The process of starting a new hedge fund or private equity fund involves choosing whether the fund will be structured as a “3(c)(1) fund” or a “3(c)(7) fund.” Many new fund managers are confused by the difference between the two, which refer to two different exemptions from the requirements imposed on “investment companies” under the Investment Company Act of 1940 (the “Act”). [Read more…]
About Alexander J. Davie
Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.
3(c)(1) Funds vs. 3(c)(7) Funds
September 21, 2017 by
Can Initial Coin Offerings Be Regulated As Securities? The SEC Says Yes.
August 29, 2017 by
Recently, there has been a lot of buzz involving so-called “Initial Coin Offerings” (ICOs), which are crowdfunded offerings powered by distributed ledger technology (a.k.a. “the blockchain”), which is also the technology behind cryptocurrencies, such as Bitcoin. Instead of selling equity, companies that use ICOs sell digital “tokens” to investors. These tokens entitle the holders to certain rights, such as the right to a portion of the future cashflow of the company or voting rights. Unlike a traditional legal contract, the rights of token holders are not enforced through courts but rather through software code (also called “smart contracts”). Although the ICO concept has gained traction very quickly and allowed various companies to raise over a billion dollars’ worth of digital currency directly from investors, many have suspected that ICOs, like their IPO counterparts, involve the issuance of securities; however, until recently, the Securities and Exchange Commission (SEC) had not yet weighed in.
On July 25, 2017, the SEC, in order to “caution the industry and market participants,” released an investor bulletin highlighting the risks of an ICO for investors and publicized an in-depth investigative report on a recent ICO that the SEC determined involved a sale of securities. [Read more…]
Accredited Investors vs. Qualified Clients vs. Qualified Purchasers: Understanding Investor Qualifications
August 17, 2017 by
Private funds, such as hedge funds, private equity funds, and venture capital funds, are governed by a host of intersecting federal laws that impact who can invest in these fund, including the Securities Act of 1933, the Securities Exchange Act of 1934, the Investment Advisers Act of 1940, and the Investment Company Act of 1940. This post provides prospective and existing private fund managers with a basic understanding of the primary categories of investors and why understanding these categories is essential in structuring and marketing a fund.
New Options for Raising Capital for Startups and Growth Companies
July 20, 2017 by
Traditionally, when raising capital, an overwhelming majority of businesses have used Rule 506 of Regulation D, also often known as the “private placement exemption” as their exemption from securities registration requirements. In recent years, Congress, the SEC, and state regulators have enacted a number of alternative exemptions designed to make capital formation easier for growing businesses, such as equity crowdfunding and “mini-IPOs,” as well as made refinements to existing exemptions, such as Rule 147 (intrastate offerings) and Rule 504. In this post, I’ll provide an overview of these newer options. [Read more…]
The Life Cycle of a Private Equity or Venture Capital Fund
June 29, 2017 by
Unlike most hedge funds, the investment holdings of private equity and venture capital funds typically are not liquid. Consequently, private equity and venture capital funds usually do not have any redemption rights and are organized to have a limited life cycle, often in the range of 7 to 15 years. During this life cycle, the fund manager will raise the capital for the fund, deploy that capital into investments, hold those investments, and then sell those investments and return the capital to the fund’s investors. This activity occurs over several distinct phases – the marketing period, the commitment period, and the post-commitment period. [Read more…]
