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Lipper HedgeWorld's Education Center
Regulatory Environment for US Domiciled Hedge Funds
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Regulatory Environment for US Domiciled Hedge Funds
Traditionally, since US hedge funds are organized as Limited Partnerships (private
investment vehicles), they have existed with relatively few regulatory requirements.
In fact, a US-domiciled fund does not need to register with the SEC if it conforms
to one the following:
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Regulation D Exemption of the Securities Act of 1933
The Securities Act of 1933 states that securities sales in the United States must be
either registered or exempt. A security need not be registered if it satisfies the
Regulation D Exemption, which states that:
- All but 35 holders of such securities are "accredited investors,"as defined:
a person with net worth in excess of $1mm or with income of $200,000
($300,000 joint income with a spouse) in each of the prior two years
with an expectation of earning the same in the current year.
- And, the securities are privately placed.
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3(c)1 or 3(c)7 Exclusion of Investment Company Act of 1940
A hedge fund manager is exempt from the provisions of the 1940 Act if the fund
can remain outside of the statutory meaning of an investment company subject to
registration. These exclusions fall primarily under two sections of the Act:
- 3(c)1: if a fund has under 100 beneficial owners and they are qualified
purchasers, it need not register as an investment company.
- 3(c)7: if a fund has 500 "super-qualified" (higher net worth and income
amounts), then it need not register as an investment company.
Both 3(c)1 and 3(c)7 also stipulate that the fund is neither making nor intending to
make a public offering. There is no exemption if the Investment Advisor holds itself
out to the public as an Investment Advisor.
The Investment Company Act was amended in 1996, requiring registration if the adviser
has more than $30 million under management and has more than 14 clients. Additionally,
federal registration is not allowed if the manager has less than $25 million under management.
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