generally subject to SEC registration, certain exemptions
may apply, like VC fund advisors. Fund management
may also be subject to broker/dealer registration under
the SEA if it is involved in the business of brokering or
dealing securities. Whether the management engages in
broker dealer activities is a fact-sensitive question requiring
thoughtful analysis. In practice, the most probative factor
is whether the management receives “transaction-
based” fees such as a percentage commission.
This approach has been criticized by many lawyers and
professionals as referring clients without being involved
in the transaction does not appear to be broker/dealer
activity. However, the SEC has taken the position that
any activity which results in transaction-based fees being
collected is presumed to be broker/dealer activity unless
otherwise exempted. One typical mistake in the Chinese
investment community is that “finders” are exempted
from SEC registration. This has resulted in hefty fines in the
EB-5 immigration industry where unregistered “finders”
of immigrant investors found themselves being sued by
the SEC. Moreover, both acting as a broker/dealer and
using unregistered broker/dealer have legal ramifications.
Fund management must carefully examine its marketing
practices and fee structure to avoid violations of broker
dealer rules.
State-level registration must also be considered. For
example, advisor with more than six New York clients are
subject to registration or notice filing through New York’s
Investment Adviser Registration Depository system even
though the advisor may not need to register with the
SEC. In the legal world, exceptions exist to general rules.
When analyzing whether registration is required, we
must carefully examine the facts against the statutory
exemptions and industry practices so as not to run afoul
of the fine prints.
STRUCTURING A PRIVATE FUND
While numerous funds are organized as limited partnership,
it is not always the best option. Since different funds need
to weather different risks and may be subject to different
taxes, no structure, no matter how carefully designed, is
universally applicable.
Limited partnership generally works for funds in which the
investors do not have much control over the investment.
This is why most large investment funds are organized
as limited partnership because the management does
not want investors’ interference. In the U.S., a limited
partnership, organized under the laws of a state, consists
of a “general partner” and one or more “limited partners.”
The limited partners are subject to limited liabilities. The
general partner technically does not enjoy limited liability
protection, but most general partners are organized as
limited liability companies to limit the risk exposures of the
natural persons operating the fund. The general partner
has the ultimate authority to bind the partnership into
any investment deals, but the fund’s Limited Partnership
Agreement may limit the authority to a certain extent.
Limited partnerships do not work where investors want to
get actively involved in the investment. As stated, “fund” is
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