is commonly referred to as the prohibition against general solicitation. The prohibition against general solicitation prevents private fund managers from soliciting investors they do not already know. Thus, a private fund manager needs to have a “substantive preexisting relationship” with the investor prior to solicitation. A “substantive preexisting relationship” is generally defined as a relationship whereby the private fund manager understands the investor’s financial circumstances and level of sophistication in financial matters prior to the solicitation. Merely knowing that an investor was wealthy or otherwise qualified as an accredited investor (for example, by reviewing a list of Fortune 500 CEOs) does not suffice, in the absence of a further relationship with such investor. Pursuant to section 3(c)(1), the fund may have no more than 100 investors, whereas a fund relying on section 3(c) (7) must have fewer than 2,000 investors to avoid having to register as a public company pursuant to section 12(g) of the Securities Exchange Act of 1934. To avoid from engaging in a public offering, private funds typically issue interests in their funds to investors pursuant to a private placement exemption under Rule 506 of Regulation D. Rule 506 is a safe harbor under the Securities Act of 1933 (“Securities Act”). Although Rule 506 allows fund interests
to be purchased by up to 35 non-accredited investors, most issuers avoid taking non-accredited investors because of the additional disclosure requirements which must be met, as well as the additional regulatory risk. Therefore, 3(c) (1) fund interests are generally offered and sold only to accredited investors. Conversely, 3(c)(7) fund interests are offered exclusively to persons who, at the time of acquisition of such securities, are qualified purchasers.
“REMEMBER – YOU WANT SUPERLATIVE SERVICE AT A FAIR PRICE – NOT FAIR SERVICE AT A SUPERLATIVE PRICE.”
CONCLUSION
The initial step of each successful private equity or venture capital fund launch begins with knowing and targeting the right investor group. To do that you’ll also need to know what vehicle will appeal to those groups and structure your fund in a manner befitting to each. It is this reason why you need to understand what your investors are looking for in a fund vehicle and what each investor needs as a return profile (e.g., a pension fund has a different return profile/targeted return than an endowment and a family office and/or high net worth investor has a different return profile/targeted return than both—more on that in our next article). In short, it is critically important, especially for emerging managers to select the appropriate service providers to help guide you through that process.
Photos shot at NEw York Distilling company ALTS CAPTIAL PAGE:
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