managing global private placements in a changing world...each fund is generally one client, unless...
TRANSCRIPT
Copyright © 2010 by K&L Gates LLP. All rights reserved.
Managing Global Private Placements in a Changing World
A Joint Presentation by CACEIS Investor Services and K&L Gates LLP
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Introduction to Speakers
Stuart Fross – K&L GatesPartner
Sandrine LeClerq – CACEIS Investor ServicesGeneral Counsel
John Schrier – CACEIS Investor ServicesCorporate Counsel, Fund Structuring
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Agenda
US Private Placements of Private Funds - a quick review and how Dodd-Frank affects them Investment Adviser Registration Requirements and the Foreign Adviser Registration Private Fund Reporting RequirementsProducts and Services Needed by Advisers After Dodd-FrankAIFMD: the end of EU private placements as we know them?UCITS IV: the alternative directive to the AIFMD?
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Background
Significant regulatory change in the US and EUNew approach to “hedge funds” and “private equity funds” by legislators and regulatorsNew approach to “managers” of private fundsFocus on the Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) in the USFocus on the Alternative Fund Management Directive in the EU What does all of this change mean?What should “managers” do, and when?
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Case Study
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A Simple Case Study
Imagine an investment adviser located outside of the US, or inside the USImagine a Cayman Islands funds The Cayman fund will be marketed in the USThe Cayman will fund will marketed in the EUThe investment adviser prefers to market the fund itselfThe fund will be sold over the next 10 years
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US Private Placements of Private Funds - a quick review and how Dodd-Frank affects them
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Requirements of Regulation D Rule 506
No general solicitationOffers made to persons with a pre-existing business relationshipMade “privately” without and publicity
Resale restrictionsPurchase with investment intentProvided with all materials information and no misstatement of material factSales made to accredited investorsaccredited investors
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Case Study
Cayman Fund must offer its shares without a general solicitation in the USMust limit offerees to persons that have a pre-existing relationshipAdviser must avoid becoming a “broker”Offering must be limited to “accredited investors”Fund must also secure an exemption from the Investment Company Act – typically by further limiting the universe of investors to “qualified purchasers”
More on ICA later, now for “accredited investors”
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Accredited Investor StandardPrior to the Dodd-Frank Act, a natural person previously was an accredited investor if he or she:
Had an individual net worth, or joint net worth with his or her spouse, including any net equity in a primary residence, that exceeded $1 million at the time of the purchase of securities (Net Worth Test), orHad an individual income in excess of $200,000 (or joint income with that person’s spouse in excess of $300,000) in each of the two most recent years and a reasonable expectation of reaching the same income in the current year (Income Test)
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Private Placements in the United StatesNo securities may be offered publicly in the US absent registration of the securities with the SEC.No offshore fund may conduct a US public offeringOffshore funds may conduct a US private placementpursuant to a private placement conducted under Section 4(2) of the Securities Act and Rule 506 of Regulation DSection 4(2) exempts from registration offerings of securities “by an issuer not involving any public offering”Private placements are generally made in accordance with Rule 506 of Regulation D
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Accredited Investor Standard
Dodd-Frank immediately requires the SEC to exclude the value of a person’s primary residence in determining whether that person meets the Net Worth Test
This exclusion became effective immediately upon enactment of the Act in July 2010
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Accredited Investor Standard
The Act requires the SEC to review the “accredited investor” definition as it applies to natural persons
The SEC cannot however increase the $1 million level of the Net Worth Test for four years after the enactment of the ActIn subsequent reviews (every four years), the SEC could propose increasing the $1 million level of the Net Worth Test
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Accredited Investor StandardIssues and questions raised by the changes
Exclusion of primary residence and other changes will shrink pool of natural person accredited investorsWill particularly affect:
Smaller advisers that manage private funds with significant investments by natural person accredited investors that are not “qualified purchasers” (i.e., 3(c)(1) funds)
The exclusion of the value of a primary residence requires immediate changes to subscription documents, website preclearance questionnaires and documents governing follow-on investments by investors
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Investment Adviser Registration Requirements and the Foreign Adviser Registration
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Adviser Registration and New ExemptionsThe Act rescinds the “private adviser exemption” effective July 21, 2011
Present law mandates SEC registration for investment advisers that have at least 15 “clients” and more than $30 million in assets under management (“AUM”).
Each fund is generally one client, unless side letters are involved.SEC registration is permissible if assets exceed $25 million.For private equity funds, invested assets generally are counted and committed assets ignored.
As not registered with the SEC either registered with one or more states, or enjoyed a total exemption. But they couldn’t “hold themselves out” to be an investment adviser.Under the Dodd-Frank Act, virtually all advisers must/will be registered: the question is with which agency/agencies.
AUM includes committed assets even before they are called.
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Adviser Registration and New Exemptions (cont.)The Act raises the minimum AUM for federal registration to $100 million
Prohibition on federal registration applies to advisers:If required to be registered as an investment adviser in the state in which it has its principal place of business and, if registered, would be subject to examinationWith AUM between $25 million and $100 million
SEC may increase these amounts by ruleIf not required to be registered in a state, the minimum AUM for federal registration is $25 million
Does not apply:To advisers to registered investment companies or BDCs To advisers that would be required to register with 15 or more states, andTo advisers with their principal office and place of business outside of the United StatesMany will fall under Advisers Act
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Foreign Private AdvisersThe Dodd-Frank Bill introduces SEC investment adviser registration requirements for any foreign investment adviser that does not meet the “Foreign Private Adviser” registration exemptions. Defined to mean any adviser who:
Has no place of business in the United StatesHas, in total, fewer than 15 clients and investors in the UnitedStates in Private Funds advised by the investment adviser Has aggregate US client AUM attributable to clients invested in the US in Private Funds advised by the investment adviser of less than $25 million
And neither:
Holds itself out generally to the public in the United States as an investment adviser; norActs as (i) an investment adviser to any investment company, or (ii) a BDC.
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Private Fund SEC Reporting Requirements
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Recordkeeping and Reporting RequirementsThe Dodd-Frank Act provides the SEC with authority to require records and reports regarding private funds (generally, a 3(c)(1) or 3(c)(7) fund)
Who will do the reporting?The Act requires records to include the following:
AUM and use of leverage, including off-balance sheet leverageCounterparty credit risk exposureTrading and investment positionsValuation policies and practicesTypes of assets heldSide arrangements or side lettersTrading practices, andSuch other information as the SEC (in consultation with the Financial Stability Oversight Council) determines is necessary and appropriate in the public interest and for protection of investors or for the assessment of systemic risk
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Recordkeeping and Reporting Requirements (cont.)SEC may issue rules requiring registered advisers to private funds to maintain and file reports containing information SEC deems necessary and appropriate
Reporting requirements may vary based on type or size of private funds advisedUnclear what these rules will require or what record maintenance period and requirements will be imposed
SEC may share information with FSOC, a body created to assess systemic risk in the financial system generally, as the FSOC considers necessary to assess systematic riskSEC and CFTC (after consultation with FSOC) must jointly promulgate rules to establish the form and content of reports to be filed with SEC and CFTC by dual registrants
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US Private Placement –Implications Post July 11, 2010
Likely investment adviser registrationLikely private fund registration requirementsApplication of US law to non-US Advisers?Key implications of registration
Compliance policies and proceduresBrochure Rule, ADV Part 2Custody rule (applies to fund)Record keepingSEC inspection powers
Is the US offering worth it?
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Managing Global Private Placement in a Rapidly Changing World
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Review of EU Private Placement regime todayThere are no EU harmonised regulations surrounding the distribution of alternative investment funds in Europe.Non-UCITS mutual funds and alternative funds (hedge, real estate and private equity) seeking to distribute must look to each countries national regulations.Some jurisdictions have codified tighter regulated regimes that provide for private placement of shares under certain limitations. Some do not permit private placement at all whilst others do not specifically address this issue - meaning that careful navigation is required.
Source: PwC, December 2010
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Review of EU Private Placement regime todayAustria
Denmark
Finland
France
Germany
Italy
Netherlands
Norway
Spain
Sweden
Switzerland
United Kingdom
Legend Regulations permitting with reasonable conditionsPossible but with limited scopeNot permitted or extremely restricted – need to be careful
Source: PwC, December 2010
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The end of the private placement regime as we know it?Not yet – and this will be in exchange for enhanced development perspectives and will mean the end of uncertainty and complexityProgressive implementation calendar
Jan 2011: the Directive enters into forceJan 2013: end of transposition period – Passport for EU AIFM/EU AIF – National Private regimes for non-EU AIFM/non-EU AIF (subject to minimum standardised rules)Jan 2015: phased entry into force of third country passport on the basis of ESMA advice – national private placement regimes continue to existJan 2018: ESMA advice determining possible termination of the national private placement regimes (passive distribution still allowed)
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Non-EU managers seeking to sell non-EU AIF under the passport (as from 2015)
Comply with all conditions of the Directive based on an “equivalence”approach
Managers must register and be authorised by the “Member state of reference”Need to appoint a depositary bank
Meet additional conditions in order to “compensate” the lack of statutory cooperation between the Member States of distribution/ the Reference Member State and the home country of the AIF/AIFM
Appointment of a Legal RepresentativeCooperation agreements must be in place between the EU member State of reference and the fund’s third country home regulatorThird countries are not on the FAFT non-cooperative listFund’s third country home regulator has signed an OECD model tax sharing information agreement with each EU state in which the fund is to be marketed
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Benefits of establishing an EU AIFM
Proximity to: Local AuthoritiesService Providers – close control and leverageInvestors – increase of confidence and on time decision with respect to issues linked to distribution and valuation etc.
Legal certaintySkip transitory periodSave reassessment risk
Constraints not to be overestimated – market solutions
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UCITS IV the alternative to the AIFM?UCITS is the EU safest product label, eligible to public distribution without restrictions through the passportUCITS are regulated by a stricter regulation
on product: investment diversification, liquidity requirement, limitation on global risk exposureon the management company: minimal local substance requirement, higher degree of governance rules
Since UCITS III, the scope of eligible instruments is substantially extended, giving managers the possibility to run “Hedge fund like”investment strategies under the UCITS label (long/short, 130/30,absolute return/relative value/ etc.)Attractive for Regulated EU professionals (insurance companies, etc.)Industry supportive solutions
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Questions?
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Panelist Contact Information
Stuart E. FrossPartner, K&L Gates [email protected]
(617) 261-3135 (phone)(617) 261-3175 (fax)
Sandrine LECLERCQGeneral Counsel CACEIS GroupCACEIS Bank [email protected]
Tel. +352 47 67 25 97Mob +352 621 99 25 97Fax. +352 47 67 35 97
John V. SchrierCorporate Counsel, Fund StructuringCACEIS (USA) [email protected]
1.212.403.9541 Direct Tel1.212.403.9500 Main Tel1.212.403.9550 Fax