Introduction

Marketing an investment fund to potential US investors can be a bewildering prospect and one of the principal reasons is the complexity of US securities legislation. The US can be a very attractive investor market and, therefore, it is important that fund managers/sponsors and other participants are able to explore opportunities with confidence.

The purpose of this note is to assist those persons who may be offering securities issued by investment funds in the US, so that they may begin to understand the regime. This note may also be of benefit to potential US investors considering their own regulatory status for the purpose of US securities laws – for example, whether they satisfy requirements to be considered an "accredited investor" or a "qualified purchaser".

Where securities are offered and sold by investment funds, there are four principal US federal securities laws which may impact the offering:

• US Securities Act of 1933, as amended; 
• US Securities Exchange Act of 1934, as amended;
• US Investment Company Act of 1940, as amended; 
• US Investment Advisers Act of 1940, as amended. 

Below we set out a summary of the key registration requirements under each Act applicable to the offer and sale of interests in investment funds, together with details of certain exemptions or exclusions which may apply – negating the need to comply with some or all of those requirements.

US Securities Act of 1933, as amended (the Securities Act)

General Rule

The general rule is that securities issued by investment funds may not be offered and sold within the United States unless the offer and sale is first registered under the Securities Act, or an exemption applies. 

Exemptions

The most commonly used exemptions for offers and sales of securities by investment funds are: (a) the safe harbor afforded by Rule 506(b) of Regulation D under the Securities Act; and (b) the non-public offering exemption afforded by Section 4(a)(2) of the Securities Act.

Because of insufficient guidance provided in case law and by the US Securities and Exchange Commission (SEC), many issuers do not rely directly on Section 4(a)(2), particularly where there are US investors other than big institutional investors participating in the offering. Instead, most issuers rely on the "private placement" safe harbor afforded by Rule 506 of Regulation D under the Securities Act. 

Safe Harbor Exemption – Rule 506(b)

To qualify for this exemption under Rule 506(b) of Regulation D under the Securities Act, the issuer must satisfy the following three fundamental requirements:

• firstly, its securities may be offered and sold only to US persons that qualify as "accredited investors", as defined in Rule 501(a) of Regulation D. An accredited investor is: (a) any company that was not formed for the purpose of investing in the securities and that has total assets of more than US$5 million; or (b) any individual who has a net worth of US$1 million (excluding the value of his/her primary residence) or income in each of the previous two years of more than US$200,000 (or a combined income with their spouse of US$300,000) and a reasonable expectation of earning at least that much in the current year. In addition, certain institutions, such as a US-regulated bank, insurance company, registered broker-dealer, registered investment company and ERISA-regulated pension plan with total assets of more than US$5 million are considered to be accredited investors. Where the issuer is a non-US entity, the accredited investor requirement does not apply to non-US persons that invest in the offering;
• secondly, in offering the securities, neither the issuer nor any of its agents may use any form of "general solicitation" or "general advertising". This means that any communication with a prospective US investor in seeking to promote or market the securities must be made only to a person whom the issuer or its agent reasonably believes to be an accredited investor (see above), by virtue of having or establishing a pre-existing, substantial relationship with that person (which allows the issuer or its agent to have a reasonable basis for concluding that the investor meets the applicable "accredited investor" definition in Rule 501(a)), or by obtaining information available publicly or otherwise sufficient to draw the reasonable conclusion that the prospective investor, if a big institutional investor, is an accredited investor. Where the issuer makes use of the internet to promote or market the securities, the issuer should restrict access (by use of a password or other means) only to US persons whom the issuer or its agent reasonably believes are accredited investors; and
• finally, neither the issuer nor any of its affiliated persons, including any investor that owns more than 20% of the outstanding voting securities of the issuer, may be subject to a "bad actor" disqualification. This means, among other things, that none of these persons has been convicted in the last five to 10 years of a crime or misdemeanour involving a violation of securities law, or been subject to an order of a court or other authorised administrative body issued within five years of a sale of securities involving a violation of securities law, etc.

Non-Public Offering Exemption – Rule 506(c)

As an alternative to Rule 506(b), Rule 506(c) may be relied upon in accordance with the non-public offering exemption provided in Section 4(a)(2) of the Securities Act. If relying on Rule 506(c), the issuer or its agents may use general solicitation or advertising to promote or market the securities (including use of an unrestricted website), but any purchaser of the securities sold in the offering must be a verified accredited investor.

Disclosure Requirements

Under Section 5 of the Securities Act, an issuer is required to provide detailed disclosure in a prospectus about the terms and conditions of an issuance of securities, in accordance with regulations set forth in registration forms adopted by the SEC, when offers and sales are to be made to the public at large. Although Section 5 does not apply to an issuer that makes a non-public offering to qualified investors in reliance on Rule 506(b) or Rule 506(c), it is usual practice for issuers to provide sufficient disclosure, in the form of a confidential offering memorandum, when offers and sales are to be made to accredited investors pursuant to the non-public offering exemption. Because the anti-fraud provisions of the Securities Act and the Securities Exchange Act (including rules under these Acts) continue to apply in such cases, issuers face potential legal suits from investors and the SEC if they do not provide sufficient disclosure to investors in these offerings. An offering memorandum in such cases may include information such as the terms of the securities being offered, the risks of investing in these securities, the background of the issuer and others associated with the offering (such as the investment manager, control persons, or placement agents) and the tax consequences of investing, holding and selling the securities, etc.

Reporting Requirements

In accordance with the requirements of Rule 503 of Regulation D under the Securities Act, the issuer making a non-public offering pursuant to Rule 506(b) or Rule 506(c) is required to file a Form D notice of sale with the SEC within 15 calendar days after the first sale of securities in the offering. There is no fee associated with filing Form D with the SEC. In addition, depending on the US state in which the US investor is resident or organised, a Form D may also have to be filed with the appropriate authority in that state and, depending on the value of the securities offered and sold to the relevant US investors, a fee may be payable to such authority. Notably, under Rule 507 of Form D, there is a penalty for failure to file reporting requirements.

US Securities Exchange Act of 1934, as amended (the Exchange Act)

General Rule

The general rule is that securities may not be offered and sold within the United States unless the "security" is registered under the Exchange Act and/or the securities were registered under the Securities Act in connection with the initial offer and sale of such securities to the public.

Exemptions and Exclusions

The issuer is not required to register its securities under the Exchange Act if it conducts its offering in accordance with the safe harbor afforded by Rule 506(b) or Rule 506(c) of Regulation D under the Securities Act, as discussed above, and it has no more than 2,000 investors or 500 persons who are not accredited investors or, in the case of a non-US fund, no more than 300 investors who are residents of the United States. Consequently, so long as the issuer stays within these limits, it will not be subject to registration of its securities under, or the periodic reporting requirements of, the Exchange Act.

An officer, employee or director of the issuer or any investment adviser of the issuer that may be engaged in activities involving the offer and sale of securities issued by the investment fund is not considered a broker and, therefore, is not subject to regulation as an associated person of a broker-dealer, provided that such person conducts his/her activities in accordance with the requirements of Rule 3a4-1 under the Exchange Act. Rule 3a4-1 exempts such a person from the definition of "broker" if the following key conditions are met:

• the person is not subject to a statutory disqualification that prohibits or suspends the person from engaging in securities-related activities or from association with a broker-dealer;
• the person does not receive transaction-based compensation in connection with its activities that relate to the offer and sale of interests in the fund;
• at the time of his/her participation in the offering, the person is not selling interests in the fund associated with a registered broker-dealer; and
• the person restricts his/her participation to transactions involving the offer and sale of interests in the fund in one of the following ways:
  • offers and sales are made only to certain financial institutions;
  • offers and sales are made only pursuant to the exemptions from registration afforded by Sections 3(a)(7), 3(a)(9) or 3(a)(10) of the Securities Act;
  • offers and sales are made only in connection with certain specified types of transactions, such as a reclassification of securities of the fund, a merger or consolidation or similar plan involving an exchange of securities, or a transfer of assets of another person to the fund in exchange for securities of the fund; 
• the person meets all of the following conditions: (i) he/she performs substantial duties for the fund or the fund’s manager other than participating in the offer and sale of fund interests; (ii) he/she was not a broker or dealer or an associated person of a broker or dealer in the preceding 12 months; and (iii) he/she does not participate in selling an offering of securities of any issuer more than once every 12 months; or
• the person restricts his/her participation to any one or more of the following activities:
  • preparing written communication or delivering this communication through the mail or other means that does not involve oral solicitation;
  • responding to enquiries of a potential purchaser in a communication initiated by the potential purchaser; or
  • performing ministerial or clerical work in effecting any transaction.

Rule 3a4-1 is typically relied upon by officers, employees and directors of an investment adviser/manager of a fund that might be engaged in activities relating to the offer and sale of interests in the fund. If Rule 3a4-1 will not be available in the circumstances of promoting and marketing the securities issued by the investment fund, then the offer and sale of these securities will have to be conducted by a registered broker-dealer unless another exemption from registration is available.

Reporting Requirements

There are no applicable reporting requirements under the Exchange Act for an investment fund, provided that the issuer conducts the offer and sale of its securities in accordance with the requirements of Rule 506 and limits the number of investors, as detailed above.

In addition, there are no reporting requirements that apply to any officer, employee, or director of the issuer or any investment adviser to the issuer under the broker-dealer regulatory requirements, if such person is properly relying on Rule 3a4-1 under the Exchange Act in connection to his/her activities relating to the offer and sale of securities in the issuer.

US Investment Company Act of 1940, as amended (the Investment Company Act)

General Rule

Generally, a non-US issuer may not conduct a public offering of its securities in the United States or to US persons unless it first obtains an order from the SEC granting it permission to register as an investment company under the Investment Company Act (Section 7(d) of the Investment Company Act). The SEC has interpreted Section 7(d) to permit a non-US issuer to make offers and sales of its securities to US persons in accordance with the exclusions from the definition of "investment company" provided in Section 3(c)(1) and Section 3(c)(7) of the Investment Company Act without having to register under such Act. Generally, most issuers seek to comply with one of these exclusions unless another exclusion, such as the real estate exclusion for real estate funds, is available. 

Exclusions

Section 3(c)(1) Exclusion

For the exclusion under Section 3(c)(1) to apply, in the case of a non-US fund, the issuer must satisfy two requirements:

• it must not have more than 100 US persons who are beneficial owners of its securities; and
• it must conduct its offering in accordance with the requirements of Rule 506(b) or Rule 506(c) of Regulation D under the Securities Act as discussed above (relating to the non-public offering requirement), or otherwise rely directly on the non-public offering contained in Section 4(a)(2) of the Securities Act.

For a fund that meets the definition of "qualifying venture capital fund", the beneficial owner limit is 250. For this purpose, a "qualifying venture capital fund" is a fund that does not have more than US$10 million of aggregate capital contributions and uncalled capital commitments, and which meets the definition of "venture capital fund" in Rule 203(l)-1 under the Investment Advisers Act (see discussion below).

Section 3(c)(7) Exclusion

For the exclusion under Section 3(c)(7) to apply, in the case of a non-US fund, the issuer must also satisfy two (different) requirements:

• each US person that purchases and owns the securities offered and sold in the offering must be a "qualified purchaser", at the time of making the decision to invest in the fund. "Qualified purchaser" is defined in the Investment Company Act to mean: (a) in the case of an individual, a person that has at least US$5 million of investments; or (b) in the case of a company, a company that has at least US$25 million of investments; andthe issuer must conduct its offering in accordance with the requirements of Rule 506(b) or Rule 506(c) of Regulation D of the Securities Act as discussed above, or otherwise rely directly on the non-public offering contained in Section 4(a)(2) of the Securities Act.

Reporting Requirements

If the issuer qualifies under Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act and is therefore not considered to be an investment company, then it is not required to file any reports under the Investment Company Act.

US Investment Advisers Act of 1940, as amended (the Advisers Act)

General Rule

Generally, a non-US person that serves as investment manager/adviser to an investment fund and/or persons, and which uses US jurisdictional means in connection with providing its services, is required to register as an investment adviser under the Advisers Act unless otherwise exempted. For such a non-US investment manager, three exemptions might be available. Please note that, for purposes of the exemptions below, a "US person" (including generally the reference to "clients in the United States") is generally (or for the most part) a person that meets the definition of US person in Rule 902(k)(1) of Regulation S under the Securities Act i.e. an individual that is resident in the United States (including its territories and possessions, such as Puerto Rico), or a company (such as a pooled investment vehicle or other fund) that is organised in the United States.

Rule 902(k)(1) defines who is a US person, whilst Rule 902(k)(2) defines who is explicitly not a US person.

Exemptions

Section 203(b)(3) Exemption

First, an investment manager that is a foreign private adviser (FPA) is not required to register under the Advisers Act. A FPA is an investment manager that satisfies all of the following requirements: (a) it does not have a place of business in the United States; (b) it has in total fewer than 15 clients and investors in the United States in private funds advised by the investment manager; (c) it has aggregate assets under management (AUM) attributable to clients in the United States and investors in the United States in private funds (i.e. a fund that qualifies for the exclusion in Section 3(c)(1) or Section 3(c)(7) of the Investment Company Act) advised by the investment manager of less than US$25 million; and (d) it does not hold itself out generally to the public in the United States as an investment adviser or serve as an investment adviser to a registered investment company or a company that has elected treatment as a business development company under the Investment Company Act. 

Section 203(m)/Rule 203(m)-1 Exemption

Secondly, under the Advisers Act, an exemption from registration is available to a non-US investment manager that satisfies the requirements set forth in Rule 203(m)-1 under the Advisers Act applicable to private fund advisers (PFA). These requirements are: (a) the PFA has its principal office and place of business outside the United States; (b) the PFA has no client that is a US person other than one or more qualifying private funds, a term that is defined in Rule 203(m)-1 to mean a private fund (i.e. a pooled investment vehicle that would be an investment company as defined in Section 3(a)(1) of the Investment Company Act but for the exclusion in Section 3(c)(1) or Section 3(c)(7), including a pooled investment vehicle that also qualifies for another exclusion from the definition of investment company other than Section 3(c)(1) or Section 3(c)(7)), that is not registered as an investment company under the Investment Company Act or has not elected treatment as a business development company; and (c) all assets managed by the investment manager at a place of business in the United States are solely attributable to private fund assets, the total value of which is less than US$150 million.

Section 203(l) Exemption

Thirdly, a non-US investment manager that is a venture capital fund adviser (VCFA) is exempt from registration under the Advisers Act. A VCFA is a person that serves as investment adviser solely to one or more venture capital funds. A venture capital fund is defined in Rule 203(l)-1 under the Advisers Act as a private fund that represents to investors that it pursues a venture capital strategy and that satisfies certain other requirements, including requirements applicable to the types of investments it makes, the amount of leverage it undertakes and the terms of the securities it issues.

Registration Requirements

In order to register with the SEC as an investment adviser, an investment adviser must meet one of several bases for registering with the SEC. Otherwise, the investment adviser must register with the state in which it has its principal office and place of business. Generally, an investment adviser must have AUM of at least US$100 million to register with the SEC. For a non-US investment adviser that has its principal office and place of business outside the United States, it may register with the SEC even if it does not have at least US$100 million of AUM or satisfy another basis for registering with the SEC.

The adviser must file a Form ADV registration application to register with the SEC. This filing is made through the Investment Adviser Regulatory Depository (IARD) administered by the US Financial Industry Regulatory Authority, Inc. (FINRA). The cost for filing Form ADV with the SEC varies according to the investment adviser’s size of AUM. For an investment manager that has AUM of at least US$100 million, the initial registration filing fee is US$225. In addition, the adviser must file a copy of its Form ADV application with, and pay a fee to, the relevant authority in each state in which it transacts business as an investment manager, unless otherwise exempted. 

If the adviser qualifies for either the PFA or VCFA exemption (see above), it is not required to register with the SEC, but it must file a Form ADV with the SEC as an exempt reporting adviser (ERA). This costs US$150 for the initial report and each annual updating amendment, regardless of the size. There is no fee for amendments other than annual updating amendments or for final reports.

Reporting Requirements

In addition to the foregoing, as a registered investment adviser, the adviser will be required to file an amendment to its Form ADV each year to report material changes in the information included in its Form ADV on file with the SEC. It must pay a fee of US$225 (assuming a size of AUM of at least US$300 million) in connection with each such annual amendment filing. It must also file the amendment with, and pay a fee to, the relevant authority in each state in which it transacts business as an investment adviser each year, unless otherwise exempted. 

In addition, as an ERA, the adviser would have to make annual filings of its Form ADV amendment to each state to which it is required to report and pay the appropriate fee. 

An investment adviser that is registered with the SEC must furnish to each of its clients (or, in the case of a non-US investment adviser, to each of its clients that is a US person) a copy of its Form ADV, Part 2A brochure. The brochure must describe key aspects of the business of the investment adviser including its ownership structure, the principal investment strategies and policies that it employs in delivering investment advice, its principal types of clients, its fees, the risks of the types of investments made in accordance with the investment advice it provides, its brokerage arrangements, its custody arrangements and the key provisions of its code of ethics. 

The above is an overview of the key regulatory and reporting requirements under the Securities Act, Exchange Act, Investment Company Act and Advisers Act applicable to investment funds, and of the main exemptions or exclusions that are available under these statutes. This is a complex area of law and our experts would be pleased to help you navigate the rules and regulations in order that you can approach US fund marketing with confidence.

Dentons’ global Asset Management & Investment Funds group is a team of more than 200 asset management-focused lawyers led from key management jurisdictions within the world’s largest law firm, whose dominant focus is investment funds work, both transactional and advisory. Through our unrivalled global coverage, clients can be sure that wherever they have assets, make investments, do business or see opportunity, we can assist.