Capital Raising (Series: PE, VC and Hedge Funds De-Mystified)

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Practical and entertaining education for
attorneys, accountants, business owners
and executives, and investors.
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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.
About this PowerPoint: if you are looking at this PowerPoint without the benefit of
listening to the conversation that surrounded it then you are doing yourself a disservice.
This PowerPoint was prepared in contemplation of being viewed in conjunction with
listening to a one hour webinar on the topic
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MEET THE FACULTY
Moderator:
Michele Itri – Tannenbaum, Helpern, Syracuse & Hirschtritt
Panelists:
Jonathan Friedland – Sugar Felsenthal Grais & Helsinger
Nick Petit – Vamonde
Nick Moran – New Stack Ventures
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ABOUT THIS WEBINAR:
Capital Raising
The managers of private funds rely on pooled capital from outside investors. How do they
do this, and how do they compete for funds with a public market fueled by expansionary
monetary policy? Legal restrictions limit who can invest in a private fund and even if
legally allowed, many private funds will not permit everyone who want to invest to do so.
This webinar addresses the present market for private capital fundraising across a diversity
of fund strategies. It answers questions about how to promote fundraising activity in a
crowded market.
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ABOUT THIS SERIES:
Title of 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.

Episode #3:
Capital Raising
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TYPES OF INVESTORS
• Typical investor qualifications in a private investment fund include:
✓ Accredited Investors
✓ Qualified Clients
✓ Qualified Purchasers
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ACCREDITED INVESTORS
• You are an accredited investor if (any of the following):
✓ Individual net worth, or combined if w/ spouse net worth ˃ $1 million
(excluding the value of his or her primary residence)
✓ Individual with income ˃ $200,000 (or if joint w/ spouse, $300,000) in each
of the 2 most recent years with a reasonable expectation same income level in
current year
✓ Entity if owned exclusively by accredited investors or is not formed for
specific purpose of acquiring interest in fund and has total assets ˃ $5 million
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ACCREDITED INVESTORS (cont’d)
• Generally, investors are allowed to self-certify as accredited investors
✓ A private fund manager permitted to rely on an representation that he, she or it
meets the requirements without any further documentation.
• However, if fund is using Rule 506(c), which allows for general solicitation in
connection with marketing of fund, then manager will incur additional obligations
related to verifying the AI status of each prospective investor.
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QUALIFIED CLIENTS
• You are a qualified client if you (any of the following):
✓ Have ≥ $1 million AUM with the investment adviser after the investment in the
fund
✓ Have net worth ≥ $2,10 million prior to the investment in fund (excluding the
value of primary residence
✓ Are a “qualified purchaser”
✓ Are an officer or director of the fund manager or are an employee who
participates in the investment activities of the investment adviser and has been
doing so for 12 months
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QUALIFIED CLIENTS (cont’d)
• Generally, a hedge fund manager that is a registered adviser would much rather
solicit to a qualified client than an accredited investor.
• Why?
✓ Because managers may only charge their performance fee (i.e. carried interest)
to qualified clients
✓ While an accredited investor may still invest in the fund, they will only be
charged a management fee
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QUALIFIED PURCHASER
• You are a qualified purchaser if you are (any of the following):
✓ An individual ≥ $5 million or more in investments, including investments held
jointly with a spouse
✓ A family-held business ≥ $5 million or more in investments
✓ A business that has discretion over $25 million or more in investments
✓ You are a trust sponsored by qualified purchasers
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FUNDRAISING AND CLOSING
• Fundraising starts once the basic fund structure is set.
✓ First step in fund raising is marketing the fund to potential investors.
✓ Can take between 6 months to over 12 months to get to initial closing.
✓ Also called “first closing”
• Additional Closings
✓ Over a period of around a year, additional investors may be sought and
subsequent “closings” occur.
✓ Fundraising period ends at final closing
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FUND RAISING TIMELINE
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Negotiating FundTerms
• Negotiating fund terms with
prospective investors
• Finalizing fund structure
• Preparing for initial closing
Initial Closing
• Acceptance of initial
investor commitments
• Launch date for fund
Six to 12-month
marketing period
Three to six month
negotiating period
One year or more
subsequent closing
period
Subsequent Closings
• Additional closings on new
investor commitments
• Subsequent closing period
subject to any limitations in
fund documents
• Fundraising period ends on
final closing
Marketing the fund
• Fundraising
• Soliciting Investors
• Initial discussions of terms

LIFECYCLE OF THE FUND
• Lifecycle of a typical private fund:
✓ Initial closing –first time investors commit to making their investment in the
fund
✓ Final closing –last investors commit to making their investments
✓ Investment period –time investments are made and managed
✓ Liquidation period –time investments are disposed of and fund liquidates.
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FUNDRAISER
• Already knows the investors – not making cold calls!
• Has a good reputation with the investors
✓ They take his/her calls and read the fund docs
✓ Critical as investors get hundreds or thousands of pitches a year
✓ Many are never read
• Knows appropriate investors for specific fund AUM – e.g., not pitching huge public
pensions for a small emerging manager (unless the investor has a dedicated
emerging manager program)
• Has deep knowledge of fund’s investment strategy
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PLACEMENT AGENTS
• Fundraising is often done in conjunction with placement agents retained by the fund.
✓ Placement agents should all be registered broker-dealers
✓ Useful assistance with understanding market conditions, marketing materials, and
with investor meetings
✓ A fundraiser may use a placement agent’s existing relationships with investors
• A few placement agents are structured as groups within large investment banking firms
(e.g., HSBC, Credit Suisse, Lazard, UBS Investment Bank)
• More frequently as separate boutique investment banks (e.g. Asante Capital, Axonia
Partners, First Avenue, Campbell Lutyens, DC Placement Advisors, Eaton Partners,
Stonehaven, Simba Capital, Probitas Partners, Rede Partners or Triago)
• Sometimes captive to an Alternative Asset management group or specialist fund marketer.
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PLATFORMS
• Angelist – uses a combination of the issuers exemption and the JOBS Act
• Some platforms preclear investors as accredited and qualified clients
• Even if the platform is registered as a broker dealer itself, there are other
considerations:
✓ E.g. A fund interest is not a registered security AND the available exemptions to
the publicly traded partnership limitations under the Internal Revenue Code for
the fund are real and threaten violators with entity level corporate taxation
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FUND RAISING NEGOTIATIONS
• Negotiate with lead investors regarding investor-specific structuring concerns often
results in side-letters
✓ Investors will look to modify partnership agreements
✓ May seek a side letter setting out certain terms
• Willingness to negotiate / outcome of negotiations depends upon many factors:
✓ Significance of investor
✓ Other investor’ demands
✓ Heavily driven by market terms
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SECURITIES ISSUES
➢ Rule 506 of Regulation D
• Rule 506 of Regulation D is considered a "safe harbor" for the private offering
exemption of Section 4(a)(2) of the Securities Act.
• Companies relying on the Rule 506 exemption can raise an unlimited amount of
money.
• There are actually two distinct exemptions that fall under Rule 506:
✓ 506(b)
✓ 506(c)
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RULE 506(b)
• Company cannot use general solicitation or advertising to market securities
• Company may sell its securities to an unlimited number of "accredited investors"
and up to 35 other purchasers
✓ All non-accredited investors, either alone or with a purchaser representative,
must be sophisticated—that is, they must have sufficient knowledge and
experience in financial and business matters to make them capable of
evaluating the merits and risks of the prospective investment
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RULE 506(b) (cont’d)
• Company decides what information to give to accredited investors, so long as it
does not violate the antifraud prohibitions of the federal securities laws
✓ But companies must give non-accredited investors disclosure documents that
are generally the same as those used in registered offerings. If company
provides information to accredited investors, it must make this information
available to non-accredited investors as well.
• Company must be available to answer questions by prospective purchasers.
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RULE 506(c)
• Under Rule 506(c), company can broadly solicit and generally advertise offering, but
still be deemed to be undertaking a private offering within Section 4(a)(2) if:
✓ Investors in the offering are all accredited investors; and
✓ Company has taken reasonable steps to verify that its investors are accredited
investors
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JOBS ACT
• JOBS Act regulations effective 9/23/2013, allows a “general solicitation within the
context of a private placement”
✓ Must file Form D and elect 506(c)
✓ Must have and retain evidence that all investors are in fact accredited – cannot
rely on a mere representation of an investor
✓ Qualified Client/Qualified Purchaser status: does not trump the verification
requirement
✓ 100 investor limit still applies to 3(c)(1) funds
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FUND PERSONNEL AND “ISSUER’S
EXEMPTION”
• Fund personnel also get involved in fundraising process under “issuer’s exemption.”
But be careful. (Rule 3a4-1 of Exchange Act)
✓ Receipt of transaction based compensation tied to fundraising efforts can cause
personnel to fall outside of this exemption
✓ Must perform substantial duties for fund other than in connection with
transactions in securities.
✓ Passive sales efforts only – prepare and deliver written communications, no
direct solicitation
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SUCCESSFUL FUNDRAISING
• Success depends on many factors including:
✓ Economic outlook
✓ Track record of management team
✓ Strength of fund or its placement agent’s relationships with prospective
investors
• Always ask your investors what they are looking for – so you can better match
investors with funds
• Make sure that you get to know not just the CIO, but also the analysts – because they
do the first read and make the recommendation whether to invest
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SUCCESSFUL FUNDRAISING (cont’d)
• Be certain that you forward docs to the correct analyst based on type of strategy
✓ Hedge funds vs. PE vs. VC
✓ Many investors further break down by strategy (e.g., long/short equity, quant,
private debt, etc.)
• Know and keep track of which investors prefer email and which ones like to chat
✓ Varies depending on state of the fundraise
• Try to intersperse periodic calls with emails – usually about once every 4-8 weeks
✓ If more frequently you are a pest
✓ If less frequently the fundraise drags on too long
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ABOUT THE FACULTY
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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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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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Nick Petit – nick@vamonde.com
Nick is an experienced entrepreneur and proven leader that couples business strategy and
disciplined execution with enabling and emerging technologies. As CMO of VAMONDE,
Nick inspires a multi-talented team leading growth and shaping the future or travel and
cultural discovery. VAMONDE is a SaaS platform that is transforming how our most
important cities and cultural institutions leverage new technology and rethink marketing.
Nick is a growth-oriented executive delivering high-impact results across strategy,
operations, and business development for technology and business services firms. He’s a
3X entrepreneur, Big 4 leader, innovation executive, part-time butcher, traveler, painter,
and Peace Corps veteran.
Nick serves on the board of directors for G-PAC – Gun Violence Prevention PAC.
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Nick Moran – nick@newstack.vc
Nick Moran is General Partner at New Stack Ventures and the founder
and host of The Full Ratchet. New Stack is a venture capital firm
investing exclusively at the 1st Institutional Round of Funding. The Full
Ratchet, launched in May, 2014, was the very first podcast about
venture capital.
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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
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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
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