All private funds need to consider the ramifications of three incredibly important acts:

• The Securities Act of 1933: This act prohibits public offerings of securities without registration.
• The Federal Investment Advisers Act of 1940: This act regulates investment advisers, generally defined as those who are paid to advise others on investing in securities. The general partner or management company of a private equity fund is considered an investment advisor by the SEC.
• The Investment Company Act of 1940: This act regulates investment companies that engage in the business of investing in the securities of other companies.  It imposes extensive and substantive requirements on registered investment companies which are not compatible with the business plan and management structure of a typical private equity fund.

In addition, funds can also be subject to state investment advisor laws.

In order to qualify as a private offering, exempt from registration under the Securities Act of 1933, most issuers and funds use Rule 506 of Regulation D. This rule requires the funds to offer securities to accredited investors. The most common types of accredited investors are individuals with gross income exceeding $200,000 in each of the two most recent years or joint income with a spouse or partner exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; persons whose individual net worth, or joint net worth with that person’s spouse or partner, exceeds $1,000,000, excluding the person’s primary residence; and certain entities with total assets in excess of $5,000,000. 

Qualified purchasers are relevant under the Investment Company Act (Company Act). Any fund that sells interests only to qualified purchasers avoids registration of the fund under Section 3(C)7 of the Company Act.  The most common types of qualified purchasers are natural persons and family-owned companies each owning $5 million in investments and entities owning $25 million in investments. 

In Minnesota, to meet the private fund advisor exemption under the Minnesota Securities Act (the state version of the Investment Advisors Act), all the investors in a private fund must be qualified clients in addition to being accredited investors. A qualified client is an investor who has invested $1,000,000 with the fund, has a net worth of $2.1 million excluding the value of a primary residence, is a qualified purchaser, or is an officer or director of the fund manager or an employee who participates in the investment activities of the investment advisor.

Minnesota law requires licensure of investment advisors doing business within the state of Minnesota, unless the investment advisor meets an exemption (Minn. Stat. Section 80A.58). If the principals of a fund have an office or work outside of Minnesota, then they are subject to this law in addition to the federal Investment Advisers Act of 1940. The most common exemption is the private fund adviser exemption. To meet the private fund adviser exemption, one must meet both of these qualifiers:

• Neither the private fund adviser nor any of its advisory affiliates are subject to a disqualification as described in Rule 262 of SEC Regulation A, Code of Federal Regulations, title 17, section 230.262; and
• The private fund adviser files with Minnesota each report that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, Code of Federal Regulations, title 17, section 275.204-4 (Form ADV).

In addition, if the private fund advisor is advising 3(c)(1) funds (other than VC funds):

• All of the investors in the private fund must be “Qualified Clients.” A Qualified Client is an investor who meets at least one of the following criteria:
• has invested $1,000,000 with the investment adviser; or
• has a net worth of $2,100,000 (excluding the value of a primary residence); or
• is a “qualified purchaser”; or
• is an officer or director of the fund manager or is an employee who participates in the investment activities of the investment adviser and has been doing so for 12 months.
• The private fund must obtain audited financials; and
• The private fund must disclose to investors all services provided, duties owed to investors, and other material info.

Private funds are investment vehicles, such as private equity, venture capital, hedge funds, and real estate funds, that pool capital from accredited and institutional investors to invest in various assets. They are typically not subject to the same regulatory requirements as public funds, allowing for greater flexibility in investment strategies. 

Avisen Legal serves a variety of clients in the private funds sector, including fund managers, investment advisors, institutional investors, high-net-worth individuals, and family offices. We assist with fund formation, compliance, structuring, and strategic transactions. 

Avisen Legal provides comprehensive services for private funds, including fund formation and structuring, compliance with federal and state regulations, preparation of offering memorandums and subscription agreements, negotiating secondary sales of alternative investments, and strategic advice on mergers, acquisitions, and joint ventures. 

Avisen Legal assists with fund formation by advising on the appropriate legal structure, preparing and filing necessary documents, drafting offering memorandums, and ensuring compliance with relevant regulations. We can help clients navigate the complex legal landscape to establish funds that align with their investment strategies and goals. 

Avisen Legal supports compliance with securities laws by advising on exemptions under the Securities Act of 1933, assisting with filings such as Form D and Form PF, and ensuring adherence to the Investment Advisers Act and the Investment Company Act. We help clients maintain regulatory compliance and manage legal risks. 

Avisen Legal assists with secondary sales of alternative investments by negotiating and drafting sale agreements, ensuring compliance with applicable regulations, and providing strategic advice on structuring transactions. Our legal guidance helps clients maximize value and navigate the complexities of secondary markets. 

Forming a private fund allows investors to pool resources, diversify their portfolios, and access a wider range of investment opportunities. Private funds offer flexibility in investment strategies and can be tailored to meet specific financial goals, providing potential for higher returns compared to traditional investment vehicles. 

Avisen Legal handles strategic transactions involving private funds by providing legal advice and representation in mergers, acquisitions, joint ventures, and divestitures. We ensure that transactions are structured to achieve clients’ strategic objectives while managing legal risks and ensuring compliance with regulatory requirements. 

During an initial consultation with Avisen Legal for private funds, you can expect a detailed discussion of your investment goals, fund structure, and regulatory compliance needs. Our attorneys will provide preliminary advice and outline a plan to address your specific requirements, ensuring a tailored approach to your private fund’s legal needs. 

Avisen Legal assists with the formation of opportunity zone funds by advising on the legal structure, preparing offering documents, and ensuring compliance with tax regulations related to opportunity zones. We help our clients take advantage of tax incentives while promoting economic development in designated areas. 

Working with experienced legal counsel for private fund formation is important because it ensures that the fund complies with complex regulatory requirements, is structured effectively, and is legally sound. Avisen’s experienced attorneys provide valuable insights and guidance, helping to avoid legal pitfalls and achieve investment objectives. 

Yes, Avisen Legal can assist with compliance under the Commodities Exchange Act by advising on registration exemptions for commodity pool operators (CPOs) and ensuring adherence to regulations set forth by the Commodity Futures Trading Commission (CFTC). We help clients navigate the regulatory landscape to maintain compliance. 

Non-compliance with securities regulations for private funds can result in severe consequences, including fines, legal penalties, and reputational damage. It can also lead to investor lawsuits and the invalidation of fund transactions. Ensuring compliance is critical to mitigating these risks and maintaining the fund’s integrity.