $150 million under management must register as a state RIA in the state where the primary operations of the fund manager are located. Many states offer an Exempt Reporting Adviser (partial RIA) to advisers on private hedge funds. Learn More About State RIA Formation and Contact Us For Help
Performance & Management Fees Hedge fund managers typically charge a management fee based on assets under management (AUM), and a performance fee (also called an incentive allocation, carried interest, performance share, etc.) based on the hedge fund's success. Learn More About Hedge Fund Performance and Management Fees SEC registered hedge fund managers can charge performance fees (i.e., the carried interest) only to “qualified clients”. Learn More About Qualified Client This rule also applies to some state registered investment advisers (RIA). Learn More About SEC RIA and Learn More About State RIA If you are not SEC registered you most likely can charge performance fees to all of your investors. In some U.S. states, performance fees can be paid to a licensed RIA only when the profits of the fund exceed a hurdle rate or on an annual basis. We will advise you as to the permissible fee arrangements for your fund. Be certain that your expectations about charging performance fees are correct. Management fees can be charged to anyone. Contact Us for Assistance
Should I Avoid Non-Accredited Investors? If you allow non-accredited investors to invest in the fund, you need to have an initial financial statement prepared (i.e., an initial audit). Learn More About Hedge Fund Audits In addition, your non-accredited investors must (alone or together with a purchaser representative) be sophisticated in that they must have sufficient knowledge and experience in financial matters to evaluate the merits and risks of investing in your hedge fund. If you allow non-accredited investors, you must prepare your hedge fund offering documents to a higher standard (i.e., as if you were offering the securities publicly). Your hedge fund's offering documents must be crafted to explain specific risks that the fund may face. We will help you make the proper disclosures required throughout the Private Placement Memorandum and protect you and the fund from unintentionally making misleading statements and material omissions. A hedge fund PPM requires specific language, drafting style, disclosures, and content. Learn More About Hedge Fund Offering Documents
Fund Administration Unlike most other countries, there is no legal requirement in the United States to appoint a hedge fund administrator. However, using one is encouraged as having calculations prepared by a fund administrator decreases the cost of an outside audit and the preparation of the fund's tax return (Form 1065 and K-1s). Hedge fund administrators provide detailed NAVs, performance records, brokerage statement reconciliation, tear sheets, and much more. Investors and regulators see value in the appointment of a third-party administrator. Learn More About Hedge Fund Administration and Costs We offer low cost and timely hedge fund administration services. Please refer to our Fee Schedule and Sample Performance Report and Contact Us for Assistance
Our Hedge Fund Services Include:
Consulting with and advising you on tax (i.e., S or C corporation elections), regulatory (i.e., state or SEC investment adviser registration & NFA registration and exemptions), US & International legal and business matters (i.e., operative agreements among multiple hedge fund organizers, contractor agreements, algorithm licensing agreements, etc.) that apply to you, your intellectual property, the fund and your investment management company;
Structuring hedge fund performance and management fees (plain vanilla & graduated rate fees) that are lawful;
Answering your fund and management company related questions;
Preparing the Private Placement Memorandum (PPM, Prospectus, etc.) in plain English while accurately and lawfully disclosing the fund’s investment terms, trading approach, and other relevant data from a legal and marketing standpoint;
Preparing the Limited Partnership Agreement or LLC Operating Agreement governing the fund;
Preparing the hedge fund Subscription Agreement;
Preparing the investment management agreement between the fund and the investment management company;
Forming the hedge fund and its management company;
Preparing and filing the hedge fund’s SEC Form D in the EDGAR System;
Preparing and filing state Blue Sky filings;
Advising you on fund marketing, branding and operational issues;
Coordinating and arranging for the fund administrator, auditor, prime broker and other service providers; and
Advising you on capital raising issues, database listings, and resources related to finding investors for your hedge fund, and
Numerous other advisory services (i.e., capital introductions).
Foreign Fund Managers Can U.S. Register Many hedge fund sponsors based in other parts of the world choose to set up a U.S. investment manager to avoid home country licensing issues and to make the hedge fund more attractive to U.S. investors. Another reason for considering U.S. investment adviser registration is to satisfy a brokerage and/or bank’s requirement that a hedge fund’s manager be licensed somewhere before it is willing to supply bank and/or brokerages services to a new hedge fund.
Set Up a U.S. Investment Manager If your home country’s licensing requirements put investment manager registration out of reach, consider getting licensed in the United States. Fortunately, any foreign based investment manager is eligible to register with the U.S. Securities and Exchange Commission (SEC) without regard to the amount of assets under management. The SEC registration process is very simple and relatively streamlined. The SEC, it is a very light regulator of foreign-based hedge fund managers. Learn More About U.S. SEC Registration and Contact Us for Assistance
Use of Offshore Hedge Fund Manager to Avoid Home Country (or State) Hurdles A U.S. hedge fund’s investment manager can be set up in your home country, offshore, or in the United States. Unfortunately, many potential hedge fund managers live in countries where the capital formation, tax and regulatory hurdles to become a hedge fund manager are insurmountable. Many countries require a working background in finance, substantial education, and other credentials to be licensed as a hedge fund manager. Even if you have the necessary background and experience, you may not be able to obtain licensing in your home country simply because the regulators do not favor smaller one-man operations. If you are based in a country like that, consider setting yourself up an investment manager, either in the United States or elsewhere. In the United States, companies can be formed in minutes and a U.S. visit is not required. Learn More About U.S. Company Formations Note that you can use the hedge fund management company not only to serve as the fund’s investment manager, but also to operate a managed account business (i.e., unlike a hedge fund, managed account customer money is not pooled). Contact Us for Assistance
Use of Investment Adviser Sub-Contracts Many hedge fund sponsors opt to set up a hedge fund management company outside of their home country or home state, whether for tax, commercial, or regulatory reasons. If you (as the hedge fund sponsor) set up the hedge fund management company outside of your home country or home state, you should have a sub-agreement for "consultancy" or "advisory" services between yourself and the offshore (or out of state) hedge fund management company. In the United States, an investment adviser is an investment manager. However, there is legal distinction between “investment manager” and “investment adviser” in most other countries. If you live in a country where a such a distinction exists and if you set up the hedge fund's manager in such a country, you should position yourself through contracts as a consultant to the offshore investment manager. Such "advisory" or "consultancy" services (i.e., an independent research analyst) is not a regulated business activity. To do this, you need an agreement between the offshore investment manager and a sub-agreement between the investment manager and the investment adviser. The goal of the agreements is to allow you to offer research services to the offshore investment manager for a fee. There are other approaches to consider as well. When the investment advisory agreement is drafted properly and timely executed, you will be able to control the timing, tax character and amount of taxable income reportable in your home country. In addition, if the investment management agreement between the fund and the investment manager are drafted correctly and timely executed, further income deferral is possible. A hedge fund manager seeking to defer substantial amounts of management and performance fees should use third-party (i.e., “outside”) directors to ensure that the deferral mechanisms are respected for home country tax purposes. Contact Us for Assistance
Hedge Fund Banking and Brokerage Services For either banking or brokerage services, you cannot use your personal account as the hedge fund’s account. The hedge fund needs its own bank and brokerage account. Banking in the United States presents a lesser burden to a hedge fund sponsor than banking in most other parts of the world. U.S. banks and brokers generally do not require a hedge fund’s investment manager to be licensed by a regulator in order to open accounts unless the investment manager is based in a jurisdiction that requires such licensing. For these reasons, the United States presents an extremely attractive option for sponsors of smaller hedge funds. Need help with banking and brokerage arrangements? We have solutions! Contact Us for Assistance
Capital Management Services Group advises hedge fund managers on all aspects of fund formation and operations. We form equity, spot forex, futures and real estate hedge funds in the United States, the British Virgin Islands and the Cayman Islands. We are committed to providing you with high quality services on a personal level and in a timely manner. We offer flat-fee engagements, which include start-to-finish legal counsel with all aspects of launching a hedge fund. We use a client-based approach to our fund structuring and analysis. When you speak to us, you gain access to a unique combination of securities, tax, and international experience. We think we have the best set of hedge fund offering documents (and related documents) based on the ever changing federal, state and international securities, commodities, and tax laws. We have quick turnaround times because we understand that our customers want to begin business as soon as possible. We are one destination for all your legal, tax, accounting and audit needs. Our customers value this one-stop relationship and routinely comment on the excellence of our personal service and the time we take to properly understand and implement their unique circumstances and objectives. Call Us at +1 (307) 213-4732, Contact Us and Read What Our Client Say About Us on LinkedIn
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Why Hire Us? When you engage us you get a unique combination of securities, tax, and global business experience. We think we have the best set of offering documents in the industry for hedge funds based on current and ever changing laws. We aim to deliver quick turnaround times because we understand that our customers want to begin their money management business as soon as possible. We conceive, structure and deploy the best tax saving strategies for your hedge fund business. We will help you start your business as soon as possible and continue to assist you.
Give us the opportunity to use that knowledge and experience for you. Each client receives personalized attention from our attorneys and staff. No client is too large or small for us. We pride ourselves in providing personal attention to each client. We provide the best services and support needed for hedge funds and business projects. No need to coordinate work between accounting, administrative and law firms--we handle the entire hedge fund business process from start to finish. We offer legal services, accounting services, tax planning services, tax return preparation services, business consulting services, and U.S. and offshore company formation services. We provide high quality services at competitive rates. But don't take our word for it, give us a call and let us prove what we can do for you.
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