Managing Global Private Placements in a Changing World

Transcription

1 Managing Global Private Placements in a Changing World A Joint Presentation by CACEIS Investor Services and K&L Gates LLP Copyright 2010 by K&L Gates LLP. All rights reserved.

2 Introduction to Speakers Stuart Fross K&L Gates Partner Sandrine LeClerq CACEIS Investor Services General Counsel John Schrier CACEIS Investor Services Corporate Counsel, Fund Structuring 1

3 Agenda US Private Placements of Private Funds - a quick review and how Dodd-Frank affects them Investment Adviser Registration Requirements and the Foreign Adviser Registration Private Fund Reporting Requirements Products and Services Needed by Advisers After Dodd-Frank AIFMD: the end of EU private placements as we know them? UCITS IV: the alternative directive to the AIFMD? 2

4 Background Significant regulatory change in the US and EU New approach to hedge funds and private equity funds by legislators and regulators New approach to managers of private funds Focus on the Wall Street Reform and Consumer Protection Act of 2010 ( Dodd-Frank Act ) in the US Focus on the Alternative Fund Management Directive in the EU What does all of this change mean? What should managers do, and when? 3

5 Case Study 4

6 A Simple Case Study Imagine an investment adviser located outside of the US, or inside the US Imagine a Cayman Islands funds The Cayman fund will be marketed in the US The Cayman will fund will marketed in the EU The investment adviser prefers to market the fund itself The fund will be sold over the next 10 years 5

7 US Private Placements of Private Funds - a quick review and how Dodd-Frank affects them 6

8 Requirements of Regulation D Rule 506 No general solicitation Offers made to persons with a pre-existing business relationship Made privately without and publicity Resale restrictions Purchase with investment intent Provided with all materials information and no misstatement of material fact Sales made to accredited investors 7

9 Case Study Cayman Fund must offer its shares without a general solicitation in the US Must limit offerees to persons that have a preexisting relationship Adviser must avoid becoming a broker Offering must be limited to accredited investors Fund must also secure an exemption from the Investment Company Act typically by further limiting the universe of investors to qualified purchasers More on ICA later, now for accredited investors 8

10 Accredited Investor Standard Prior to the Dodd-Frank Act, a natural person previously was an accredited investor if he or she: Had an individual net worth, or joint net worth with his or her spouse, including any net equity in a primary residence, that exceeded $1 million at the time of the purchase of securities (Net Worth Test), or Had an individual income in excess of $200,000 (or joint income with that person s spouse in excess of $300,000) in each of the two most recent years and a reasonable expectation of reaching the same income in the current year (Income Test) 9

11 Private Placements in the United States No securities may be offered publicly in the US absent registration of the securities with the SEC. No offshore fund may conduct a US public offering Offshore funds may conduct a US private placement pursuant to a private placement conducted under Section 4(2) of the Securities Act and Rule 506 of Regulation D Section 4(2) exempts from registration offerings of securities by an issuer not involving any public offering Private placements are generally made in accordance with Rule 506 of Regulation D 10

12 Accredited Investor Standard Dodd-Frank immediately requires the SEC to exclude the value of a person s primary residence in determining whether that person meets the Net Worth Test This exclusion became effective immediately upon enactment of the Act in July

13 Accredited Investor Standard The Act requires the SEC to review the accredited investor definition as it applies to natural persons The SEC cannot however increase the $1 million level of the Net Worth Test for four years after the enactment of the Act In subsequent reviews (every four years), the SEC could propose increasing the $1 million level of the Net Worth Test 12

14 Accredited Investor Standard Issues and questions raised by the changes Exclusion of primary residence and other changes will shrink pool of natural person accredited investors Will particularly affect: Smaller advisers that manage private funds with significant investments by natural person accredited investors that are not qualified purchasers (i.e., 3(c)(1) funds) The exclusion of the value of a primary residence requires immediate changes to subscription documents, website preclearance questionnaires and documents governing follow-on investments by investors 13

15 Investment Adviser Registration Requirements and the Foreign Adviser Registration 14

16 Adviser Registration and New Exemptions The Act rescinds the private adviser exemption effective July 21, 2011 Present law mandates SEC registration for investment advisers that have at least 15 clients and more than $30 million in assets under management ( AUM ). Each fund is generally one client, unless side letters are involved. SEC registration is permissible if assets exceed $25 million. For private equity funds, invested assets generally are counted and committed assets ignored. As not registered with the SEC either registered with one or more states, or enjoyed a total exemption. But they couldn t hold themselves out to be an investment adviser. Under the Dodd-Frank Act, virtually all advisers must/will be registered: the question is with which agency/agencies. AUM includes committed assets even before they are called. 15

17 Adviser Registration and New Exemptions (cont.) The Act raises the minimum AUM for federal registration to $100 million Prohibition on federal registration applies to advisers: If required to be registered as an investment adviser in the state in which it has its principal place of business and, if registered, would be subject to examination With AUM between $25 million and $100 million SEC may increase these amounts by rule If not required to be registered in a state, the minimum AUM for federal registration is $25 million Does not apply: To advisers to registered investment companies or BDCs To advisers that would be required to register with 15 or more states, and To advisers with their principal office and place of business outside of the United States Many will fall under Advisers Act 16

18 Foreign Private Advisers The Dodd-Frank Bill introduces SEC investment adviser registration requirements for any foreign investment adviser that does not meet the Foreign Private Adviser registration exemptions. Defined to mean any adviser who: Has no place of business in the United States Has, in total, fewer than 15 clients and investors in the United States in Private Funds advised by the investment adviser Has aggregate US client AUM attributable to clients invested in the US in Private Funds advised by the investment adviser of less than $25 million And neither: Holds itself out generally to the public in the United States as an investment adviser; nor Acts as (i) an investment adviser to any investment company, or (ii) a BDC. 17

19 Private Fund SEC Reporting Requirements 18

20 Recordkeeping and Reporting Requirements The Dodd-Frank Act provides the SEC with authority to require records and reports regarding private funds (generally, a 3(c)(1) or 3(c)(7) fund) Who will do the reporting? The Act requires records to include the following: AUM and use of leverage, including off-balance sheet leverage Counterparty credit risk exposure Trading and investment positions Valuation policies and practices Types of assets held Side arrangements or side letters Trading practices, and Such other information as the SEC (in consultation with the Financial Stability Oversight Council) determines is necessary and appropriate in the public interest and for protection of investors or for the assessment of systemic risk 19

21 Recordkeeping and Reporting Requirements (cont.) SEC may issue rules requiring registered advisers to private funds to maintain and file reports containing information SEC deems necessary and appropriate Reporting requirements may vary based on type or size of private funds advised Unclear what these rules will require or what record maintenance period and requirements will be imposed SEC may share information with FSOC, a body created to assess systemic risk in the financial system generally, as the FSOC considers necessary to assess systematic risk SEC and CFTC (after consultation with FSOC) must jointly promulgate rules to establish the form and content of reports to be filed with SEC and CFTC by dual registrants 20

22 US Private Placement Implications Post July 11, 2010 Likely investment adviser registration Likely private fund registration requirements Application of US law to non-us Advisers? Key implications of registration Compliance policies and procedures Brochure Rule, ADV Part 2 Custody rule (applies to fund) Record keeping SEC inspection powers Is the US offering worth it? 21

23 Managing Global Private Placement in a Rapidly Changing World 22

24 Review of EU Private Placement regime today There are no EU harmonised regulations surrounding the distribution of alternative investment funds in Europe. Non-UCITS mutual funds and alternative funds (hedge, real estate and private equity) seeking to distribute must look to each countries national regulations. Some jurisdictions have codified tighter regulated regimes that provide for private placement of shares under certain limitations. Some do not permit private placement at all whilst others do not specifically address this issue - meaning that careful navigation is required. Source: PwC, December

25 Review of EU Private Placement regime today Austria Denmark Finland France Germany Italy Netherlands Norway Spain Sweden Switzerland United Kingdom Legend Regulations permitting with reasonable conditions Possible but with limited scope Not permitted or extremely restricted need to be careful Source: PwC, December

26 The end of the private placement regime as we know it? Not yet and this will be in exchange for enhanced development perspectives and will mean the end of uncertainty and complexity Progressive implementation calendar Jan 2011: the Directive enters into force Jan 2013: end of transposition period Passport for EU AIFM/EU AIF National Private regimes for non-eu AIFM/non-EU AIF (subject to minimum standardised rules) Jan 2015: phased entry into force of third country passport on the basis of ESMA advice national private placement regimes continue to exist Jan 2018: ESMA advice determining possible termination of the national private placement regimes (passive distribution still allowed) 25

27 Non-EU managers seeking to sell non-eu AIF under the passport (as from 2015) Comply with all conditions of the Directive based on an equivalence approach Managers must register and be authorised by the Member state of reference Need to appoint a depositary bank Meet additional conditions in order to compensate the lack of statutory cooperation between the Member States of distribution/ the Reference Member State and the home country of the AIF/AIFM Appointment of a Legal Representative Cooperation agreements must be in place between the EU member State of reference and the fund s third country home regulator Third countries are not on the FAFT non-cooperative list Fund s third country home regulator has signed an OECD model tax sharing information agreement with each EU state in which the fund is to be marketed 26

28 Benefits of establishing an EU AIFM Proximity to: Local Authorities Service Providers close control and leverage Investors increase of confidence and on time decision with respect to issues linked to distribution and valuation etc. Legal certainty Skip transitory period Save reassessment risk Constraints not to be overestimated market solutions 27

29 UCITS IV the alternative to the AIFM? UCITS is the EU safest product label, eligible to public distribution without restrictions through the passport UCITS are regulated by a stricter regulation on product: investment diversification, liquidity requirement, limitation on global risk exposure on the management company: minimal local substance requirement, higher degree of governance rules Since UCITS III, the scope of eligible instruments is substantially extended, giving managers the possibility to run Hedge fund like investment strategies under the UCITS label (long/short, 130/30, absolute return/relative value/ etc.) Attractive for Regulated EU professionals (insurance companies, etc.) Industry supportive solutions 28

30 Questions? 29

31 Panelist Contact Information Stuart E. Fross Partner, K&L Gates LLP (617) (phone) (617) (fax) Sandrine LECLERCQ General Counsel CACEIS Group CACEIS Bank Luxembourg Tel Mob Fax John V. Schrier Corporate Counsel, Fund Structuring CACEIS (USA) Inc Direct Tel Main Tel Fax 30