Presenting a live 90-minute webinar with interactive Q&A Private Fund Securities Law Exemptions: Navigating Accredited Investors, Qualified Purchasers and Qualified Clients Evaluating Exemptions for Funds and Managers Under the Investment Adviser, Securities, Exchange and Investment Company Acts TUESDAY, SEPTEMBER 13, 2016 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Daniel M. Baich, Of Counsel, Dorsey & Whitney , New York Genna Garver, Of Counsel, Dorsey & Whitney , New York The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Private Fund Securities Law Exemptions: Navigating Accredited Investors, Qualified Purchasers and Qualified Client Genna Garver and Daniel Baich
Private Fund Securities Laws • Securities Act of 1933 • Investment Company Act of 1940 • Securities Exchange Act of 1940 • Investment Advisers Act of 1940 • State statutory counterparts, subject to NSMIA preemption • Securities laws of applicable foreign jurisdictions (e.g., Europe’s AIFMD) 6
Securities Act of 1933 • Prohibits the offering or sale of securities unless a registration statement has been filed or an exemption is available. • “Securities” is broadly defined to include stock and note (debt) instruments. • Applies to transactions in securities involving the use of the U.S. mails or interstate commerce.
33 Act – Common Exemptions • Section 4(a)(2) • Regulation D Safe Harbor • Regulation S Safe Harbor 8
33 Act – Section 4(a)(2) • Section 4(a)(2) – Transactions not involving any public offering – Public offering not defined – To qualify for this exemption, which is sometimes referred to as the “private placement” exemption, the purchasers of the securities must : • either have enough knowledge and experience in finance and business matters to be “sophisticated investors” (able to evaluate the risks and merits of the investment), or be able to bear the investment's economic risk • have access to the type of information normally provided in a prospectus for a registered securities offering and • agree not to resell or distribute the securities to the public – In general, public advertising of the offering, and general solicitation of investors, is incompatible with the “private placement” exemption . 9
33 Act – Regulation D • Regulation D Safe Harbor — Commonly Used Provisions – 506(b) — limited offers without regard to $ amount • Up to 35 non-accredited investors • No general solicitation or general advertising – 506(c) — JOBs Act Provision • All verified accredited investors • General solicitation and general advertising permitted 10
33 Act Regulation D • Practical Tips – Use of 506(c) and general advertising will not permit you to stop advertising and convert the offering to 506(b) – Regulation D requires you to file Form D with the SEC and with certain states, depending on if a state exemption is available – Failure to file Form D will not invalidate the exemption at either the Federal or state level 11
33 Act – Federal preemption • The Securities Act of 1933 preempts state law for “covered” securities. • “Covered” securities include offerings made pursuant to Regulation D; but not offerings made pursuant to 4(a)(2). • Offerings made pursuant to 4(a)(2) will need a state level exemption in each state where the securities will be offered and sold. 12
33 Act – Accredited Investors – Current Definition • Accredited Investors – Current definition includes any person who falls within one of the categories below or whom the issuer reasonably believes falls into one of these categories: • any natural person whose individual net worth, or joint with spouse, exceeds $1,000,000, excluding the primary residence and any indebtedness secured thereby • any natural person who had an individual income in excess of $200,000 in each of the two most recent years or joint income with that person’s spouse in excess of $300,000 and has a reasonable expectation of reaching the same income level in the current year 13
33 Act – Accredited Investor Verification • The issuer is required to take “reasonable steps” to verify the accredited investor status of the purchasers. • Rule 506(c)(2)(ii) sets forth non-exclusive and non-mandatory accredited investor verification methods that, if satisfied, serve as safe harbors for issuers who will be deemed to have satisfied the “reasonable steps” verification requirement. – Reviewing any Internal Revenue Service (IRS) form reporting a purchaser’s income for the two most recent fiscal years and obtaining a written purchaser representation that he or she has a reasonable expectation of reaching the required income level during the current year – Reviewing specified documentation evidencing the purchaser’s assets and liabilities dated within the prior three months and obtaining a written purchaser representation that all liabilities necessary to make a determination of net worth have been disclosed. • As what constitutes “reasonable steps” is a principles -based determination, an issuer that does not satisfy any of the verification safe harbors can still satisfy the reasonable steps requirement using other verification methods. 14
33 Act – Accredited Investors – Proposed Modifications to Definition • Accredited Investors – December 18, 2015 – SEC Report on The Review of the Definition of Accredited Investor - 2 Main Recommendations 1. Revise the current financial thresholds for natural persons. 2. Allow for other forms of proof of investor sophistication. - SEC staff did not recommend the elimination of the accredited investor definition, but rather recommended modifications to the existing standards. 15
33 Act – Accredited Investors – Proposed Modifications to Definition • Revise the current financial thresholds for natural persons. – Leave the current income and net worth thresholds in place, subject to investment limitations. – Create additional inflation-adjusted income and net worth thresholds that are not subject to investment limitations. – Index all financial thresholds for inflation on a going-forward basis. – Permit spousal equivalents to pool their finances for purposes of qualifying as accredited investors. – Revise the definition as it applies to entities by replacing the $5 million assets test with a $5 million investments test and including all entities rather than specifically enumerated types of entities. – Grandfather issuers’ existing investors that are accredited investors under the current definition with respect to future offerings of their securities. 16
33 Act – Accredited Investors – Proposed Modifications to Definition • Allow individuals to qualify as accredited investors based on other measures of sophistication. – Permit individuals with a minimum amount of investments to qualify as accredited investors. – Permit individuals with certain professional credentials to qualify as accredited investors. – Permit individuals with experience investing in exempt offerings to qualify as accredited investors. – Permit knowledgeable employees of private funds to qualify as accredited investors for investments in their employer’s funds. – Permit individuals who pass an accredited investor examination to qualify as accredited investors. 17
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