One of the first questions that new private fund advisers often ask me is whether they will need to “register” with the SEC. They are often thinking in terms of registration as an investment adviser. However, even if a fund adviser is exempt from registration as an investment adviser with the SEC, he or she also needs to understand the impact of other federal securities laws, such as the Securities Act of 1933 and the Investment Company Act of 1940, as well as the impact of state securities laws, including state investment adviser registration requirements. I often hear new fund advisers say that they intend to rely on a particular exemption from one law and assume this exemption applies across the board to all securities laws. This post will explore the different statutes and regulations that govern private fund advisers and the registration exemptions which are usually relied upon.[Read more…]
Section 203(l) of the Investment Advisers Act of 1940 (the “Advisers Act”), also known as the venture capital adviser exemption, provides that an investment adviser that solely advises venture capital funds is exempt from registration with the SEC under the Advisers Act. The term “venture capital fund” is not defined in the text of the Advisers Act; instead, the term is defined in SEC Rule 203(l)-1(a) as a private fund that meets certain conditions. This article looks at each of these conditions and explains what is needed to meet them. [Read more…]
The vast majority of private companies raising capital use Rule 506 of Regulation D, which, if complied with, ensures the securities being sold are exempt from registration with the Securities and Exchange Commission (SEC) because the offering of these securities does not involve “any public offering.” One of the primary advantages of a Rule 506 offering is that it is considered an offering of “covered securities,” which means that individual states cannot require issuers who meet the conditions of Rule 506 to register their offerings at the state level. By granting covered security status to Rule 506 offerings, Congress greatly reduced the compliance costs of companies raising private capital who would otherwise have to comply with the unique registration or exemption requirements of each state where one of their investors happened to live.[Read more…]
A private equity fund is an investment entity formed by an investment adviser (often also referred to as a fund manager or sponsor), that raises capital from investors to make investments in private companies under a specified investment strategy. Typically, the investors commit to investing a certain amount of capital over time, in one or more capital calls made over the course of the private equity fund’s life cycle. The investors are passive and do not participate in the management of the fund or the selection of its investments. The fund manager is responsible for investing the assets pursuant to the fund’s investment strategy. Additionally, private equity funds are often “blind” (in that the investor does not know in advance what their money will be invested in) and anonymous (in that no investor knows the identities of the other investors). [Read more…]
Rewards-based crowdfunding sites, such as Kickstarter and IndieGoGo, have become a common way to get innovative businesses and products off the ground. The premise behind these crowdfunding sites is that, by raising small monetary contributions from a large number of people interested in supporting the business idea via the Internet, companies and entrepreneurs can amass enough capital to fund a fledgling project or venture. In exchange for supplying the funds, the funders are to receive the product being developed or certain other specified incentives, assuming that the entire funding goal is met by a certain deadline. If it’s not, the funds are to be returned to the backers.
The concept of crowdfunding has actually existed for some time. Players in the music industry launched online campaigns to fund tours and albums as far back as the late 1990s. It wasn’t until the mid to late 2000s when the word “crowdfunding” began to be used, and with the launch of major crowdfunding sites like IndieGoGo in 2008 and Kickstarter in 2009, the phenomenon took off and reached the popularity it sees today.
This post describes the common legal pitfalls associated with conducting a rewards-based crowdfunding campaign and steps to take to alleviate those pitfalls. [Read more…]