Oxford Legal Research Library: 2 Marketing Private Investment Funds in: The Law of Private Investment Funds

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 Content type: Book content Product: Financial Law [FBL] Published in print: 15 February 2018 ISBN: 9780198807247 2 Marketing Private Investment Funds From: The Law of Private Investment Funds (3rd Edition) Timothy Spangler Previous Edition (2 ed.) Subject(s): Financial promotion — Advertising and marketing and funds — Private equity fund — Private fund.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (p. 36) 2 Marketing Private Investment Funds A. Introduction 2.01 B. Distribution approaches 2.05 C. Financial promotion in the United Kingdom 2.13 D. Exemptions to the financial promotion restrictions 2.21 One-off communications 2.24 High net worth individuals 2.25 Sophisticated investors 2.27 E. Promotion of collective investment schemes 2.28 Scheme Promotion Order 2.31 FCA rules 2.34 Unauthorized persons 2.36 F. The consequences of CIS categorization 2.40 G. AIFMD 2.45 H. Marketing in the United States 2.46 The Investment Company Act of 1940 2.52 The Investment Advisers Act of 1940 2.66 The Securities Act of 1933 2.70 The Securities Exchange Act of 1934 2.75 CAB 2.82 I. Conclusion 2.90 A. Introduction 2.01 In order to avoid the substantive investment restrictions contained in the product- orientated regulations applicable to retail investment funds, private investment funds are typically marketed only to certain designated categories of investors. Such categories of acceptable investors are intended by financial regulators to ensure that the participants in these funds have the ability to understand the risks involved in such investments and to negotiate such levels of investor protection as they deem sufficient.1 However, such restrictions can result in disparate treatment of substantially similar investment products, often due to outdated or formulaic approaches. (p. 37) 2.02 Jurisdictions also vary widely in how they define and regulate investment funds. These differences can significantly impair the ability of a jurisdiction's nationals to participate in a fund vehicle established elsewhere. Impediments to cross-border distribution of private investment funds include: (a) widely divergent tax treatment; (b) unnecessary administrative costs and delays; 1.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (c) differences in risk tolerance; and (d) varying approaches to investor protection. 2.03 Definitions regarding what constitutes a fund subject to specific product regulations can be narrow or broad.2 A vehicle deemed a 'fund' in one jurisdiction (e.g., its home) may not be deemed so in another (e.g., the investor's domicile), or vice versa. Generally, vehicles classified as a 'fund' (as opposed to other forms of investment products) are subject to further requirements or restrictions designed to foster investor protection, including: (a) special registration and reporting requirements; or (b) significant restrictions as to how the vehicle can be promoted in that country, in addition to or in place of the rules governing the marketing of investments (e.g., shares and bonds) generally. 2.04 Where direct investment in private investment funds is not possible in a given jurisdiction, investor participation can be achieved in other ways, including structured products (such as indirect certificates or notes) or life insurance products, which provide the holders with an economic return related to one or more funds. Unfortunately, these structural responses inevitably add further distance (both literally and figuratively) between a manager and his ultimate client, thereby magnifying the 'governance challenge' facing these participants. Rather than being a partner in a partnership3 or a shareholder in a company,4 the structured product participant may be the counterparty to a swap contract with a bank, or the owner of a note or certificate issued by a special purpose vehicle. The relationship between such bank or special purpose vehicle on the one hand and the ultimate fund on the other may be sufficient to provide the participant with an economic section based on the fund's performance, but not necessarily the benefit of the various duties and obligations otherwise owed by the fund manager to the ultimate clients. (p. 38) B. Distribution approaches 2.05 The distribution of private investment funds is principally conducted by way of private placements rather than public offers; with limited exceptions, this is driven primarily by restrictions on public marketing efforts imposed by financial regulations such as the Financial Services and Markets Act 2000 (FSMA) in the United Kingdom. Most regimes are based on restricting access to these funds, except in the case of sufficiently large and/or sophisticated investors.5 Regulators can limit access to these funds by way of either establishing high minimum subscription levels or establishing qualification standards for each investor that must be met before he or she can invest. Where investors are being sought on a global basis,6 numerous practical difficulties must be overcome by the principals (of primary importance, the time demands) seeking to raise funds themselves. 2.06 The three main ways by which investors typically access private investment funds for investment are: (a) by direct dealing with the private investment fund; (b) by investing in a listed investment company; or (c) via an intermediary. 2.07 Investors are not generally prohibited from investing in private investment funds.7 They may research fund opportunities themselves or they may, subject to restrictions on 2 3 4 5 6 7.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 financial promotion and regulated activities, be contacted by such funds or their investment managers. 2.08 The use of an intermediary who is authorized under FSMA allows a broader opportunity to market private investment funds, although a full retail distribution is generally not permissible because of restrictions on the promotion of collective investment schemes (CISs) discussed below. Under the Conduct of Business (COBS) rules applicable to UK-authorized intermediaries, persons classified as either 'professional clients' or 'eligible counterparties' (as opposed to 'retail clients') can be marketed unregulated CISs. (p. 39) 2.09 A less frequently travelled path is the listing in London and admission to trading on the London Stock Exchange of certain fund-of-fund products. Pursuant to the Listing Rules, closed-ended investment companies may be eligible for listing provided they adhere to certain risk-spreading requirements. Because of the frequent use of short selling8 by hedge funds, single strategy funds are not currently eligible for listing. Multi-manager funds-of-funds, however, are eligible for listing (as they do not themselves engage in shorting) and, as a result, may be marketed to retail investors in the same manner as any other listed company. Unlike listings on the Irish Stock Exchange (ISE), which are obtained for reasons other than secondary liquidity,9 the purpose of a listing on the London Stock Exchange (LSE) is to facilitate trading in the shares. Importantly, funds that obtain such listings are subject to potentially detailed ongoing compliance obligations. To the extent that such ongoing obligations are drafted to address the governance challenge inherent in private investment funds, promoting the listing of such a vehicle could be an effective way to address such issues. 2.10 Where an intermediary is used, such as a placement agent,10 numerous interrelated services to the private investment funds and fund managers may be provided, including: (a) identifying and pre-qualifying investors; (b) preparing marketing materials; (c) assisting fund managers with preparations for the investor presentations; and (d) managing the subscription process during the initial launch period. Typically, placement agents in the United States are registered as broker-dealers under the Securities Exchange Act and are members of Financial Industry (p. 40) Regulatory Authority (FINRA), while in the United Kingdom they are authorized persons under FSMA. 2.11 Importantly, due to the manner in which private investment funds are marketed, not all investors in a particular fund are necessarily pari passu with all other investors as concerns their respective rights. Because of the difficulty that certain new fund managers face in raising their first fund, it is not uncommon to reward an initial investor, who provides the fund with 'proof of concept', with one or more of the following to compensate for the value they create by way of their participation: (a) a discount on the management fee; (b) a participation in the performance remuneration; (c) increased information rights; or (d) an equity stake in the fund manager itself. 2.12 Such preferential terms may serve as an impediment to other investors' participation in the fund. This is based in part on the recognition that because of these terms, the interests of the cornerstone investor and the remaining investors are not fully in-line. As a result, the governance challenge in a private investment fund can be increased when 8 9 10.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 certain groups of investors have conflicting interests and the fund manager is in a position to manipulate such groups. C. Financial promotion in the United Kingdom 2.13 The financial promotion restriction under FSMA, section 21 prohibits a person, in the course of business, from communicating an invitation or inducement to engage in investment activity unless he is an authorized person under FSMA, or the content of the communication is approved by such a person.11 A series of exemptions to the financial promotion restrictions have been provided in the Financial Promotion Order.12 Importantly, the current financial promotion regime is expected to continue to allow a national private placement regime to thrive in the United Kingdom, unlike Germany and France where sales without an Alternative Investment Fund Managers Directive (AIFMD) passport are prohibited. (p. 41) 2.14 An authorized person may issue a financial promotion or approve13 the issue of a financial promotion by another person, but is obliged to comply with Financial Conduct Authority (FCA) rules in connection with such activities. Specifically, financial promotions made by authorized persons must comply with chapter 4 of the COBS rules. The basic requirement is that a financial promotion given or approved by an authorized person in respect of an investment must be 'fair, clear and not misleading'.14 Where a financial promotion breaches the requirement to be fair, clear, and not misleading, the FCA will take action as appropriate. 2.15 A breach of FSMA, section 21 is a criminal offence punishable by fine and/or up to two years' imprisonment.15 Further, if as a consequence of an unlawful financial promotion a person enters as a customer into a controlled agreement, then that agreement is unenforceable against him and he is entitled to recover money paid and compensation for any loss sustained by him as a result of having parted with it.16 Finally, the FCA are given power to restrain potential breaches of the financial promotion restriction and to seek orders to disgorge profits and force restitution resulting from such breaches.17 2.16 The FCA have stated that the 'in the course of business' criterion requires a commercial interest on the part of the communicator.18 This interest, however, does not have to be a direct interest in the subject matter being communicated.19 2.17 The FSMA adopts the media-neutral concept of a 'communication' which is then subdivided into 'real time' and 'non-real time' communications, and then further subdivided between 'solicited' and 'unsolicited' real time communications. The categorization impacts on which exemptions to FSMA, section 21 are available, as discussed below. 2.18 An 'invitation' to engage in investment activity is a communication that directly invites a person to enter or offer to enter into an investment agreement. An 'inducement' is a much wider concept, unfortunately left undefined under FSMA. In the FCA's view, a communication would need to contain more than mere factual (p. 42) information to be deemed an inducement.20 A degree of persuasion must be present, with the intent of leading a person to engage in investment activity. The invitation or inducement must be one to engage in investment activity. 2.19 The financial promotion regime covers only communications originating in the United Kingdom and communications originating outside the United Kingdom that are capable of having effect within the United Kingdom.21 An overseas communication is capable of having an effect in the United Kingdom if it is an invitation or inducement to a person in the United Kingdom to engage in an investment activity. Even if the communication is not made to or directed at a person in the United Kingdom, a communication capable of resulting in a 11 12 13 14 15 16 17 18 19 20 21.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 person in the United Kingdom engaging in an investment activity would be caught within the prohibition.22 2.20 A communication is a real-time communication if it is made in the course of a personal visit, a telephone conversation, or other interactive dialogue. All other means of communication are deemed non-real time and, as such, benefit from more exemptions from the financial promotion restriction than real time communications. D. Exemptions to the financial promotion restrictions 2.21 A number of exemptions are available to the financial promotion restriction where an unauthorized person wishes to issue a financial promotion, without the approval of an authorized person. The exemptions depend on whether a communication is: (a) real time or non-real time; (b) solicited or unsolicited; or (c) made to or directed at a recipient. 2.22 Some are applicable to all controlled activities, while others are applicable only to specific controlled activities. The former group of exemptions includes the following: (a) communications to overseas recipients; (b) follow-up communications; and (p. 43) (c) communications made only to or directed only at persons reasonably believed to be investment professionals. 2.23 Under FPO, Art 19, investment professionals include: (a) authorized persons; (b) an exempt person, where the communication relates to a controlled activity which is a regulated activity in relation to which that person is exempt; (c) a government, local authority, or international organization; (d) any person whose ordinary activities involve him in carrying on the controlled activity to which the communication relates to purposes of a business carried on by him; or (e) a person who is a director, officer, or employee of a person within (a)–(d) above where the communication is made to him in that capacity, and where the recipient's responsibilities involve him in carrying on such controlled activity. One-off communications 2.24 The financial promotions restrictions do not apply to a one-off communication that is either a non-real time communication or a solicited real time communication, or (if additional criteria are satisfied relating to the recipient, namely, a reasonable belief by the communicator that the recipient expects the communication and understands the risks of investment) and unsolicited real-time communication.23 A safe harbour24 sets out certain conditions that, if all are met, guarantee that a communication will be treated as one-off: (a) the communication is made only to one recipient or only to a group of recipients in the expectation that they would engage in the investment activity jointly; 22 23 24.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (b) the identity of the product or service to which a communication relates has been determined having regard to the particular circumstances of the recipient; and (c) the communication is not part of an organized marketing campaign. 25 High net worth individuals 2.25 This exemption was adopted to facilitate approaches to wealthy 'business angels' by companies looking for investors.26 This exemption applies to non-real time and solicited real time communications to an individual and relies on self-certification (p. 44) by the investor coupled with a 'health warning' by the person making the financial promotion. Importantly, amendments adopted after the two-year review of FSMA dispensed with the need for the investor to obtain a certificate of high net worth from a third party, such as an accountant or employer. 2.26 This exemption is limited to promotions of shares of unlisted companies and units in collective investment schemes that predominantly invest in shares of unlisted companies (i.e., private equity). Sophisticated investors 2.27 The FSMA also contains an exemption for communications made to certified sophisticated investors. Such investors must have a current certificate signed by an authorized person that the investor is sufficiently knowledgeable to understand the risks associated with an investment of a particular description.27 The communication itself must include various risk warnings and disclaimers.28 The communication would need to indicate: (a) that it is exempt from the general restriction on the communication of invitations or inducements to engage in the investment activity on the ground that it is made to a certified sophisticated investor; (b) the requirements that must be met for a person to qualify as a certified sophisticated investor; (c) that the content of the communication has not been approved by an authorized person and that such approval is, unless this or another exemption applies, required by FSMA, section 21; (d) that reliance on the communication for the purpose of engaging in any investment activity may expose the individual to a significant risk of losing all of the property invested or of incurring additional liability; and (e) that any person who is in any doubt about the investment to which the communication relates should consult an authorized person specializing in advising on investments of the kind in question. E. Promotion of collective investment schemes 2.28 In tacit recognition of the governance challenge embedded within private investment funds, the UK financial regulatory regime applies a different, more vigorous, set of additional rules on the marketing of unregulated CISs. (p. 45) 2.29 Section 238 of FSMA establishes a general prohibition on the promotion of CISs in the United Kingdom by persons authorized under FSMA. Exemptions are 25 26 27 28.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 immediately provided for regulated CISs, and further exemptions may be provided by either Treasury order or rules of the FCA for unauthorized CISs.29 2.30 Generally, an authorized person who wishes to communicate or approve a financial promotion, which is not otherwise covered by an exemption in the Financial Promotion Order, must comply with the rules contained in COBS 4. However, in the case of an unregulated CIS, an authorized person is prohibited from either communicating a financial promotion30 or approving a promotion relating thereto,31 subject to two categories of exemptions.32 Scheme Promotion Order 2.31 The Promotion of Collective Investment Schemes (Exemptions) Order (the Scheme Promotion Order)33 establishes certain classes of investors whereby if individuals can be certified as belonging to these classes, they may receive financial promotions. 2.32 The two most common exemptions are for high net worth investors (which is based on an objective measure of the individual annual income or wealth) and for sophisticated investors (which requires a subjective determination that the individual appreciates the risks associated with certain categories of investments). An important distinction exists between the two exemptions. The high net worth individual exemption is only available to funds that invest wholly or predominantly in unlisted companies. On the other hand, the sophisticated investor exemption is not limited with respect to the type of fund. 2.33 A number of the principal exemptions available under the Financial Promotion Order are broadly similar to their counterparts under the Scheme Promotion Order.34 (p. 46) FCA rules 2.34 The FCA-adopted rules differ from the exemptions contained in the Scheme Promotion Order. The most useful categories of exemptions under COBS 4.12 include: (a) certified high net worth investors; (b) eligible employees; (c) non-retail clients; and (d) self-certified sophisticated investors. 2.35 The category in which a customer falls will determine the scope of the duties that an authorized person owes to that customer.35 The three categories are:36 (a) retail clients; (b) professional clients; and (c) eligible counterparties. An individual who would otherwise be categorized under the COBS rules as a 'retail client' may 'opt up'37 into being a 'professional client' by receiving from the authorized person an opt-out notice which includes a detailed description of the rights he would otherwise enjoy as a private customer. As a retail client, the authorized person would have a duty to ensure that prior to making the investment, the investment was suitable for the client (if advice was given) or appropriate for him (if no advice was given).38 As a professional client, the authorized person would still have to carry out the suitability and appropriateness assessments, but would be able to assume that the client had the required level of knowledge and expertise. As a result of moving to a client category that provides less 29 30 31 32 33 34 35 36 37 38.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 protection, he or she would be able to be marketed investments (such as private investment funds) that could not be promoted to private customers. Unauthorized persons 2.36 When an unregulated CIS is being marketed in the United Kingdom by an unauthorized person, such as, for example, the fund's general partner or investment manager, either the relevant communications must be approved by an authorized person or an exemption to the financial promotion regime must be relied upon. If (p. 47) such approval from an authorized person were obtained, the unauthorized person would have the same latitude to market the CIS as an authorized person would.39 2.37 A risk facing an unauthorized person in connection with marketing activities, even when direct involvement is limited, is that its activities are classified as arranging for investors to invest in a fund. Arranging deals in investments is a regulated activity that, absent an exemption, may only be carried on by authorized persons.40 Actions such as accepting subscription applications, receiving money, and providing confirmations to investors would be problematic. Since any act that does not bring about investment is not caught,41 in theory, providing subscription applications to potential investors should not constitute arranging. In practice, however, this is a difficult line to draw and care must be taken because of the serious criminal and civil sanctions attaching to the breach of the general prohibition. Procedures may be established, however, for such activities to take place outside of the United Kingdom.42 2.38 Certain exemptions may apply to carve out particular activities from the definition of arranging. Arrangements made by an unauthorized person for an investor to invest in a fund through an authorized person would be exempt if either the investment is made on the basis of advice to the investor by an authorized person, or it is clear in all the circumstances that the investor is not seeking advice from the unauthorized person as to the merits of investing in the fund.43 This exemption is unavailable, however, where the unauthorized person receives any payment from any person other than the investor, unless the unauthorized person accounted for such payment to the investor. 2.39 Once an investor has committed to an investment in a fund, the unauthorized person can liaise with investors and serve as a point of contact for information on the fund. Since the investors are already participants in the fund, such activities would generally not fall within the definition of inviting or inducing an investment. Caution must be taken to ensure that such activities do not amount to investment advice. (p. 48) F. The consequences of CIS categorization 2.40 Where a company is used as the fund vehicle, the FCA's approach to regulation differs significantly based upon whether the structure is open-ended44 or closed-ended.45 An open- ended corporate fund will fall within the definition of a collective investment scheme, the operation of which is a regulated activity requiring authorization by the FCA. In contrast, closed-ended investment companies46 fall outside the definition of a CIS and therefore do not require an authorized operator and, further, could be marketed to retail investors without themselves applying to the FCA for authorization. 2.41 Falling within the definition of 'collective investment scheme' raises significant impediments to the marketing of a private investment fund, where authorization for retail distribution is not obtained. Because of the manner in which the UK regulatory framework has developed, these two categories of products are subject to different regulatory approaches despite offering investors similar investment propositions. 39 40 41 42 43 44 45 46.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 2.42 Where a vehicle is deemed not to constitute a CIS, an authorized person (or, subject to the approval of an authorized person, an unauthorized person) may in principle market interests in that vehicle to any investor in the United Kingdom, regardless of whether they are an institution or a private individual, subject to the COBS rules as they apply to different categories of investors under FSMA. If the entity falls within the definition of a CIS, then such an investment may generally not be promoted to private customers by either an authorized or an unauthorized person.47 (p. 49) 2.43 Despite (or perhaps because of) increased volatility and uncertainty in the financial markets, investor demand for alternative investment vehicles, specifically hedge funds, continues to increase. Although institutional interest in hedge funds is rising, the investor base remains predominantly high net worth individuals. However, growing attention is being paid, in the United Kingdom as in the United States, to the so-called 'mass affluent', which might be accessed through retail distribution channels. To the extent that this demand comes from retail investors, for whom the restrictions on marketing are particularly strict, any attempt to broaden access in this direction will require significant regulatory change. The ability of the FCA to liberalize the marketing regime for unregulated CISs is, however, limited by FSMA, section 238 that contains an absolute provision against marketing such funds to the general public. For any such changes, primary legislation, and thus action from HM Treasury, would be required. 2.44 DP05/3 correctly recognized that the question of the 'retailization' of hedge funds and other private investment funds may be more constructively phrased in terms of whether retail private investment funds should be able to make use of skill-based portfolio strategies. To the extent that such strategies are to be permitted, concurrent liberalization of investment restrictions and concentration limits would be required. The investor-side benefits of opening up such funds include increasing opportunities for investors to diversify their portfolios and decreasing the 'governance challenge' posed to investors who are restricted to accessing these strategies through private investor funds. The industry-side benefits include increasing the product ranges of (and competition between) members of the investment management industry and fostering the overall development of the industry in the United Kingdom. However, legitimate concerns remain about the ability of retail investors to fully understand the risk profiles and investment strategies of certain fund products, sowing the seeds for future potential mis-selling scandals.48 G. AIFMD 2.45 The arrival of AIFMD significantly altered the landscape of private investment fund marketing in Europe.49 The directive created the regulatory categories of Alternative Investment Fund (AIF)50 and Alternative Investment Fund Manager (AIFM), and around them constructed both a rule book for how they should be (p. 50) operated in the European Economic Area (EEA), as well as significant limits on how they can be marketed. Prior to AIFMD, Delaware and the Cayman Islands had served as preferred jurisdictions for global private funds over the decades. However, the adoption of the AIFMD raised strict limitations on marketing funds established outside of the EEA. Prior to AIFMD, non-EEA investment advisors typically relied on the private placement rules of each EEA member state to access capital. Unfortunately, many EEA member states have significantly restricted their private placement rules since the implementation of AIFMD. AIFMD established a marketing passport, which was designed to be the most efficient way of marketing a fund across the EEA, but is currently only available to AIFMs whose registered office is located within the EEA and are intending to market an EEA domiciled fund. 47 48 49 50.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 H. Marketing in the United States 2.46 The US approach to the marketing of private investment funds provides an instructive counterpoint to the system that has developed in the United Kingdom. Perhaps unsurprisingly, the US market has been to date both the largest in size and the most advanced as to manager and investor development, while also benefiting from a consistently liberal regulatory regime. 2.47 First and foremost, a fund must determine who will constitute a US person. 'US person', as defined by Rule 902 of Regulation S under the Securities Act, generally includes the following: (a) any natural person resident in the United States; (b) any partnership or corporation organized or incorporated under the laws of the United States; (c) any trust of which any trustee is a US person; and (d) any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident in the United States. 2.48 A number of exclusions to the above definition (i.e., not US persons) are also provided, including: (a) any discretionary account or similar account (other than an estate or trust) held for the benefit or account of a non-US person by a dealer or other professional fiduciary organized, incorporated, or (if an individual) resident in the United States; (b) any trust of which any professional fiduciary acting as trustee is a US person, if a trustee who is not a US person has sole or shared investment discretion (p. 51) with respect to the trust assets, and no beneficiary of the trust (and no settlor if the trust is revocable) is a US person; and (c) any agency or branch of a US person located outside the United States if: (i) the agency or branch operates for valid business reasons; and (ii) the agency or branch is engaged in the business of insurance or banking and is subject to substantive insurance or banking regulation, respectively, in the jurisdiction where located. 2.49 Importantly, the definitions for the purposes of the US federal securities laws are different from the determination of whether a person is a US taxpayer, and therefore subject to particular concerns that must be addressed in the structuring of the vehicles. 'US taxpayer' typically includes: (a) a US citizen or resident alien of the United States (as defined for US federal income tax purposes); (b) any entity treated as a partnership or corporation for US tax purposes that is created or organized in, or under the laws of, the United States or any state thereof; (c) any other partnership that is treated as a US taxpayer under US Treasury Department regulations;.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (d) any estate, the income of which is subject to US income taxation regardless of source; and (d) any trust over whose administration a court within the United States is able to exercise primary supervision and all substantial decisions of which are under the control of one or more US persons. 2.50 Persons who have lost their US citizenship and who live outside the United States, as well as certain former long-term residents, may nonetheless in some circumstances be treated as US taxpayers. 2.51 In addition to US federal securities laws, the effect of individual state law will need to be considered based on the location of any US investors, as notice filings and filing fees may be required. Often a US registered broker-dealer will be retained by a fund in connection with marketing to US investors, although a number of funds market their interests directly. The Investment Company Act of 1940 2.52 The Investment Company Act governs investment funds generally. Absent an exemption, most private investment funds would fall within the definition of 'investment company' and be required to register with the Securities and Exchange Commission (SEC). Registered funds are subject to a number of constraints incompatible with many investment strategies pursued by private investment funds. 2.53 Under section 3(a) of the Investment Company Act, 'investment company' includes any vehicle engaged in the business of investing in securities. Private (p. 52) investment funds typically make use of the exemptions provided by section 3(c)(1) and section 3(c)(7) and forgo registration, and the substantive restrictions that this entails. 2.54 Section 3(c)(1) is the elder and more common of the two exclusions from the definition of 'investment company'. The requirements are twofold: (a) the interests in the fund must be privately placed to investors; and (b) the fund must not have in excess of 100 investors. 2.55 What constitutes a public offering for the purposes of the Investment Company Act is understood in practice to be the same as under section 4(2) of the Securities Act. As a result, funds seeking to rely on this exemption will conduct their offerings in compliance with Rule 506 of Regulation D, which is the safe harbour for section 4(2). Further, private placements of fund interests in the United States pursuant to Rule 506 under the Securities Act will not be integrated with an offshore public offering of the interests. As a result, foreign funds may have up to 100 US beneficial owners without falling within the public offering prohibition of section 7(d) under the so-called Touche, Remnant doctrine. 2.56 The question, however, of how to count up to 100 for the purposes of section 3(c)(1) is not entirely self-evident and is subject to numerous rules and interpretations. In certain circumstances beneficial owners of separate funds may be aggregated under the principle of integration, where the two vehicles are in effect a single fund. Similarities in investor profiles and investment strategies will be relevant factors in this analysis. Importantly, the staff of the SEC have stated that onshore and offshore funds with similar investment objectives would not be integrated where the vehicles address investors with materially different tax positions..

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 2.57 Where a fund is organized outside the United States, typically only investors who are US persons are counted. For purposes of the 100-owner limit, as a result, the number of other investors in the fund would only be subject to limits imposed in the fund's jurisdiction of domicile. Where an offshore fund serves as a feeder for a US master fund which itself is seeking an exemption pursuant to section 3(c)(1), both US and non-US persons would need to be counted for these purposes. 2.58 Section 3(c)(7) focuses on the status of investors in the fund, rather than their number. The requirements are twofold: (a) as with section 3(c)(1), the interests in the fund must be privately placed to investors; and (b) the fund may only have as investors: (i) 'qualified purchasers'; and (ii) 'knowledgeable employees' of the fund manager. (p. 53) 2.59 A 'qualified purchaser' within the meaning of Investment Company Act, section 2(a)(51) includes: (a) a natural person (including any person who holds a joint, community property, or other similar shared ownership interest in the fund with that person's qualified purchaser spouse) who owns not less than US$5 million in 'investments'. (b) an entity that owns not less than US$5 million in 'investments' and that is owned directly or indirectly by or for two or more natural persons who are related as siblings or spouses (including former spouses), or direct lineal descendants by birth or adoption, spouses of such persons, the estates of such persons, or foundations, charitable organizations, or trusts established by or for the benefit of such persons (a Family Company); (c) an entity acting for its own account or the accounts of other qualified purchasers, who in the aggregate owns and invests on a discretionary basis not less than US$25 million in 'investments'; (d) a qualified institutional buyer as defined in para (a) of Rule 144A under the Securities Act, acting for its own account, the account of another qualified institutional buyer, or the account of a qualified purchaser; (e) an entity, each beneficial owner of the securities of which is a qualified purchaser. 2.60 Section 3(c)(7) was promulgated to allow for an unlimited number of 'qualified purchasers' to invest in a fund, subject again to there not being a public offering of the fund's interests. Usefully, if all of the investors in a fund are qualified investors, then that fund will be deemed a qualified person, even where the investments held by the fund are insufficient themselves to fulfil the definition of 'qualified purchaser'. Where a fund is organized outside the United States, typically any of those investors who are US persons must be qualified purchasers. Where an offshore fund serves as a feeder for a US master fund which itself is seeking an exemption pursuant to section 3(c)(7), both US and non-US persons would need to be qualified purchasers for these purposes. 2.61 Where interests in a fund will be privately placed in the United States and also offered in other countries, it is important to ensure that the two offerings are not integrated such that they are viewed by the SEC as a single plan of jurisdiction. Clarity has been provided by the SEC in Regulation S, which lays out when US securities laws will apply to persons and issuers outside the United States. As a general rule, the offer or sale of a security will be exempt under Regulation S where such offer or sale occurs in an 'offshore.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 transaction' and the offeror has not made any 'directed selling efforts in the United States'. An 'offshore transaction' occurs when the offer is made to a person physically located outside the United States and the sale is made to a buyer who was also outside the United States. Marketing activities that can reasonably be expected to condition the US market for the securing in question would constitute 'directed selling efforts'. (p. 54) 2.62 Non-US funds managed by non-US managers, whether established in an offshore jurisdiction such as the Cayman Islands or British Virgin Islands (BVI) or in an onshore jurisdiction, such as the United Kingdom or Ireland, frequently prohibit any investment by US persons, due to their concerns over the US regulatory regime and their desire not to fall foul of the numerous overlapping requirements. However, in limited circumstances US persons may invest in these funds without requiring registration of either the funds or their manager. The SEC staff have established two separate lines of no-action letters that address these points. 2.63 In Touche Remnant & Co,51 a private offering of a non-US fund may be made into the United States where the offering is conducted as a private placement under Regulation D and where the fund has no more than 100 investors who are US persons. In Goodwin, Procter & Hoar,52 the staff clarified that an offshore fund would not be subject to registration if it limits the US persons investing in it to 'qualified purchasers'. In these letters, the staff have allowed non-US funds to make use of the same exemptions to registration as domestic funds without needing to place similar limits on their non-US investors. The staff have subsequently liberalized the analysis in Touche Remnant in Investment Funds Institute of Canada,53 when they clarified that, where a non-US fund had not been marketed in such a way that 'could reasonably be expected . . . to condition the US market', the fact that a non-US person subsequently relocates to the United States would not be counted against the fund for the purposes of the 100-investor limit. 2.64 Under section 3(c)(1)(A), beneficial ownership by a corporation, partnership, trust, or other entity will generally constitute ownership by one person, unless: (a) the entity owns 10 per cent or more of the 'voting securities' of the fund; and (b) the entity is an investment company or would be save for the section 3(c)(1) or section 3(c)(7) exemptions. Where the entity investing is 'looked through', each of the beneficiaries of the entity will be counted by the fund for purposes of the 100-person test. The issue of whether limited partnership interests and unit trust interests constitute 'voting securities' for these purposes is a complex, fact-driven question. 2.65 In addition to the attribution rules in section 3(c)(1)(A), an entity formed for the purpose of circumventing the Investment Company Act may be questioned under section 48(a). The staff have questioned entities' status as a single beneficial owner where more than 40 per cent of its assets are invested in a section 3(c)(1) fund. (p. 55) The Investment Advisers Act of 1940 2.66 Section 202(a)(11) defines an investment adviser to include any person who for compensation engages in the business of advising on the value of securities or the advisability of investing in securities. Absent an exemption, registration of investment advisers under the Advisers Act is required pursuant to section 203(a). 2.67 The definition of 'investment adviser' is therefore based on a three-part test: (a) providing advice on 'securities'; 51 52 53.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (b) as part of a business; and (c) receiving compensation. 2.68 Registration as an investment adviser brings with it fiduciary duties54 owed to clients, as well as substantive requirements that must be fulfilled. In the case of the former, these include providing suitable advice, best executions, and full disclosure of conflicts. In the case of the latter, a registered adviser must comply with detailed rules addressing, among other things: (a) advertisements; (b) custody; (c) performance fees; (d) record keeping; and (e) privacy. Whether or not registered with the SEC, all investment advisers will be subject to the anti- fraud provisions of section 206 of the Advisers Act.55 2.69 Individuals employed by the fund manager do not need to be registered as 'investment advisers' under the Advisers Act and the SEC imposes no examination requirements. US states, however, may require examinations and licences of individuals representing an investment adviser in their state.56 The Securities Act of 1933 2.70 When marketing a private investment fund to US investors, not only must exemptions be secured in connection with the fund's potential status as an 'investment company', it is also necessary to ensure that each offer and sale of interests in the fund is exempt from registration under the Securities Act. Whether constituted as a limited partnership, a unit trust, or a company, the interests of a fund will (p. 56) fall within the definition of a 'security'. Absent a suitable exemption, the offer and sale of such interest will require registration with the SEC. 2.71 The purpose of the Securities Act is to provide for the adequate disclosure of information to investors when offers are made to the public. Exemptions to the registration requirements are available to certain offers and sales that either occur in the secondary market or constitute private placements.57 2.72 Private investment funds generally avoid the registration requirements by relying on the exemption provided by section 4(2) of the Securities Act. This exemption covers transactions by an issuer not involving any public office. Due to some ambiguities with regard to applying this section in practice, the SEC promulgated Regulation D as a safe harbour.58 2.73 A fundamental concept within Regulation D is the 'accredited investor'. An 'accredited investor' within the meaning of Rule 501 of Regulation D under the Securities Act, includes: (a) a natural person with individual net worth (or joint net worth with spouse) at the time of his or her purchase exceeding US$1 million. For the purposes of this item, 'net worth' means the excess of total assets at fair market value over total liabilities; 54 55 56 57 58.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (b) a natural person with individual income (without including any income of the investor's spouse) in excess of US$200,000, in each of the two most recent years, or joint income with spouse in excess of US$300,000, in each of the two most recent years and who reasonably expects to reach the same income level in the current year; (c) an entity, including a grantor trust, in which all of the equity owners are accredited investors (for this purpose, a beneficiary of a trust is not an equity owner, but the grantor of a grantor trust is an equity owner); (d) a corporation, Massachusetts or similar business trust, limited liability company, partnership, or an organization described in section 501(c)(3) of the Internal Revenue Code, not formed for the specific purpose of acquiring the interests, with total assets in excess of US$5 million; (e) a trust with total assets in excess of US$5 million not formed for the specific purpose of acquiring the interests, whose purchase is directed by a person with such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of an investment in the interests. (p. 57) 2.74 Provided that the other provisions of Regulation D are complied with, an unlimited number of accredited investors may invest in a fund without sacrificing the private placement exemption provided by section 4(2). The Securities Exchange Act of 1934 2.75 Marketing efforts in the United States may also give rise to broker-dealer registration issues. In order to protect investors from the risk of mis-selling, the 1934 Act requires brokers and dealers to be registered with the SEC. 2.76 A broker is any person engaged in the business of effecting transactions in securities for the account of others.59 No distinction is made between privately placed and publicly offered securities. If a fund manager's employees receive commissions from the sale of participations in a fund, they will be deemed brokers. As a result, they must be 'associated persons' of a 1934 Act registered broker-dealer. 2.77 Registering as a broker-dealer in the United States can take several months and entails registration with the SEC and the FINRA as well as relevant state regulations. The applicant will need to complete and file a Form BD, in which disclosures will be made on the ownership operation and disciplinary history of the applicant and its owners and executives. In addition to the Form BD, the FINRA requires further materials on the directors, officers, and key employees of the applicant, as well as information on its source of capital, its financial controls, and its operational procedures. Overall the process of broker-dealer registration bears more similarity to authorization by the FCA than registration as an investment adviser, which by comparison is less burdensome and time-consuming. In addition to complying with the FINRA's Conduct Rules on an on-going basis, the officers and employees of the registered broker dealer must also pass specified FINRA examinations. 2.78 Any person engaged in the business of effecting transactions in securities for the account of others in the United States must either register as a broker-dealer or qualify for an applicable exemption. However, an exemption is available to a private investment fund that sells its own securities through its own directors, officers, and employees. Directors, officers, and employees of the fund's investment manager are also eligible for these exemptions. Such person may not receive any commissions or other forms of compensation directly related to such marketing efforts. 59.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 2.79 Pursuant to a safe harbour, officers, directors, or employees of either the fund or the fund manager may market participations in a fund without needing to register.60 The requirements of the safe harbour include: (a) the individual has not been associated with a broker-dealer in the last 12 months; (p. 58) (b) the individual must not participate in the marketing of any fund more frequently than once every 12 months; (c) the individual must primarily perform substantial duties for the fund manager other than marketing the fund; and (d) the individual must not be compensated for the marketing effort by commissions or other remuneration based either directly or indirectly on transactions in securities. 2.80 It is not always clear, though, when remuneration is based on transactions and when it is not. Where bonus pools are established by the fund manager, in addition to not having an explicit component of the determination being based on the success of the marketing, it is also advisable not to have elements that are derived indirectly from such success (e.g., the size of the fund). 2.81 Where the safe harbour is not available, employees of the fund manager must limit their discussions with prospective investors to the investment objectives of the fund. A registered broker-dealer will be left with the responsibility for soliciting, negotiating and accepting participations from investors. CAB 2.82 On 18 August 2016, the SEC adopted rules governing the registration and regulation of a new category of brokers known as capital acquisition brokers (CABs). Importantly, the CAB rules (CAB Rules) are not an exemption from broker-dealer registration, but a reduction the regulatory burdens on CABs in line with their more limited scope of activities. 2.83 A CAB is a registered broker that engages in the following activities: (a) advising an issuer about its securities offerings or other capital raising activities; (b) advising a company about its purchase or sale of a business or assets or possible restructuring; (c) advising a company about the selection of an investment banker; (d) assisting in the preparation of an issuer's offering materials; (e) providing fairness opinions, valuation services and other similar services; (f) acting as a placement agent for the sale of unregistered securities to institutional investors in connection with a change of control of a privately held company; and (g) effecting securities transactions in connection with the transfer of ownership and control of a privately held company to a buyer that will actively operate the company. 2.84 Limitations on a CAB include that it may not: (i) carry or introduce customer accounts; (ii) hold or handle customers' funds or securities; (iii) act as principal or agent in accepting customers' orders for the purchase or sale of securities; (iv) (p. 59) have investment discretion; or (v) engage in proprietary trading or market-making activities. 2.85 The compliance costs of being a CAB are intended to be lower than full broker-dealer registration. Importantly, a CAB's principals and associated persons will be subject to the same registration, qualifications, and continuing education requirements as principals and representatives of full FINRA members. However, CABs will not be required to hold annual 60.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 compliance meetings, review and investigate transactions, or conduct internal inspections of their businesses. 2.86 Private fund managers who would like to receive transaction fees in connection with acquisitions or dispositions of securities may rely on the new CAB rules, which followed the SEC's June 2016 order against Blackstreet Capital Management LLC,61 increasing the risk of receiving transaction-based fees without broker-dealer registration.62 2.87 The SEC traditionally had not viewed issuers of securities, such as hedge funds and private equity funds, as broker-dealers.63 However, employees and other associated persons of such issuers were at risk of triggering broker-dealer registration requirements64 if they were not able to rely on the safe harbor from registration provided by Rule 3a4-1 under the Exchange Act. Private funds whose associated persons are required to be registered with a broker-dealer are now able to make of the lighter regulatory requirements under the CAB Rules. 2.88 Importantly, the definition of a CAB is not determinative of whether a person or entity is required to register with the SEC as a broker-dealer, even if they limit their activities to those performed by CABs. Typically, the determining factor for such an analysis is the receipt of transaction-based compensation. Other factors indicating possible broker or dealer status are: (a) soliciting securities transactions; (b) holding oneself out as a broker by executing trades; (c) acting as a finder in exchange for a transaction fee; (d) receiving or holding customer securities or funds; (e) assisting others in settling securities transactions; and (f) regularly participating in the securities business. 65 (p. 60) 2.89 A CAB may engage in 'qualifying, identifying, soliciting, or acting as placement agents or finders' for private funds, but only 'with respect to institutional investors'. 'Institutional investor' includes banks, investment companies, other financial institutions, governmental entities, retirement and other qualified plans, other persons or entities with total assets of $50 million, and 'qualified purchasers' under the Investment Company Act of 1940.66 Accredited investors are not 'institutional investors' for purposes of the CAB Rules and a CAB may not solicit accredited investors for private funds. I. Conclusion 2.90 In order to avoid the substantive investment restrictions contained in the product- orientated regulations applicable to retail investment funds, private investment funds are typically marketed only to certain designated categories of investors. Such categories of acceptable investors are intended by financial regulators to ensure that the participants in these funds have the ability to understand the risks involved in such investments and to negotiate such levels of investor protection as they deem sufficient. 2.91 The goal of marketing restrictions is, therefore, to ensure that, either based on their sophistication, experience, or number, the investors in a fund will have the means by which they are able to negotiate provisions in the fund documentation sufficient to protect them from the risks of fraud and poor performance. In such cases, participants are expected to be in a position to overcome the governance challenge at the heart of the collectivized investment vehicle by means of their own diligence, oversight, and negotiating leverage. 61 62 63 64 65 66.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 2.92 By falling outside the 'mutual fund' authorization regime, investors in private investment funds must rely on themselves to secure the levels of protection necessary to overcome the governance challenge. Although many such investors may have the commercial leverage to negotiate adequate protective measures, their ability to implement such measures is constrained in many respects by the relevant tax rules which operate to undermine the ability of such investors to protect themselves adequately on an ongoing basis. Footnotes: 1 As a result of complex restrictions on promotion, the marketing of a private investment fund is a more complex and more time-consuming process for all parties involved. Pragmatic decisions will often need to be made about the demographics of the prospective investors. Not all investors will necessarily receive equal attention and prominence in the marketing process. The governance challenge often results in part from such differences in attention. 2 And no matter how precise such a definition attempts to be, there will always be issues along the frontiers: HLA Hart, The Concept of Law, pp. 13–16 (1994). 3 See Chapter 6. 4 See Chapter 7. 5 See S Reg No 293, 104th Cong 2d Sess 3.4 (1996) (1996 Senate Report) at 10: 'The qualified purchaser pool reflects the Committee's recognition that financially sophisticated investors are in a position to appreciate the risks associated with investment pools that do not have the Investment Company Act's protections. Generally, these investors can evaluate on their own behalf matters such as the level of a fund's management fees, governance provisions, transactions with affiliates, investment risk, leverage and redemption rights.' 6 See Chapter 16. 7 Certain institutional investors can be limited in their ability to invest in certain investment products (such as private investment funds) by their constitutions or by applicable regulations. 8 Short selling entails borrowing an asset from a third party in order to sell it onto the market in the anticipation of repurchasing it at a lower price in the future. 9 Although listings are frequently obtained by hedge funds on the ISE, trading in shares on the exchange is exceedingly rare. The presence of a fund on the approved list of a recognized stock exchange, however, is felt to facilitate investment by institutional investors otherwise subject to external or internal limits on their investment in unlisted securities. Typically, only alternative funds limiting themselves to 'professional investors' will be permitted to list. An approved listing sponsor will be required to facilitate the necessary applications and secure approval. In addition, potential investors may look more favourably upon a fund established in an offshore jurisdiction that has voluntarily subjected itself to the oversight of a recognized exchange. Listed funds will be subject to continuing disclosure obligations imposed by the stock exchange to ensure that shareholders receive certain information about the fund and its net asset value. 10 Placement agents may be either small and highly focused boutiques or global teams within large investment banks. Placement agents will have different strengths among the various categories of prospective investors, such as: (a) private banks; 1 2 3 4 5 6 7 8 9 10.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 (b) family offices; (c) independent financial advisers; (d) pension trustees; and (e) insurance companies. 11 This technology-neutral restriction on financial promotion replaced and modernized separate restrictions under the Financial Services Act 1986 on issuing investment advertisements and making unsolicited calls. 12 The Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (SI 2000/1529) (the FPO) as amended. The FPO preserves and in certain cases extends many of the exemptions previously present under the Financial Services Act 1986. 13 Technically, there is no requirement to legend a particular document stating that it has been approved for purposes of FSMA, s 21. This practice, however, is fairly established in the market place. 14 As discussed below, however, an authorized person cannot issue or approve communications relating to unregulated collective investment schemes, absent a particular exemption. 15 FSMA, s 25. 16 FSMA, s 30. The court, however, retains discretion to allow the agreement to be enforced and money transferred under it retained. FSMA, s 30(4)–(7). 17 FSMA, ss 380 and 382. 18 See PERG (the Perimeter Guidance Manual) 8 of the FCA Handbook. 19 Importantly, a communicator need not be carrying on its regulated activity by way of business to be caught by the Financial Promotion regime PERG 8.5. 20 PERG 8.4. 21 FSMA, s 418 and PERG 8.8. 22 An exemption does exist for a communication made inside or outside the United Kingdom to a person who receives it outside the United Kingdom or which is directed only at persons outside the United Kingdom. This concession addresses the belief that the United Kingdom should not deem unlawful a financial promotion that only has an effect in a foreign country, as such a decision best lies in the hands of that foreign country's regulators. 23 FPO, Art 28 and Art 28A. 24 FPO, Art 28(2) and (3). 25 See PERG 8.14.4. 26 FPO, Art 48. 27 FPO, Art 50. 28 FPO, Art 50(3). 29 Importantly, FSMA, s 238 is directed at authorized persons only, in an attempt to limit their otherwise broad ability to market securities for which they issue or approve financial promotions. The ability of an unauthorized person to issue a financial promotion, whether in 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 connection with an unregulated CIS or any other security, is governed entirely by FSMA, s 21 and the Financial Promotion Order. 30 FSMA, s 238. 31 FSMA, s 240. 32 Violations of these prohibitions would be actionable by a private person who suffers a loss: FSMA, s 150. In addition, the authorized person could also face very severe consequences under the FCA's rules. 33 The Financial Services and Markets Act 2000 (Promotion of Collective Investment Schemes) Exemptions Order 2001 (SI 2001/1060). 34 FPO, Art19 (investment professionals) is broadly equivalent to Scheme Promotion Order, Art 14; FPO, Arts 28 and 28A (one-off communications) are broadly equivalent to Scheme Promotion Order, Arts 15 and 15A; and FPO, Art 50 (sophisticated investors) is broadly equivalent to Scheme Promotion Order, Art 3. 35 An authorized person must provide a retail client with written terms of business, which describe the services that the firm will be providing to its customers and must include certain provisions required by the FCA Handbook. Where the customer is a professional client (e.g., an unregulated collective investment scheme), there is no requirement for written terms of business, but COBS 2.2.1R requires certain information to be provided to all clients before services are provided, and to do so in writing is likely to be the most convenient route. 36 Of these three categories, eligible counterparties are provided with the least protection under the FCA Handbook and retail clients the most protection, while the professional clients fall in between the two. 37 The process is governed by COBS 3.5.3R. 38 COBS 9.2.1R and 10.2.1R. 39 One important anomaly should be noted. On its own, an unauthorized person would be subject to the general financial promotion regime. However, an authorized person may only approve a communication that it could have communicated itself. FSMA, s 240. As a result, an approved communication would be subject to the Scheme Promotion Order exemptions rather than the Financial Promotion Order exemptions. 40 Regulated Activities Order (RAO), Art 25(1). 41 RAO, Art 26. 42 Generally, FSMA only restricts the carrying on of a regulated activity in the United Kingdom. However, an activity carried on outside the United Kingdom would be deemed to be carried on in the United Kingdom where such person has its registered office in the United Kingdom and day-to-day management of the carrying on of the regulated activity is the responsibility of the registered or head office. FSMA, s 418. 43 RAO, Art 29. 44 Open-ended funds allow for periodic subscription and/or redemption by investors throughout the life of the fund. As a result, such a fund may have no pre-set termination date and the investment horizon will vary from one investor to another. 45 Closed-ended funds do not allow for such periodic liquidity at the request of investors. Typical of private equity and real estate funds, these funds take investors' committed capital during the early years of a fund's life and only return proceeds to investors when the underlying investments are realized. In part, a fund being closed-ended or open-ended will be driven by either (i) the liquidity of the underlying investment, and whether it is viable to 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45.

[Audio] From: Oxford Legal Research Library (http://olrl.ouplaw.com). (c) Oxford University Press, 2023. All Rights Reserved. Subscriber: King's College London; date: 22 October 2023 realize partial stakes to fund redemption requests, or (ii) whether liquidity can be given to investors by way of secondary market transactions (e.g., a listing). 46 Whether or not a company is open-ended will depend on whether a reasonable investor would expect to be able to realize his investment based on the underlying net asset value within a period appearing to him to be reasonable. 47 Against a backdrop of systemic changes within the financial services industry generally, and the traditional and alternative investment management industries specifically, the FCA released its Discussion Paper DP05/3: 'Wider Range Retail Investment Products', specifically questioning the continued validity of these differences. 48 See Chapter 17. 49 See Cornelia Woll, 'Lobbying under Pressure: The Effect of Salience on European Union Hedge Fund Regulation', Journal of Common Market Studies 2013, Vol. 51, Issue 3. 50 AIFMD defines an AIF as any collective investment scheme which does not require authorization under the Undertakings for Collective Investments in Transferable Securities (UCITS) Directive: Art 3, s 1(b). 51 Touche Remnant & Co, SEC no-action letter (27 July 1984). 52 Goodwin, Procter & Hoar, SEC no-action letter (28 Feb 1997). 53 Investment Funds Institute of Canada, SEC no-action letter (4 March 1996). 54 See paragraphs 4.28–4.47 and 5.90–5.94 below. 55 See paragraphs 5.57–5.89 below for a more detailed discussion of ongoing compliance requirements for Advisers Act registered firms. 56 Many US states require certain personnel to have passed FINRA examinations, such as Series 7, Series 65 or 66, and Series 24, although exemption based on prior experience may be available in limited cases. 57 US lawyers can provide investors in a fund with legal opinions that the fund's offering of interests in the United States need not register under the 1933, but act only upon receipt of suitable representations from the fund and any placement agents that, among other things, no general solicitations of general advertising have occurred. 58 Importantly, failure to perfect the Regulation D safe harbour does not preclude the ability to rely on section 4(2) generally. 59 Section 3(a)(4) of the 1934 Act. 60 Rule 3a4-1 under the 1934 Act. 61 In re Blackstreet Capital Management, LLC, SEC Release No 34-77959 (1 June 2016). 62 See 'A Few Observations in the Private Fund Space', David W. Blass, Chief Counsel, Division of Trading and Markets US Securities and Exchange Commission, American Bar Association, Trading and Markets Subcommittee, Washington, DC, 5 April 2013. 63 Exchange Act Release No 20943 (9 May 1984). 64 See, e.g., In the Matter of Ranieri Partners LLC and Donald W. Phillips, Exchange Act Rel. No 69091 (8 March 2013). 65 See MuniAuction, Inc., SEC No-Action Letter (13 March 2000); and see Davenport Management, Inc., SEC No-Action Letter (13 April 1993) and BondGlobe, Inc., SEC No- Action Letter (6 February 2001). 66 CAB Rule 016(i). 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66.