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Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™
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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
2
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DISCLAIMER
The material in this webinar is for informational purposes only. It
should not be considered legal, financial or other professional advice.
You should consult with an attorney or other appropriate professional
to determine what may be best for your individual needs. While
Financial Poise™ takes reasonable steps to ensure the information it
publishes is accurate, Financial Poise™ makes no guaranty in this
regard.
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MEET THE FACULTY
Moderator:
Michele Itri – Tannenbaum, Helpern, Syracuse & Hirschtritt
Panelists:
Wayne Davis – Tannenbaum, Helpern, Syracuse & Hirschritt
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger
Thomas Kennedy – Versa Capital Management, LLC
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ABOUT THIS WEBINAR:
Basics of Fund Formation
Private funds are legally required to organize in a very specific manner. Each requires a
sponsor (investment manager) and a specified investment target/objective. Investors in
private funds are normally passive, much like a mutual fund or ETF investor, and rely on
the fund sponsor to acquire, manage and divest appropriately. Of course, there are
differences between the different kinds of private funds. This webinar explores fund
formation from an economic and compliance standpoint, and leverages our panelists’
experience to explain how the structure of private funds influence their performance. The
webinar also touches on documentation and compliance in an age of regulatory scrutiny,
and how funds are evolving to adjust.
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ABOUT THIS SERIES:
PE, VC, And Hedge Funds De-Mystified
Many people are familiar with the terms private equity, venture capital and hedge fund, but
few can actually define how each investment vehicle operates or makes money. Thanks to
their seemingly complicated nature and lucrative reputations, the PE, VC and hedge fund
industries occupy an almost mythic (and sometimes infamous) status for Americans. The
combination of mystery and wealth creates a vacuum for misinformation and mistrust.
This webinar series de-mystifies these private funds, explaining their similarities and
differences from other investment vehicles and from each other- from the legal, financial,
and investment mandate perspectives.
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EPISODES IN THIS SERIES
2/5/19 Episode #1:
What is a “Private Fund?”
3/5/19 Episode #2:
Basics of Fund Formation
4/9/19 Episode #3:
Capital Raising
5/7/19 Episode #4:
Due Diligence Before Investing
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Dates shown are premiere dates.
All webinars will be available
On Demand approximately 4 weeks
after they premiere.
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Episode #2:
Basics of Fund Formation
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STRUCTURE
GP
Limited
Partnership
LP
LP
LP
LPLP
LP
LP
LP
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STRUCTURE (cont’d)
GP / Management
Company
Limited
Partnership
LP
LP
LP
LPLP
LP
LP
LP
Private Fund
Professionals
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STRUCTURE (cont’d)
GP / Management
Company
Limited
Partnership
(Fund)
LP
LP
LP
LPLP
LP
LP
LP
Private Fund
Professionals
Portfolio
Investment
Portfolio
Investment
Portfolio
Investment
Portfolio
Investment
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STRUCTURE (cont’d)
GP
Private Fund
Professionals
Management
Company
(aka Fund Sponsor)
GP
Fund 1
Fund 2
LP
LP LP
LP
LPLP
LP
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GENERAL STRUCTURAL NORMS
⚫ Fund commonly organized as limited partnership
⚫ GP of Fund (or Managing Member of LLC) = Fund Manager
⚫ Fund is a flow-through entity
⚫ LP Agreement typically follows industry-standard form
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THE FUND
⚫ The fund is a pooled vehicle where investors acquire an interest in exchange for
capital commitment/capital contributions
⚫ Entity that holds the portfolio investments directly or indirectly through acquisition
vehicles
⚫ Generally a Delaware limited partnership, and occasionally a limited liability
company
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THE FUND (cont’d)
⚫ Investors are passive and have no management power
⚫ LPA or LLC Agreement establishes governance and control requirements
⚫ Private equity, venture capital and other “closed-end” funds do not allow
redemptions
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LEGAL DOCUMENTATION
⚫ Fund Limited Partnership Agreement
⚫ Private Placement Memorandum
⚫ Subscription Agreement
⚫ General Partner LLC Agreement
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LEGAL DOCUMENTATION (cont’d)
⚫ Management Company LLC Agreement
⚫ Investment Management Agreement
⚫ Agreements with Service Providers (Administrators, Placement Agent,
Prime Broker, Custodian, etc.)
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LPA AGREEMENT
⚫ Establishes term of Partnership –
➔ Perpetual
➔ “Closed-end” term of years with extensions.
⚫ Capital commitments/capital contributions of Limited Partners and
General Partner
➔ Defaulting Partner Provisions (loan treatment, acceleration, offer,
removal)
⚫ Investment Period
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LPA AGREEMENT (cont’d)
⚫ Allocations of profits and losses
⚫ Distribution waterfall :
➔ Return of capital requirements
➔ Preferred return or hurdle to LPs
➔ Catch-up to GP
➔ 80% to LPs in proportion to their capital contributions; 20% to GP
(“carried interest”)
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LPA AGREEMENT (cont’d)
⚫ Management Fees and Partnership Expenses (fund organizational
expenses versus operating expenses of GP, management company)
⚫ Recall of LP distributions
⚫ Clawback of carried interest, escrow arrangements
⚫ General partner removal (by majority in interest for fraud, gross
negligence, willful misconduct or similar act, GP bankruptcy, GP change
in control, or occurrence of “key man” event)
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LPA AGREEMENT (cont’d)
⚫ Investment committee or advisory board
⚫ Time commitments; successor funds
⚫ Alternative Investment Vehicles; Co-Investment Vehicle provisions
⚫ “Side pockets” for hybrid or hedge funds
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LPA AGREEMENT (cont’d)
⚫ Investment Opportunities and Restrictions
⚫ Restrictions on Transfers of Interests (GP consent, “secondary”
transfers)
⚫ Dissolution
⚫ Valuation
⚫ Provisions relating to partners subject to special regulation (ERISA,
UBTI, ECI)
⚫ Exculpation and Indemnification
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LPA AGREEMENT (cont’d)
⚫ Power of Attorney to GP
⚫ Amendment
⚫ Confidentiality
⚫ Anti-money laundering
⚫ Books and Records
⚫ Tax Return Information
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PRIVATE PLACEMENT MEMORANDUM
⚫ The Private Placement Memorandum is the document that discloses
everything the investor needs to know to make an informed investment
decision prior to investing:
⚫ Serves a defensive purpose for the fund vis a vis investor claims
⚫ Contains securities notices and disclaimers
⚫ Summary of offering terms (size of offering, offering period,
minimum investment accepted, initial and subsequent closings)
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PRIVATE PLACEMENT MEMORANDUM (cont’d)
⚫ Business and investment strategy (types of investments, industry
and sector focus, geographical focus, allocation of investments)
⚫ Risk factors – very important to disclose main risks to investors
⚫ Summary of Fund LPA
⚫ Diversification; investment restrictions
⚫ Disclosure of potential conflicts of interest
⚫ Tax and Regulatory Considerations
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SUBSCRIPTION AGREEMENT
⚫ Subscription Agreement is the actual “sales contract” between the
Sponsor and a limited partner
⚫ Includes an investor questionnaire, which establishes the investor’s
sophistication and accredited status
⚫ Representations/warranties are geared towards making sure investors
do not cause the Fund to run afoul of exemptions claimed under
applicable regulations and tax laws
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SUBSCRIPTION AGREEMENT (cont’d)
⚫ Details any requirements regarding the capital commitment and capital
contributions
⚫ Confirms receipt of the LPA, PPM and sometimes the Form ADV of the
sponsor
⚫ Acceptance of subscription remains subject to approval by the General
Partner
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GP LLC AGREEMENT
⚫ Addresses “normal” partnership related issues (death, disability of
principals, management, voting, buy-sell, transfer restrictions, etc.)
⚫ Often separates units into:
⚫ Capital interests to cover capital contributions into GP (and, in turn, to
the fund), and
⚫ Profits interests (distributions from GP’s receipt of carried interest)
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GP LLC AGREEMENT (cont’d)
⚫ Tax distributions
⚫ Clawbacks by the Fund
⚫ “Drag-along” rights, particularly where disparate equity owners
⚫ Sets forth removal of manager
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SECURITIES ISSUES
⚫ Four major Acts ( + Rules promulgated pursuant thereto) that apply:
➔ U.S. Securities Act of 1933, as amended (the Securities Act)
➔ U.S. Securities Exchange Act of 1934, as amended (the Exchange Act)
➔ U.S. Investment Company Act of 1940, as amended (the Investment
Company Act)
➔ U.S. Investment Advisers Act of 1940, as amended (the Advisers Act)
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SECURITES ISSUES – ANTIFRAUD PROVISIONS
⚫ All four Acts (+ Common Law) include , antifraud provisions
⚫ E.g. Rule 10b-5 under the Exchange Act:
“It shall be unlawful for any person . . . (a) to employ any device, scheme, or
artifice to defraud, (b) to make any untrue statement of a material fact or to
omit to state a material fact necessary in order to make the statements made, in
the light of the circumstances under which they were made, not misleading, or
(c) to engage in any act, practice or course of business which operates or would
operate as a fraud or deceit upon any person, in connection with the purchase
or sale of any security.”
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SECURITIES ISSUES – PRIVATE PLACEMENTS
⚫ All offers and sales of securities must be registered with the SEC under the Securities Act
unless an exemption applies
⚫ Exemptions include:
➔ Private Placements Under Regulations D
✓ Under§4(a)(2) of the Securities Act, the obligation to register the offer/sale of
securities does not apply to transactions by an issuer not involving a public
offering
✓ Regulation D under the Securities Act provides guidance as to what would
constitute a private placement
➔ Offshore Offerings Under Regulation S
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SECURITIES ISSUES – THE EXCHANGE ACT
⚫ Issuer Exemption from Broker-Dealer Registration
➔ Any person selling interests in the fund may need to register with the SEC under
the Exchange Act as a broker-dealer
➔ But there is an exemption provided for “associated persons” of an issuer
⚫ Investor Limits to Avoid Public Filing Requirements
➔ Most issuers that have more than 1,999 holders of record or 500 holders who are
not accredited investors must comply with public disclosure, reporting, and other
obligations as a public company under the Exchange Act
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THE INVESTMENT COMPANY ACT AND
“QUALIFIED PURCHASES”
⚫ Generally, any issuer that is or holds itself out as being primarily engaged in
business of investing, reinvesting, or trading in securities is an investment
company under the Investment Company Act
➔ VC funds and PE funds, however, are not investment companies, if
formed in a manner that satisfies the definitional exclusions of Section
3(c) of the Investment Company Act
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THE INVESTMENT COMPANY ACT AND
“QUALIFIED PURCHASES” (cont’d)
➔ Section 3(c)(1) excludes any issuer whose outstanding securities are beneficially owned by ≤ 100
persons and that is not making and does not presently propose to make a public offering of its
securities
➔ Section 3(c)(7) excludes any issuer, the outstanding securities of which are owned exclusively by
persons who, at the time of the acquisition of such securities, are qualified purchasers, and
which is not making and does not at that time propose to make a public offering of such
securities
⚫ Knowledgeable Employees may own securities of a fund that relies on Section 3(c)(1) or Section
3(c)(7), even if doing so would result in more than 100 persons beneficially owning the fund’s
securities and even though such employees are not qualified purchasers
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THE ADVISERS ACT AND “QUALIFIED CLIENTS”
⚫ Scope of Registration Requirements:
➔ “Investment adviser” = Any person who, for compensation, engages in
business of advising others as to value of securities or as to advisability of
investing in, purchasing, or selling securities or who, for compensation and as
part of a regular business, issues or promulgates analyses or reports
concerning securities.
➔ The Advisers Act covers investment advisers with assets of $25 million or
more under management. Investment advisers with less than $100 million
under management are to be regulated by the states
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THE ADVISERS ACT AND “QUALIFIED CLIENTS”
(cont’d)
⚫ Benefits of Registration as an Investment Adviser:
⚫ Can allow significant participation by corporate pensions under the Employee
Retirement Income Security Act of 1974
⚫ Can attract certain government employee benefit plans that require their
managers to be registered investment advisers
⚫ Permitted to hold themselves out broadly to the public as investment advisers
to attract clients
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THE ADVISERS ACT AND “QUALIFIED CLIENTS”
(cont’d)
⚫ If a fund manager registers as an investment adviser with the SEC, all of the
fund’s investors must be qualified clients in order to enable the fund
manager to receive performance based compensation
⚫ A qualified client includes, among others, a natural person or company who
has a net worth (including assets and liabilities held jointly with a spouse) of
more than $2.1 million
⚫ Qualified purchasers under the Investment Company Act are automatically
deemed qualified clients under the Advisers Act
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ABOUT THE FACULTY
MICHELE ITRI – Itri@thsh.com
Michele Itri is the Co-Chair of the Tax Law Practice at Tannenbaum Helpern Syracuse & Hirschtritt LLP.
Michele Itri’s practice focuses on the tax and legal aspects of investment funds, financial instruments,
international transactions, corporate and real estate transactions. She works closely with clients to structure
transactions to achieve that most favorable tax results. Her practice encompasses all aspects of federal, state,
local and international taxation, with an emphasis on onshore and offshore investment funds, venture capital
transactions, corporate acquisitions, financial instruments and real estate acquisitions and dispositions.
Michele assists clients in the structuring of onshore and offshore investment funds (such as general equity
funds, fund of funds, real estate funds, venture capital funds, distressed debt funds, arbitrage funds and global
macro funds) and in the structuring and organization of private partnerships and limited liability companies
(primarily investment management and real estate management companies and start-ups). She is a graduate
of Harvard Law School (J.D.1998) and Colgate University (B.A.1995).
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ABOUT THE FACULTY
JONATHAN FRIEDLAND – jfriedland@sfgh.com
Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply:
to make money for clients whenever possible and to protect their interests at every turn. Licensed in four
states, Jonathan’s transactional work focusses on representing private funds and other owners of private
businesses, and the businesses they own. He regularly advises on M&A activities, structuring new
ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV®
Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions.
Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years)
and from the University of Pennsylvania Law School. He clerked for a federal judge before entering
private practice and served for several years as an Adjunct Professor of Strategic Management at the
University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several
significant treatises, several chapters in other treatises, and scores of articles on law and business.
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ABOUT THE FACULTY
WAYNE DAVIS – Davis@thsh.com
Wayne H. Davis is co-chair of Tannenbaum Helpern’s Investment Management Practice and a member
of the firm’s Executive Committee. Wayne advises U.S. and non-U.S domiciled venture capital, private
equity and hedge funds, as well as family offices, on all aspects of their business, including structuring
and formation, governing regulation, seed capital and financing arrangements, and the implementation
of select investment strategies. Wayne has represented numerous investment funds, financial
institutions and investors in connection with counter-party defaults and liquidations, including in the
context of the Lehman Brothers and MF Global-related insolvency proceedings in both the U.S. and the
U.K., as well as in numerous investment fund insolvency related matters.
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ABOUT THE FACULTY
THOMAS KENNEDY – TKennedy@versa.com
Mr. Kennedy, a member of the Portfolio Legal Services team, has over 20 years of experience in law and
business, assisting clients in a broad variety of industries with advice on legal matters ranging from
corporate governance, mergers and acquisitions, securities law, and general corporate and commercial
matters.
Prior to his association with Versa, Mr. Kennedy was a Partner in the Corporate and Securities Group of
law firm Pepper Hamilton LLP, and he previously served as Associate General Counsel to a NYSE-listed
manufacturing concern.
Mr. Kennedy is a graduate of St. Joseph's University and Washington University Law School, where he
was a member of the Order of the Coif, and Articles Editor for the Washington University Law Quarterly.
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QUESTIONS OR COMMENTS?
If you have any questions about this webinar that you did not get to ask during
the live premiere, or if you are watching this webinar On Demand, please do
not hesitate to email us at info@financialpoise.com with any questions or
comments you may have. Please include the name of the webinar in your email
and we will do our best to provide a timely response.
IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily
for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education.
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ABOUT FINANCIAL POISE
DailyDAC LLC, d/b/a Financial Poise™ provides
continuing education to attorneys, accountants,
business owners and executives, and investors. Its
websites, webinars, and books provide Plain
English, entertaining, explanations about legal,
financial, and other subjects of interest to these
audiences.
Visit us at www.financialpoise.com.
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Basics of Fund Formation (Series: PE, VC, and Hedge Funds De-Mystified)

  • 1. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Insert the cover image for this webinar on this slide entirely 1
  • 2. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Practical and entertaining education for attorneys, accountants, business owners and executives, and investors. 2
  • 3. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe DISCLAIMER The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure the information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 3
  • 4. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe MEET THE FACULTY Moderator: Michele Itri – Tannenbaum, Helpern, Syracuse & Hirschtritt Panelists: Wayne Davis – Tannenbaum, Helpern, Syracuse & Hirschritt Jonathan Friedland – Sugar Felsenthal Grais & Helsinger Thomas Kennedy – Versa Capital Management, LLC 4
  • 5. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS WEBINAR: Basics of Fund Formation Private funds are legally required to organize in a very specific manner. Each requires a sponsor (investment manager) and a specified investment target/objective. Investors in private funds are normally passive, much like a mutual fund or ETF investor, and rely on the fund sponsor to acquire, manage and divest appropriately. Of course, there are differences between the different kinds of private funds. This webinar explores fund formation from an economic and compliance standpoint, and leverages our panelists’ experience to explain how the structure of private funds influence their performance. The webinar also touches on documentation and compliance in an age of regulatory scrutiny, and how funds are evolving to adjust. 5
  • 6. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THIS SERIES: PE, VC, And Hedge Funds De-Mystified Many people are familiar with the terms private equity, venture capital and hedge fund, but few can actually define how each investment vehicle operates or makes money. Thanks to their seemingly complicated nature and lucrative reputations, the PE, VC and hedge fund industries occupy an almost mythic (and sometimes infamous) status for Americans. The combination of mystery and wealth creates a vacuum for misinformation and mistrust. This webinar series de-mystifies these private funds, explaining their similarities and differences from other investment vehicles and from each other- from the legal, financial, and investment mandate perspectives. 6
  • 7. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe EPISODES IN THIS SERIES 2/5/19 Episode #1: What is a “Private Fund?” 3/5/19 Episode #2: Basics of Fund Formation 4/9/19 Episode #3: Capital Raising 5/7/19 Episode #4: Due Diligence Before Investing 7 Dates shown are premiere dates. All webinars will be available On Demand approximately 4 weeks after they premiere.
  • 8. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe Episode #2: Basics of Fund Formation 8
  • 9. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STRUCTURE GP Limited Partnership LP LP LP LPLP LP LP LP
  • 10. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STRUCTURE (cont’d) GP / Management Company Limited Partnership LP LP LP LPLP LP LP LP Private Fund Professionals
  • 11. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STRUCTURE (cont’d) GP / Management Company Limited Partnership (Fund) LP LP LP LPLP LP LP LP Private Fund Professionals Portfolio Investment Portfolio Investment Portfolio Investment Portfolio Investment
  • 12. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe STRUCTURE (cont’d) GP Private Fund Professionals Management Company (aka Fund Sponsor) GP Fund 1 Fund 2 LP LP LP LP LPLP LP
  • 13. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GENERAL STRUCTURAL NORMS ⚫ Fund commonly organized as limited partnership ⚫ GP of Fund (or Managing Member of LLC) = Fund Manager ⚫ Fund is a flow-through entity ⚫ LP Agreement typically follows industry-standard form
  • 14. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE FUND ⚫ The fund is a pooled vehicle where investors acquire an interest in exchange for capital commitment/capital contributions ⚫ Entity that holds the portfolio investments directly or indirectly through acquisition vehicles ⚫ Generally a Delaware limited partnership, and occasionally a limited liability company
  • 15. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE FUND (cont’d) ⚫ Investors are passive and have no management power ⚫ LPA or LLC Agreement establishes governance and control requirements ⚫ Private equity, venture capital and other “closed-end” funds do not allow redemptions
  • 16. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LEGAL DOCUMENTATION ⚫ Fund Limited Partnership Agreement ⚫ Private Placement Memorandum ⚫ Subscription Agreement ⚫ General Partner LLC Agreement
  • 17. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LEGAL DOCUMENTATION (cont’d) ⚫ Management Company LLC Agreement ⚫ Investment Management Agreement ⚫ Agreements with Service Providers (Administrators, Placement Agent, Prime Broker, Custodian, etc.)
  • 18. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT ⚫ Establishes term of Partnership – ➔ Perpetual ➔ “Closed-end” term of years with extensions. ⚫ Capital commitments/capital contributions of Limited Partners and General Partner ➔ Defaulting Partner Provisions (loan treatment, acceleration, offer, removal) ⚫ Investment Period
  • 19. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT (cont’d) ⚫ Allocations of profits and losses ⚫ Distribution waterfall : ➔ Return of capital requirements ➔ Preferred return or hurdle to LPs ➔ Catch-up to GP ➔ 80% to LPs in proportion to their capital contributions; 20% to GP (“carried interest”)
  • 20. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT (cont’d) ⚫ Management Fees and Partnership Expenses (fund organizational expenses versus operating expenses of GP, management company) ⚫ Recall of LP distributions ⚫ Clawback of carried interest, escrow arrangements ⚫ General partner removal (by majority in interest for fraud, gross negligence, willful misconduct or similar act, GP bankruptcy, GP change in control, or occurrence of “key man” event)
  • 21. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT (cont’d) ⚫ Investment committee or advisory board ⚫ Time commitments; successor funds ⚫ Alternative Investment Vehicles; Co-Investment Vehicle provisions ⚫ “Side pockets” for hybrid or hedge funds
  • 22. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT (cont’d) ⚫ Investment Opportunities and Restrictions ⚫ Restrictions on Transfers of Interests (GP consent, “secondary” transfers) ⚫ Dissolution ⚫ Valuation ⚫ Provisions relating to partners subject to special regulation (ERISA, UBTI, ECI) ⚫ Exculpation and Indemnification
  • 23. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe LPA AGREEMENT (cont’d) ⚫ Power of Attorney to GP ⚫ Amendment ⚫ Confidentiality ⚫ Anti-money laundering ⚫ Books and Records ⚫ Tax Return Information
  • 24. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PRIVATE PLACEMENT MEMORANDUM ⚫ The Private Placement Memorandum is the document that discloses everything the investor needs to know to make an informed investment decision prior to investing: ⚫ Serves a defensive purpose for the fund vis a vis investor claims ⚫ Contains securities notices and disclaimers ⚫ Summary of offering terms (size of offering, offering period, minimum investment accepted, initial and subsequent closings)
  • 25. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe PRIVATE PLACEMENT MEMORANDUM (cont’d) ⚫ Business and investment strategy (types of investments, industry and sector focus, geographical focus, allocation of investments) ⚫ Risk factors – very important to disclose main risks to investors ⚫ Summary of Fund LPA ⚫ Diversification; investment restrictions ⚫ Disclosure of potential conflicts of interest ⚫ Tax and Regulatory Considerations
  • 26. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SUBSCRIPTION AGREEMENT ⚫ Subscription Agreement is the actual “sales contract” between the Sponsor and a limited partner ⚫ Includes an investor questionnaire, which establishes the investor’s sophistication and accredited status ⚫ Representations/warranties are geared towards making sure investors do not cause the Fund to run afoul of exemptions claimed under applicable regulations and tax laws
  • 27. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SUBSCRIPTION AGREEMENT (cont’d) ⚫ Details any requirements regarding the capital commitment and capital contributions ⚫ Confirms receipt of the LPA, PPM and sometimes the Form ADV of the sponsor ⚫ Acceptance of subscription remains subject to approval by the General Partner
  • 28. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GP LLC AGREEMENT ⚫ Addresses “normal” partnership related issues (death, disability of principals, management, voting, buy-sell, transfer restrictions, etc.) ⚫ Often separates units into: ⚫ Capital interests to cover capital contributions into GP (and, in turn, to the fund), and ⚫ Profits interests (distributions from GP’s receipt of carried interest)
  • 29. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe GP LLC AGREEMENT (cont’d) ⚫ Tax distributions ⚫ Clawbacks by the Fund ⚫ “Drag-along” rights, particularly where disparate equity owners ⚫ Sets forth removal of manager
  • 30. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SECURITIES ISSUES ⚫ Four major Acts ( + Rules promulgated pursuant thereto) that apply: ➔ U.S. Securities Act of 1933, as amended (the Securities Act) ➔ U.S. Securities Exchange Act of 1934, as amended (the Exchange Act) ➔ U.S. Investment Company Act of 1940, as amended (the Investment Company Act) ➔ U.S. Investment Advisers Act of 1940, as amended (the Advisers Act)
  • 31. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SECURITES ISSUES – ANTIFRAUD PROVISIONS ⚫ All four Acts (+ Common Law) include , antifraud provisions ⚫ E.g. Rule 10b-5 under the Exchange Act: “It shall be unlawful for any person . . . (a) to employ any device, scheme, or artifice to defraud, (b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or (c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.”
  • 32. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SECURITIES ISSUES – PRIVATE PLACEMENTS ⚫ All offers and sales of securities must be registered with the SEC under the Securities Act unless an exemption applies ⚫ Exemptions include: ➔ Private Placements Under Regulations D ✓ Under§4(a)(2) of the Securities Act, the obligation to register the offer/sale of securities does not apply to transactions by an issuer not involving a public offering ✓ Regulation D under the Securities Act provides guidance as to what would constitute a private placement ➔ Offshore Offerings Under Regulation S
  • 33. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe SECURITIES ISSUES – THE EXCHANGE ACT ⚫ Issuer Exemption from Broker-Dealer Registration ➔ Any person selling interests in the fund may need to register with the SEC under the Exchange Act as a broker-dealer ➔ But there is an exemption provided for “associated persons” of an issuer ⚫ Investor Limits to Avoid Public Filing Requirements ➔ Most issuers that have more than 1,999 holders of record or 500 holders who are not accredited investors must comply with public disclosure, reporting, and other obligations as a public company under the Exchange Act
  • 34. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE INVESTMENT COMPANY ACT AND “QUALIFIED PURCHASES” ⚫ Generally, any issuer that is or holds itself out as being primarily engaged in business of investing, reinvesting, or trading in securities is an investment company under the Investment Company Act ➔ VC funds and PE funds, however, are not investment companies, if formed in a manner that satisfies the definitional exclusions of Section 3(c) of the Investment Company Act
  • 35. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE INVESTMENT COMPANY ACT AND “QUALIFIED PURCHASES” (cont’d) ➔ Section 3(c)(1) excludes any issuer whose outstanding securities are beneficially owned by ≤ 100 persons and that is not making and does not presently propose to make a public offering of its securities ➔ Section 3(c)(7) excludes any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of the acquisition of such securities, are qualified purchasers, and which is not making and does not at that time propose to make a public offering of such securities ⚫ Knowledgeable Employees may own securities of a fund that relies on Section 3(c)(1) or Section 3(c)(7), even if doing so would result in more than 100 persons beneficially owning the fund’s securities and even though such employees are not qualified purchasers
  • 36. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE ADVISERS ACT AND “QUALIFIED CLIENTS” ⚫ Scope of Registration Requirements: ➔ “Investment adviser” = Any person who, for compensation, engages in business of advising others as to value of securities or as to advisability of investing in, purchasing, or selling securities or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities. ➔ The Advisers Act covers investment advisers with assets of $25 million or more under management. Investment advisers with less than $100 million under management are to be regulated by the states
  • 37. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE ADVISERS ACT AND “QUALIFIED CLIENTS” (cont’d) ⚫ Benefits of Registration as an Investment Adviser: ⚫ Can allow significant participation by corporate pensions under the Employee Retirement Income Security Act of 1974 ⚫ Can attract certain government employee benefit plans that require their managers to be registered investment advisers ⚫ Permitted to hold themselves out broadly to the public as investment advisers to attract clients
  • 38. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe THE ADVISERS ACT AND “QUALIFIED CLIENTS” (cont’d) ⚫ If a fund manager registers as an investment adviser with the SEC, all of the fund’s investors must be qualified clients in order to enable the fund manager to receive performance based compensation ⚫ A qualified client includes, among others, a natural person or company who has a net worth (including assets and liabilities held jointly with a spouse) of more than $2.1 million ⚫ Qualified purchasers under the Investment Company Act are automatically deemed qualified clients under the Advisers Act
  • 39. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY MICHELE ITRI – Itri@thsh.com Michele Itri is the Co-Chair of the Tax Law Practice at Tannenbaum Helpern Syracuse & Hirschtritt LLP. Michele Itri’s practice focuses on the tax and legal aspects of investment funds, financial instruments, international transactions, corporate and real estate transactions. She works closely with clients to structure transactions to achieve that most favorable tax results. Her practice encompasses all aspects of federal, state, local and international taxation, with an emphasis on onshore and offshore investment funds, venture capital transactions, corporate acquisitions, financial instruments and real estate acquisitions and dispositions. Michele assists clients in the structuring of onshore and offshore investment funds (such as general equity funds, fund of funds, real estate funds, venture capital funds, distressed debt funds, arbitrage funds and global macro funds) and in the structuring and organization of private partnerships and limited liability companies (primarily investment management and real estate management companies and start-ups). She is a graduate of Harvard Law School (J.D.1998) and Colgate University (B.A.1995). 3 9
  • 40. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY JONATHAN FRIEDLAND – jfriedland@sfgh.com Jonathan Friedland, a senior partner with Sugar Felsenthal Grais & Helsinger, LLP, views his job simply: to make money for clients whenever possible and to protect their interests at every turn. Licensed in four states, Jonathan’s transactional work focusses on representing private funds and other owners of private businesses, and the businesses they own. He regularly advises on M&A activities, structuring new ventures and restructuring old ones, and on other commercial relationships. Jonathan is rated AV® Preeminent™ by Martindale-Hubbell, 10/10 by AVVO, and enjoys several other similar distinctions. Jonathan graduated from the State University of New York at Albany, magna cum laude (in three years) and from the University of Pennsylvania Law School. He clerked for a federal judge before entering private practice and served for several years as an Adjunct Professor of Strategic Management at the University of Chicago’s Graduate School of Business. Jonathan is lead author and editor of several significant treatises, several chapters in other treatises, and scores of articles on law and business. 4 0
  • 41. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY WAYNE DAVIS – Davis@thsh.com Wayne H. Davis is co-chair of Tannenbaum Helpern’s Investment Management Practice and a member of the firm’s Executive Committee. Wayne advises U.S. and non-U.S domiciled venture capital, private equity and hedge funds, as well as family offices, on all aspects of their business, including structuring and formation, governing regulation, seed capital and financing arrangements, and the implementation of select investment strategies. Wayne has represented numerous investment funds, financial institutions and investors in connection with counter-party defaults and liquidations, including in the context of the Lehman Brothers and MF Global-related insolvency proceedings in both the U.S. and the U.K., as well as in numerous investment fund insolvency related matters. 4 1
  • 42. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT THE FACULTY THOMAS KENNEDY – TKennedy@versa.com Mr. Kennedy, a member of the Portfolio Legal Services team, has over 20 years of experience in law and business, assisting clients in a broad variety of industries with advice on legal matters ranging from corporate governance, mergers and acquisitions, securities law, and general corporate and commercial matters. Prior to his association with Versa, Mr. Kennedy was a Partner in the Corporate and Securities Group of law firm Pepper Hamilton LLP, and he previously served as Associate General Counsel to a NYSE-listed manufacturing concern. Mr. Kennedy is a graduate of St. Joseph's University and Washington University Law School, where he was a member of the Order of the Coif, and Articles Editor for the Washington University Law Quarterly. 4 2
  • 43. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe QUESTIONS OR COMMENTS? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 4 3
  • 44. Copyright © 2019 by DailyDAC, LLC d/b/a Financial Poise Webinars™ Receive our free weekly newsletter at www.financialpoise.com/subscribe ABOUT FINANCIAL POISE DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. Its websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com. 4 4 Our free weekly newsletter, Financial Poise Weekly, educates readers about business, business law, finance, and investing. To receive it simply add yourself by going to: https://www.financialpoise.com/newsletter/ Email addresses are never sold to or shared with third parties.