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Private equity funds ___ (basic definition)
commit capital in the securities of privately held high risk, potentially high return businesses, in divisions and subsidiaries of large conglomerates, and in securities of listed companies typically to make them private. These include venture capital and hedge funds.
structure of limited partnership (graph)
Fees and distributions
- carried interest
- - generally 20% of the gains --> GP
- - Partners will receive proceeds of investment in proportion to their relative capital contributions to such investment
33 Securities Act §4(a)(2)
private offering exemption-
exempts from the registration and prospectus delivery requirements of Section 5 any transactions by an issuer not involving any "public offering"-->this can be achieved through the use of Reg D (a "safe harbor").
4(a)(2) does NOT extend to anti-fraud provisions, so ensure that disclosures made to investors are not false or misleading in any material aspect.
not about purchaser, but the actions of the offeror!
self-executing- no notice or other filings or regulatory approvals required for exemption to be effective
Regulation D- overview and accredited investors
- Reg D contains the current set of SEC rules governing exemptions for private offerings and defines accredited investors (see Rule 506)
- Reqs: (1) no general solicitation and (2) need accredited investors
Most financial institutions are accredited investors.
- If individual, must have:
- -at least $1 mil net worth alone or with spouse OR
- -individual income in excess of $200,000 in each of the two most recent years or joint income above $300,000 for two years AND reasonable expectation of reaching the same income level in the current year.
Reg D- Rule 502 (c)
general solicitation and advertising
502(c):when a private offering is made in reliance on Reg D, neither the issuer nor any person acting on its behalf may offer or sell the securities by means of any form of "general solicitation or general advertising," including:advertisements, articles, notices or other communications published in newspapers, magazines or similar publications or broadcast over radio or television. Unrestricted internet access cannot happen.
- good practice to avoid any comment when asked for information in media (i.e. interview requests in investment newsletters)
Reg D- 502 (b)
no specific info required to be furnished when LP interests in PE fund are sold only to accredited investors --> disclosure requirements triggered if the offering extended to persons that are not accredited investors
Reminder: doesn't extend to anti-fraud provisions!, only registration and prospectus delivery requirements; so disclosures may not be false or misleading in any material respect
502(d)-issuer of securities to exercise reasonable care to ensure that the purchasers are not underwriters
Reg D- Rule 506 (b)
Safe harbor exemption
506(b)(2)(i)- no more than 35 purchasers, excluding "accredited investors"--> in effect, permits sales to an indefinite # of accredited investors; but in practice too many would be cause for concern
no one involved in offering of interest (20% of fund) is a bad actor
- focuses on number of purchasers not number of those offered securities
Rule 506 (c)
[DETERMINE IF THIS WILL BE TESTED SINCE NEW RULE]
an issuer may use general solicitation to offer and sell securities, provided that:
- -the issuer takes reasonable steps to verify that the purchasers of the securities are accredited investors:
- - all purchasers of securities are sold; and
- - the sales otherwise satisfy the definitional, integration and resale provisions of the Regulation D safe harbor
avoid violating 1940 Act Section 7(d) which requires registration of offshore funds:
offers by a foreign issuer (including an offshore fund) where there no substantial US market interest need to satisfy the following conditions:
- 1) the offer and sale is made in an offshore transaction; and
- 2) there are no "directed selling efforts" in the United States
- any US purchasers count toward 100 person beneficial owner limit
Regulation S/ Regulation D relationship
US fund by foreign investors: a nexus with U.S. laws, so need exemption from 33 Act registration requirement. But no reliance on Reg D, use Reg S
- -U.S. fund, one U.S. investors, 9 non U.S. investors
- can offer with Reg S for foreign and Reg D for U.s.; non integerated, not *required* to offer via Reg S for foreign investor
Investment Company Act- 3(c)(1)
- not an investment company if:
- 1) the issuer's outstanding securities (other than short term paper) are beneficially owned by fewer than 100 persons and
- 2) issuer is not making and does not presently intend to make a public offering of its securities
- issue is whether company is privately held
- 100 person limit applies to the holders of all securities except for short-term paper--whether securities are debt or equity or voting or non-voting makes no difference for this purpose. questions usu. arise as to the 100 person limit
Investment Act- 3(c)(1)(A)
- look through provision:
- i) if a company owns ten percent or more of the outstanding voting securities of a private investment company and
- ii) the ten percent owner is an investment company but for the 3(c)(1) and (7) exceptions then
owners of the outstanding securities of the ten percent owner are deemed to hold outstanding securities of the private investment company.
1940 Investment Company Act- 3(c)(7)
A company is exempted from requirements of an investment company under 1940 Act if all of the investors are "qualified purchasers":
-natural person or family owned company exempted if owns at least $5 mil in investments
-trust not formed for specific purpose of acquiring securities and each settlor or other contributer is a QP or
- any other person who in aggregate owns and invests at least $25 mil
Investment Adviser's Registration Act of 2010
If U.S. based manager
$150 mil assets under management (AUM) --> SEC
$100 mil AUM but $1 or more non fund client(s) --> SEC
$25-$100 mil --> state registration, unless state stated doesn't register advisers, then SEC
< $25 mil --> state registration
If no US investor, Foreign Private Adviser's Exemption
- - < $25 mil
- - no office in U.S.
- - no more than 15 clients (aka investors)
then no obligation to register with SEC
but 25 mil easily reached, so Exempt Reporting Adviser