Legal Risk Management Tips

Every adviser, broker, and securities attorney has uttered these words to a client hundreds of times: all securities offered in the United States must be registered or qualified under an exemption from registration.  Until March 25, 2015, new and seasoned companies alike had two workable options under this rubric: a private offering or going public.  However, the recently adopted amendments to the seldom-used Regulation A have created a middle ground and a more flexible option for companies to raise capital.

Limited liability companies, or LLCs, are a commonly used form of business entity.  LLCs are entities created pursuant to state law that allow their owners to mix and match characteristics of corporations, limited partnerships, general partnerships and, in the case of single-member LLCs, sole proprietorships.  These flexible entities combine the pass-through taxation of a partnership[1] with the limited liability of a corporation.  Since the first limited liability company act was enacted in Wyoming in 1977, all 50 states have limited liability company statutes on the books, and the use of LLCs in certain business settings has become ubiquitous. 

The ability of a fund manager or an entrepreneur to raise capital for their fund or company can be a critical component for the success of their venture.  Fundraising can be quite challenging, so it is not surprising that those who are out raising funds will look favorably at friends, family members and business contacts who offer to bring investors to the table.  These friends, family members and business contacts are seldom registered with the Securities and Exchange Commission (“SEC”) as broker-dealers and are generally referred to as “finders.”  While the use of finders may be embraced as a smart supplement to other fundraising efforts of the fund manager or entrepreneur, a note of caution should be sounded.  As discussed below, with very limited exceptions, the activities of a finder ordinarily would require the finder to be registered as a broker-dealer, and the consequences for failing to have the required registration can be severe, both for the unregistered finder and for the fund or company that engages them. 

 The ability of a private equity fund’s manager to obtain capital commitments from investors is critical to the fund’s success.  Unlike hedge funds which provide managers with the ability to reinvest non-withdrawing investors’ investment proceeds, private equity funds have relatively limited reinvestment ability and generally must distribute investment proceeds to its investors.  Therefore, in order to keep making new investments, private equity fund managers must create and finance new funds every few years, which then requires new promotional materials for each new fund.

Considerations for Marketing Private Equity Funds

The ability of a private equity fund’s manager to obtain capital commitments from investors is critical to the fund’s success.  Unlike hedge funds which provide managers with the ability to reinvest non-withdrawing investors’ investment proceeds, private equity funds have relatively limited reinvestment ability and generally must distribute investment proceeds to its investors.  Therefore, in order to keep making new investments, private equity fund managers must create and finance new funds every few years, which then requires new promotional materials for each new fund.