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.

The Form ADV is one of the most important documents compiled by an investment adviser.  Not only does it serve as the adviser’s client disclosure brochure to unveil important information related to the firm’s products and service offerings, fees, business practices and related conflicts of interest, but it also serves as a critical tool for the SEC’s regulatory program for measuring and analyzing risk for its registrants. 

If you ever find yourself in a room full of investment advisers and are in need of a conversation starter, ask the following question: “Who believes that anti-money laundering (“AML”) regulations don’t apply to investment advisers?”  The likely outcome will be a spirited debate with some taking the position that AML regulations do not apply to investment advisers, only to broker-dealers, while others may argue that AML safeguards are part of their fiduciary duty as an investment adviser and therefore there is an obligation to develop AML procedures.  The answer to the question is the focus of this article and will discuss current anti-money laundering regulations, duties owed by investment advisers and the anticipated changes that may be occurring in this area in the not-too-distant future.

When an individual leaves a broker-dealer or an investment advisory firm, the former company has an obligation to notify regulatory authorities of the departure and for reasons other than a voluntary or partial termination, is required to provide an explanation of the reasons that the employee-employer relationship ended. 

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. 

With the new-year comes new-rules.  Literally hundreds[1] of new laws will go into effect in the state of California during the month of January, with even more becoming effective later in 2015.  This article provides an overview of some of the new corporate laws affecting businesses.  While this article is geared towards California businesses, several other states have substantially similar laws in place, or are in the process of enacting such laws.  Further, out-of-state companies that operate in California are often subject to the rules of the state, so it is important to be aware of how such rules may impact your business.   

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. 

As part of its “Fiscal Year 2014 Financial Report” released by the Securities and Exchange Commission (“SEC”) last month, the SEC discussed how “new investigative approaches and the innovative use of data and analytical tools” helped contribute to a strong year of enforcement actions.  According to the report, the SEC ended the fiscal year of 2014 (which for the SEC concludes on September 30^th) having filed for a record 755 enforcement actions across a broad range of misconduct.  Furthermore, the SEC stated the resulting disgorgement and monetary penalties arising from these enforcement actions totaled $4.16 billion according to preliminary figures.  Compare this total to the $3.1 billion total in 2012 (based upon 734 enforcement actions), and $3.4 billion total in 2013 (based upon 686 enforcement actions), and it’s clear to see that the SEC is not only increasing the number of enforcement actions, but such actions are more costly than ever before.  According to SEC Chair Mary Jo White, “innovative use of technology, enhanced use of data and quantitative analysis was instrumental in detecting misconduct and contributed to the Enforcement Division’s success.” 

 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.