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TreatiseTreatise

Private Equity Funds: Formation and Operation
 by Phyllis A. Schwartz, Stephanie R. Breslow
 
 Copyright: 2009-2012
 Last Updated: June 2012

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  • ISBN Number: 9781402411250
  • Page Count: 740
  • Number of Volumes: 1
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PLI’s new Private Equity Funds gives you the solid understanding of private equity funds that can help you make these vehicles grow, while providing full coverage of the laws and regulations governing them.

Private Equity Funds explains the features, advantages, and drawbacks of PIPEs, SPACs, mezzanine funds, credit opportunity funds, and distressed funds, as well as the efficiencies created when private equity funds and hedge funds converge. Private Equity Funds discusses the negotiation of terms between fund sponsors and investors, including fund size, the investment program, capital commitments and contributions, distributions, and related documentation.

Private Equity Funds helps you to choose the right organizational options for funds and their sponsors; structure and implement ownership and compensation arrangements that work best for each fund; hire and retain the best fund talent; and qualify for the Securities Act’s private placement exemption, the IAA’s exclusion from registration as an investment adviser, and other exemptive relief.

Updated at least once a year, Private Equity Funds: Formation and Operation is an indispensable guidebook for all attorneys and professionals involved in private equity funds, and useful and accessible reading for investors.

  Introduction
Chapter 1: Introduction to Private Equity Funds
  • § 1:1 : A Brief History of Private Equity1-3
    • § 1:1.1 : Post World War II: American Research and Development1-3
    • § 1:1.2 : Small Business Administration1-4
    • § 1:1.3 : The Seventies: Favorable Legislation1-5
    • § 1:1.4 : The Eighties: Leveraged Buyouts1-6
    • § 1:1.5 : The Nineties: Technology Industry1-8
    • § 1:1.6 : The New Millennium: Securitization Market1-10
    • § 1:1.7 : The Subprime Mortgage Crisis1-11
    • § 1:1.8 : The European Sovereign Debt Crisis1-13
    • § 1:1.9 : The Investment Climate1-14
  • § 1:2 : What Is a Private Equity Fund?1-15
    • § 1:2.1 : Overview1-15
    • § 1:2.2 : Typical Investments1-15
      • [A] : Diversified Portfolio1-15
      • [B] : Deal Structures1-16
      • [C] : Types of Investments1-17
    • § 1:2.3 : Organizational Structure1-17
    • § 1:2.4 : Private Placements1-17
    • § 1:2.5 : Key Players1-18
      • [A] : Fund Sponsors1-18
      • [B] : Investors1-20
      • [C] : Professional Advisors1-20
      • [D] : Placement Agents1-21
  • § 1:3 : Types of Funds1-21
    • § 1:3.1 : Buyout Funds1-21
      • [A] : Typical Investments1-21
      • [B] : Distinguishing Organizational Features1-22
    • § 1:3.2 : Venture Capital Funds1-23
      • [A] : Typical Investments1-23
      • [B] : Distinguishing Organizational Features1-24
    • § 1:3.3 : Mezzanine and Credit Opportunity Funds1-24
      • [A] : Typical Investments1-24
        • [A][1] : Mezzanine Funds1-24
        • [A][2] : Credit Opportunity Funds1-25
      • [B] : Distinguishing Organizational Features1-26
    • § 1:3.4 : Distressed Debt Funds1-26
      • [A] : Typical Investments1-26
      • [B] : Distinguishing Organizational Features1-26
    • § 1:3.5 : Real Estate Funds1-27
      • [A] : Typical Investments1-27
      • [B] : Distinguishing Organizational Features1-27
    • § 1:3.6 : Funds of Funds1-28
      • [A] : Typical Investments1-28
      • [B] : Distinguishing Organizational Features1-29
    • § 1:3.7 : Structured Product Funds1-29
      • [A] : Typical Investments1-29
      • [B] : Distinguishing Organizational Features1-30
    • § 1:3.8 : “Club” or “Pledge” Funds1-31
      • [A] : Typical Investments1-31
  • § 1:4 : Current Trends in Private Equity1-32
    • § 1:4.1 : Private Investments in Public Equity (PIPEs)1-32
    • § 1:4.2 : Special Purpose Acquisition Company (SPAC)1-33
      • [A] : Investment Advantages1-33
      • [B] : Structural Considerations1-34
      • [C] : Investment Risks1-35
    • § 1:4.3 : Mezzanine and Credit Opportunity Funds1-35
    • § 1:4.4 : Sovereign Wealth Funds (SWFs)1-36
      • [A] : Foreign Policy Concerns with SWFs1-37
    • § 1:4.5 : Secondaries1-38
    • § 1:4.6 : Distressed Funds1-40
    • § 1:4.7 : Seed Capital Funds1-41
    • § 1:4.8 : Permanent Capital1-41
  • § 1:5 : Industry Convergence1-42
    • § 1:5.1 : Blurring the Line Between Private Equity and Hedge Funds1-42
      • [A] : Strategic Differences1-42
      • [B] : Erosion of Differences Between Private Equity and Hedge Funds1-43
      • [C] : Advantages of Convergence1-44
      • [D] : Convergence Concerns1-45
        • [D][1] : Valuation of Fund Assets and Computation of Compensation1-45
        • [D][2] : Cultural Clash1-45
        • [D][3] : Marketing Issues1-46
        • [D][4] : Investor Expectations1-46
    • § 1:5.2 : Hybrid Funds1-47
    • § 1:5.3 : Private Equity Funds Versus Mutual Funds1-49
Chapter 2: Terms of Private Equity Funds
  • § 2:1 : Overview2-5
    • § 2:1.1 : Fund Size2-7
    • § 2:1.2 : Fund Investment Strategy2-7
    • § 2:1.3 : Fund Maturity2-8
    • § 2:1.4 : Single Fund or Cluster of Parallel Funds2-8
    • § 2:1.5 : Fund Jurisdiction2-9
    • § 2:1.6 : Fund Manager Experience2-9
    • § 2:1.7 : Investor Fund Term Negotiation Objectives2-10
  • § 2:2 : Fund Size2-12
    • § 2:2.1 : Excessively Small Funds2-12
    • § 2:2.2 : Excessively Large Funds2-12
    • § 2:2.3 : Fund Size Caps or Floors2-13
  • § 2:3 : Investment Programs2-14
    • § 2:3.1 : Fund Investment Approach Stated in Offering Memorandum2-15
    • § 2:3.2 : Investment Guidelines and Restrictions2-16
  • § 2:4 : Life of a Fund2-18
    • § 2:4.1 : Marketing Period2-19
      • [A] : First-Time Funds2-19
      • [B] : Development of Fund Terms and Initial Offering Materials2-20
      • [C] : Warehousing Investments2-21
      • [D] : Closings2-22
      • [E] : Admission of Subsequent Investors2-23
    • § 2:4.2 : Investment Period2-24
      • [A] : Recall of Capital2-25
      • [B] : Management Fees and Expenses2-25
      • [C] : Post-Investment Period Investments2-26
    • § 2:4.3 : Holding Period2-26
  • § 2:5 : Capital Commitments and Capital Contributions2-27
    • § 2:5.1 : Capital Commitments2-27
    • § 2:5.2 : Capital Contributions2-28
    • § 2:5.3 : General Partner Commitment2-28
      • [A] : Incremental Liability Exposure2-28
      • [B] : Sponsor Commitments2-29
    • § 2:5.4 : Drawdowns and Notices2-30
      • [A] : Draw Period2-30
      • [B] : Capital Call Notice2-31
      • [C] : Capital Contribution Notice2-31
    • § 2:5.5 : Minimum Commitment2-32
    • § 2:5.6 : Defaults on Capital Contributions2-33
      • [A] : Remedies2-33
      • [B] : Defaulting Partner’s Interest2-34
      • [C] : Investor Default Due to Loss of Confidence in Fund Sponsor2-35
      • [D] : Consequences of Investor Default2-36
    • § 2:5.7 : Follow-On and Pending Investments2-36
      • [A] : Follow-On Investments2-37
      • [B] : Pending Investments2-37
      • [C] : Drawing Capital for Follow-On and Pending Investments2-38
    • § 2:5.8 : Recall and Reinvestment; Limited Partner Clawback2-38
      • [A] : Reinvestment and Recall of Capital2-38
      • [B] : Limited Partner Clawback2-40
  • § 2:6 : Closings2-41
    • § 2:6.1 : Initial Closing; Offering Period2-41
  • § 2:7 : Distributions2-41
    • § 2:7.1 : Timing of Distributions2-41
    • § 2:7.2 : Distributions In-Kind2-42
      • [A] : Marketable Securities2-42
      • [B] : Tax Advantages of Distributions In-Kind2-43
      • [C] : Sale of Securities Instead of Distributions In-Kind2-43
      • [D] : Residual Assets2-44
    • § 2:7.3 : Tax Distributions2-44
    • § 2:7.4 : Tax Withholding2-45
  • § 2:8 : Fees and Allocations2-47
    • § 2:8.1 : Carried Interest2-47
      • [A] : Overview2-47
      • [B] : Deal-by-Deal Carry2-47
      • [C] : Deal-by-Deal with Loss Carryforward2-48
        • [C][1] : Principal Issues and Variations2-49
      • [D] : Back-End Loaded Carry2-54
        • [D][1] : Delay in Receipt of Carry2-55
        • [D][2] : Advantages to Investor2-55
        • [D][3] : Advantages to Fund Sponsor2-56
        • [D][4] : Special Tax Distributions to General Partners2-57
      • [E] : Hybrid Carry Arrangements2-57
      • [F] : Waivers and Reductions of Carry2-57
      • [G] : General Partner Clawback2-59
        • [G][1] : Calculation of the Clawback2-60
        • [G][2] : When the Clawback Is Payable2-61
        • [G][3] : Who Is Liable for Repayments of the Clawback2-62
        • [G][4] : What Deductions May Be Taken in Calculating the Clawback2-65
        • [G][5] : What Security Is Given to Ensure Repayment2-66
    • § 2:8.2 : Management Fees2-68
      • [A] : Overview2-68
      • [B] : How Management Fees Are Calculated2-68
        • [B][1] : Typical Structure2-68
        • [B][2] : Deviation from the Typical Market Structure2-69
        • [B][3] : Investor Scrutiny of Management Fees2-69
        • [B][4] : Net Invested Capital2-70
        • [B][5] : Deferred Management Fees for Different Investors2-70
      • [C] : Timing of Management Fee Payments2-70
      • [D] : Reduction to Management Fees2-70
        • [D][1] : Transaction Fees2-71
        • [D][2] : Waiver of Management Fees in Exchange for Profit Interests2-73
        • [D][3] : Waiver of Management Fees Relating to Payment of Placement Agent Fees2-73
      • [E] : Source of Payment for Management Fees2-74
    • § 2:8.3 : Other Fees2-75
      • [A] : Break-Up Fees2-75
      • [B] : Directors Fees2-76
      • [C] : Advisory and Similar Fees2-76
      • [D] : Acquisition/Disposition Fees2-77
      • [E] : Affiliate Service Fees2-77
  • § 2:9 : Expenses2-78
    • § 2:9.1 : Overview2-78
    • § 2:9.2 : Fund Expenses2-78
      • [A] : Types of Expenses Incurred by Funds2-78
        • [A][1] : Management Fees2-79
        • [A][2] : Costs in Acquiring, Holding, and Disposition of Investments2-79
        • [A][3] : Organizational Expenses2-79
        • [A][4] : Service Provider Costs2-80
        • [A][5] : Extraordinary Expenses2-81
        • [A][6] : Partner Meeting Expenses2-81
        • [A][7] : Taxes2-81
      • [B] : Sources of Cash to Cover Expenses2-81
    • § 2:9.3 : Investment Manager Expenses2-82
      • [A] : Types of Expenses Incurred by the Investment Manager2-82
      • [B] : Sources of Cash to Cover Expenses2-82
    • § 2:9.4 : General Partner Expenses2-83
      • [A] : Types of Expenses Incurred by the General Partner2-83
      • [B] : Sources of Cash to Cover Expenses2-83
  • § 2:10 : Management Company; General Partner2-83
    • § 2:10.1 : In General2-83
    • § 2:10.2 : Duties and Powers of the General Partner2-84
    • § 2:10.3 : Duties and Powers of the Management Company2-89
    • § 2:10.4 : Restrictions on Fund Managers2-89
      • [A] : Time Commitment2-89
      • [B] : Order Allocation and Aggregation of Trades2-90
      • [C] : Conflict Transactions2-91
      • [D] : Allocation of Investment Opportunities; Deal Exclusivity2-92
      • [E] : Subsequent Funds2-93
      • [F] : Other Activities2-93
      • [G] : Non-Competition2-93
  • § 2:11 : Limited Partners2-94
    • § 2:11.1 : Limited Liability2-94
    • § 2:11.2 : No Participation in Management2-95
    • § 2:11.3 : Additional Limited Partners; Increased Commitments2-98
  • § 2:12 : Advisory Committee2-99
  • § 2:13 : Exculpation and Indemnification2-101
    • § 2:13.1 : Exculpation2-101
      • [A] : Misconduct2-101
      • [B] : Delaware Law2-101
      • [C] : Standard of Liability2-102
    • § 2:13.2 : Indemnification2-102
  • § 2:14 : Withdrawal of Interests2-103
    • § 2:14.1 : Mandatory Withdrawals2-103
    • § 2:14.2 : Optional Withdrawals2-104
    • § 2:14.3 : Rights Upon Withdrawal2-104
  • § 2:15 : Key Person Events2-105
    • § 2:15.1 : Nature of Key Person Events2-105
    • § 2:15.2 : Remedies Following Key Person Events2-106
      • [A] : Termination of Investment Period2-106
      • [B] : Dissolution of Fund2-106
      • [C] : Replacement of General Partner and Manager2-107
  • § 2:16 : Transferability of Interests2-107
    • § 2:16.1 : General Restrictions on Transfers2-107
    • § 2:16.2 : Typical Restrictions on Transferability2-108
      • [A] : General Partner Consent2-108
      • [B] : Transfers Between Unrelated Parties2-108
      • [C] : General Partner’s Discretion2-109
    • § 2:16.3 : Permitted Transfers2-110
    • § 2:16.4 : Rights of First Refusal2-111
    • § 2:16.5 : Pledges of Interests2-111
    • § 2:16.6 : Locating Buyers2-112
    • § 2:16.7 : Legal and Tax Issues2-112
  • § 2:17 : Valuation of Fund Assets2-114
    • § 2:17.1 : In General2-114
    • § 2:17.2 : Economic Features of Private Equity Funds Affected by Valuation of Assets2-114
      • [A] : Distribution Calculations2-114
      • [B] : Management Fee Calculations2-115
      • [C] : Distributions In-Kind2-115
    • § 2:17.3 : Determination of Values of Investments2-115
    • § 2:17.4 : Marketing Based on Valuation2-116
  • § 2:18 : Duration2-116
    • § 2:18.1 : Term of the Fund2-116
    • § 2:18.2 : Early Dissolution2-116
    • § 2:18.3 : Liquidation and Winding Up of the Fund2-117
  • § 2:19 : Side Letters2-118
    • § 2:19.1 : In General2-118
    • § 2:19.2 : Legal and Regulatory Concerns Raised by Side Letters2-119
    • § 2:19.3 : Common Types of Side Letter Provisions2-121
      • [A] : Most Favored Nation Provisions2-121
      • [B] : Compensation Provisions2-123
      • [C] : Redemption Provisions2-123
      • [D] : Transfer Provisions2-123
      • [E] : Information Rights2-124
      • [F] : Investment Guidelines2-125
      • [G] : Requirement That Other Investors Sign Substantially Similar Subscription Documents2-126
      • [H] : Sovereign Immunity2-127
      • [I] : Capacity Rights2-127
  • § 2:20 : Amendments2-127
  • § 2:21 : Certificates2-129
  • § 2:22 : Closing Process2-130
  • § 2:23 : Warehousing of Deals2-131
  • § 2:24 : Powers of Attorney2-132
  • § 2:25 : Governing Law2-133
  • § 2:26 : Submission to Jurisdiction2-134
  • § 2:27 : Arbitration/Mediation2-134
Chapter 3: Organizational Options for Funds and Their Sponsors
  • § 3:1 : Introduction3-2
  • § 3:2 : Limited Partnerships3-2
    • § 3:2.1 : Overview3-2
    • § 3:2.2 : Limited Liability Protection3-3
    • § 3:2.3 : Advantages of Limited Partnerships3-3
      • [A] : Tax Advantages3-3
      • [B] : Economic and Management Structural Flexibility3-5
      • [C] : Limited Partnership Agreement3-5
    • § 3:2.4 : Disadvantages of Limited Partnerships3-6
      • [A] : General Partner’s Unlimited Liability3-6
      • [B] : Negative Tax Consequences to General Partner3-6
      • [C] : Recharacterization As a General Partner3-6
    • § 3:2.5 : Other Issues3-7
      • [A] : General Partner’s Capital Contribution3-7
      • [B] : Characterization As a Publicly Traded Partnership3-7
    • § 3:2.6 : Forming the Limited Partnership3-8
      • [A] : Certificate of Limited Partnership3-8
      • [B] : Employer Identification Number3-8
      • [C] : Written Limited Partnership Agreement3-8
  • § 3:3 : Limited Liability Companies3-9
    • § 3:3.1 : Overview3-9
    • § 3:3.2 : Advantages of the LLC3-9
      • [A] : Limited Liability Protection and Tax Advantages3-9
      • [B] : Flexible Management Structure3-9
      • [C] : Flexible Economic Structure3-10
      • [D] : Single-Member LLCs3-10
    • § 3:3.3 : Disadvantages of the LLC3-10
      • [A] : Newly Recognized Entity3-10
      • [B] : Recharacterization As a Publicly Traded Partnership3-11
      • [C] : Tax Disadvantages3-11
      • [D] : Lack of International Recognition3-11
    • § 3:3.4 : Forming the LLC3-11
      • [A] : Certificate of Formation3-11
      • [B] : IRS Forms3-12
      • [C] : Operating Agreement3-12
  • § 3:4 : Subchapter S Corporations3-13
    • § 3:4.1 : Overview3-13
    • § 3:4.2 : Restrictions on Subchapter S Corporations3-13
    • § 3:4.3 : Forming the S Corporation3-14
  • § 3:5 : C Corporations3-14
    • § 3:5.1 : Overview3-14
    • § 3:5.2 : Double Taxation3-15
    • § 3:5.3 : Advantages of C Corporations3-15
    • § 3:5.4 : Management and Economic Structural Flexibility3-15
    • § 3:5.5 : Forming the C Corporation3-15
  • § 3:6 : Other Alternatives3-15
Chapter 4: Ownership and Compensation Arrangements for Fund Sponsors
  • § 4:1 : Overview4-2
  • § 4:2 : Background on Management Structures4-4
    • § 4:2.1 : Management Company4-5
    • § 4:2.2 : General Partner4-5
    • § 4:2.3 : Benefits of a Bifurcated Management Structure4-6
  • § 4:3 : Structuring the General Partner Entity and the Management Company4-7
  • § 4:4 : Structuring Ownership and Compensation Arrangements4-8
    • § 4:4.1 : General Considerations4-8
    • § 4:4.2 : Overview of Compensation Options4-9
      • [A] : Salaries and Bonuses4-9
      • [B] : Direct Employee Investment in the Fund Sponsor’s Funds4-9
      • [C] : Employee Funds Investing in the Fund Sponsor’s Funds4-10
      • [D] : Employee Funds That Invest Side-by-Side with the Fund Sponsor’s Funds4-11
      • [E] : Annual Co-Investment Vehicles4-12
      • [F] : Employees’ Securities Companies4-12
    • § 4:4.3 : Profit Sharing and Ownership in the Management Entities4-14
      • [A] : Ownership Interest in the Management Entities4-16
    • § 4:4.4 : Allocating Economic Rights Among Interest Holders4-18
      • [A] : Carried Interest4-18
        • [A][1] : Allocation of Carried Interest4-18
        • [A][2] : Timing of Carried Interest Payments4-20
      • [B] : Investment Income4-22
      • [C] : Equity Income from the General Partner Entity4-23
  • § 4:5 : Drafting the Management Entity Operating Agreement4-24
    • § 4:5.1 : General Introduction4-24
    • § 4:5.2 : Naming the Company4-26
      • [A] : Choosing a Name4-26
      • [B] : Protecting a Name4-27
      • [C] : Statutory Requirements for a Name4-28
      • [D] : Purpose of the Company4-29
      • [E] : Descriptions of Rights and Obligations4-30
    • § 4:5.3 : Management Issues4-32
      • [A] : Management Generally4-32
      • [B] : Authority of the Managers4-33
      • [C] : Voting or Consent Rights4-35
      • [D] : Other Management Provisions4-38
      • [E] : Fiduciary Duties of Managers4-39
        • [E][1] : Duty of Managers Towards One Another4-39
        • [E][2] : Duties to Portfolio Companies4-40
      • [F] : Activities of the Managers4-43
      • [G] : Exculpation of Managers4-44
      • [H] : Expenses of the Management Entities4-45
    • § 4:5.4 : Capital Provisions4-46
      • [A] : General Overview4-46
      • [B] : Capital Commitments4-47
      • [C] : Capital Contributions4-48
      • [D] : Defaulting Equity Owners4-49
      • [E] : Clawback Obligation4-50
      • [F] : Reserves and Holdbacks4-51
    • § 4:5.5 : Restrictions on Economic Rights: Vesting, Dilution, and Sunset Provisions4-52
      • [A] : Vesting Arrangements4-52
      • [B] : Dilution4-54
      • [C] : Forfeiture of Economic Rights by Equity Owners4-55
        • [C][1] : Terms of Departure4-55
        • [C][2] : Sunset Provisions4-57
      • [D] : Restrictive Covenants4-57
  • § 4:6 : Structuring Ownership and Compensation Arrangements for the Management Company4-58
Chapter 5: Employment Matters
  • § 5:1 : Introduction5-1
  • § 5:2 : Recruitment and Interviewing5-2
    • § 5:2.1 : The Job Application5-2
    • § 5:2.2 : The Interviewing Phase5-3
    • § 5:2.3 : Background Check5-3
    • § 5:2.4 : Properly Classifying Potential Hires5-3
    • § 5:2.5 : Negotiating Employment Agreements5-4
      • [A] : Restrictive Covenants5-5
        • [A][1] : Non-Competition Clauses5-6
        • [A][2] : Non-Solicitation of Investors and Customers5-8
        • [A][3] : Non-Solicitation of Personnel5-8
        • [A][4] : Non-Disparagement5-9
        • [A][5] : Confidentiality5-9
        • [A][6] : Protecting Work Product and Prohibiting Track Record Portability5-10
        • [A][7] : Enforceability5-10
  • § 5:3 : Employment Policies and Procedure5-10
    • § 5:3.1 : The Employment Handbook5-11
    • § 5:3.2 : Employee Training5-11
  • § 5:4 : Lift-Outs5-12
    • § 5:4.1 : Defending Against a Lift-Out5-12
      • [A] : Steps to Deter Lift-Outs5-12
    • § 5:4.2 : Dealing with a Lift-Out5-13
    • § 5:4.3 : Preserving Fund Sponsor’s Legal Position with Respect to Lift-Outs5-15
    • § 5:4.4 : Hiring Employees As a Result of a Lift-Out5-17
Chapter 6: Fund Documentation
  • § 6:1 : Starting the Process: The Preliminary Offering6-1
    • § 6:1.1 : Summary of Terms6-1
    • § 6:1.2 : The “Flip Book”6-2
    • § 6:1.3 : Due Diligence Questionnaire6-3
  • § 6:2 : Offering Memorandum6-3
  • § 6:3 : Limited Partnership Agreement6-4
    • § 6:3.1 : Terms of the Limited Partnership Agreement6-4
    • § 6:3.2 : Reviewing the Limited Partnership Agreement6-5
    • § 6:3.3 : Negotiating the Terms of the Limited Partnership Agreement6-5
  • § 6:4 : Ancillary Documents6-6
    • § 6:4.1 : Subscription Agreements6-7
    • § 6:4.2 : Investment Management Agreements6-8
    • § 6:4.3 : Administration Agreements6-9
    • § 6:4.4 : Legal Opinions6-10
Chapter 7: Adopting a Compliance Program
  • § 7:1 : Overview7-1
  • § 7:2 : Establishing a Compliance Program7-2
    • § 7:2.1 : Administering a Fund Sponsor’s Compliance Program7-2
    • § 7:2.2 : The Compliance Manual7-3
      • [A] : Overview7-3
      • [B] : General Drafting Considerations7-3
    • § 7:2.3 : Implementing the Firm’s Compliance Program7-5
    • § 7:2.4 : Reviewing and Updating the Compliance Manual7-6
Chapter 8: Securities Act of 1933
  • § 8:1 : Overview8-1
  • § 8:2 : Raising Capital in the United States8-3
    • § 8:2.1 : Section 4(2) Private Placement Exemption8-3
    • § 8:2.2 : Regulation D8-3
      • [A] : The Regulation D Exemption8-3
      • [B] : Rule 501(a): Accredited Investors8-4
        • [B][1] : Non-Accredited Investors8-7
      • [C] : Rule 502(c): Prohibition on General Solicitation and Advertising8-7
        • [C][1] : Substantive Pre-Existing Relationship8-9
        • [C][2] : Establishing a Substantive Pre-Existing Relationship8-10
        • [C][3] : Communications with the Press and the Public8-10
        • [C][4] : Internet Communications8-11
        • [C][5] : Consequences of Making a General Solicitation or General Advertisement8-12
        • [C][6] : Practical Guidance Concerning the Offering Process8-13
      • [D] : Rule 502(d): Limitations on Resale8-14
        • [D][1] : Form D Filing Requirement8-15
      • [E] : Attribution8-15
      • [F] : Integration of Multiple Private Offerings8-15
  • § 8:3 : Raising Capital Outside of the United States8-16
    • § 8:3.1 : Regulation S8-16
  • § 8:4 : Consequences of a Failure to Comply with Private Placement Exemptions8-19
  • § 8:5 : Anti-Fraud Rules8-20
Chapter 9: Investment Company Act of 1940
  • § 9:1 : Overview9-2
  • § 9:2 : Section 3(c)(1) of the Investment Company Act9-3
    • § 9:2.1 : Public Versus Private Offering9-3
      • [A] : Offshore Funds9-3
    • § 9:2.2 : 100-Beneficial-Owner Limit9-4
      • [A] : Attribution9-5
        • [A][1] : Look Through9-5
        • [A][2] : Representations Required from Investors9-6
        • [A][3] : Funds of Funds; Larger Funds9-7
      • [B] : Integration of Section 3(c)(1) Funds9-7
  • § 9:3 : Section 3(c)(7) of the Investment Company Act9-9
    • § 9:3.1 : Qualified Purchasers9-9
      • [A] : Investments9-11
  • § 9:4 : Knowledgeable Employees9-12
    • § 9:4.1 : Overview9-12
    • § 9:4.2 : Alternatives for Employee Investment9-14
  • § 9:5 : Involuntary Transfers9-15
  • § 9:6 : Business Development Companies9-15
    • § 9:6.1 : Overview9-15
    • § 9:6.2 : BDC Structure9-16
    • § 9:6.3 : Advantages of a BDC9-17
    • § 9:6.4 : Taxation of BDCs9-18
  • § 9:7 : Consequences of Failure to Comply with Investment Company Act Exclusions or Exemptions9-19
Chapter 10: Investment Advisers Act of 1940
  • § 10:1 : Overview10-2
  • § 10:2 : Advisers Act Registration10-4
    • § 10:2.1 : In General (Investment Adviser Registration Requirements)10-4
    • § 10:2.2 : Registration of Investment Advisory Affiliates10-5
      • [A] : Fund General Partners, Managing Members and Similar SPVs10-5
      • [B] : Investment Advisory Affiliates—Single Registration10-6
    • § 10:2.3 : Registration Process—Form ADV10-7
    • § 10:2.4 : Consequences of Investment Advisers Act Registration10-9
      • [A] : Required Policies and Procedures10-9
      • [B] : SEC Examinations and Enforcement10-9
      • [C] : Performance-Based Compensation10-11
      • [D] : Section 207 of the Advisers Act10-14
      • [E] : Section 208 of the Advisers Act10-14
      • [F] : Form PF10-15
  • § 10:3 : Exemptions from Investment Advisers Act Registration10-17
    • § 10:3.1 : Exemption for Investment Advisers with Less Than $150 Million Regulatory AUM in the United States10-18
      • [A] : Determination of Regulatory AUM in the United States10-19
      • [B] : Frequency of Calculation of Private Fund Assets10-21
    • § 10:3.2 : Exemption for Advisers to Venture Capital Funds10-21
      • [A] : “Grandfather” Provision10-24
      • [B] : Application to Non-U.S. Advisers10-24
    • § 10:3.3 : Exemption for Foreign Private Advisers10-25
      • [A] : Counting Clients10-25
      • [B] : Counting Investors10-26
      • [C] : Meaning of “in the United States”10-27
      • [D] : Meaning of “Place of Business”10-28
  • § 10:4 : Exempt Reporting Advisers10-29
    • § 10:4.1 : Reporting Requirements10-29
  • § 10:5 : Substantive Provisions of the Advisers Act10-30
    • § 10:5.1 : Section 206: Antifraud Provisions10-30
    • § 10:5.2 : Code of Ethics10-36
      • [A] : Rule 204A-110-36
      • [B] : Personal Trading10-38
      • [C] : Gifts and Entertainment10-40
      • [D] : Outside Business Activities10-40
    • § 10:5.3 : Insider Trading10-41
      • [A] : General Overview10-41
      • [B] : Adopting Insider Trading Policies10-43
    • § 10:5.4 : Principal Transactions10-45
      • [A] : Cross Trading10-46
    • § 10:5.5 : Advertising Practices10-47
      • [A] : Testimonials10-48
      • [B] : Past Specific Recommendations10-49
    • § 10:5.6 : Performance Advertising10-51
      • [A] : Clover Capital No-Action Letter10-52
      • [B] : Model Performance10-53
      • [C] : Performance “Net of Fees” Requirement10-54
      • [D] : Performance Advertising Record-Keeping Requirement10-56
      • [E] : Performance Presentation Considerations for Private Equity Firms10-56
      • [F] : FINRA Rules Concerning Performance Advertising10-58
        • [F][1] : Related Performance10-58
        • [F][2] : Target Returns10-59
        • [F][3] : Projected Returns10-59
        • [F][4] : Hypothetical and Backtested Performance10-60
        • [F][5] : Risk Factors10-60
      • [G] : Track Record Portability10-61
        • [G][1] : Employee Track Record Portability10-61
        • [G][2] : Adviser Track Record Portability10-62
      • [H] : Proxy Voting Procedures10-63
    • § 10:5.7 : Adviser Compliance Policies and Procedures10-65
    • § 10:5.8 : Business Continuity Planning10-65
  • § 10:6 : Offshore Advisers10-66
Chapter 11: Other Regulations Affecting Funds and Sponsors
  • § 11:1 : Broker-Dealer Regulation11-3
    • § 11:1.1 : Overview11-3
    • § 11:1.2 : Issuer Exemption11-3
    • § 11:1.3 : Broker Requirements11-5
    • § 11:1.4 : Third-Party Marketers11-5
      • [A] : Definition of “Third-Party Marketer”11-5
      • [B] : Payment of Third-Party Marketers11-6
      • [C] : Third-Party Marketers As Broker-Dealers11-6
        • [C][1] : Securities Act and Investment Company Act Registration Exemptions11-7
        • [C][2] : Anti-Money Laundering Compliance Obligation11-8
  • § 11:2 : Placement Agent and Other Pay-to-Play Restrictions11-8
  • § 11:3 : Section 13(d) and Section 13(g) Filings11-10
    • § 11:3.1 : Schedule 13D11-12
    • § 11:3.2 : Schedule 13G11-12
    • § 11:3.3 : Section 13(d) Groups11-14
  • § 11:4 : Section 1611-14
    • § 11:4.1 : Section 16(a) Reporting11-15
    • § 11:4.2 : Section 16(b) Short-Swing Trades Liability11-18
    • § 11:4.3 : Section 16(c) Short Sales Against the Box11-19
  • § 11:5 : Rule 13(h)11-19
    • § 11:5.1 : Overview11-19
    • § 11:5.2 : Large Trader Defined11-20
    • § 11:5.3 : Threshold for Filing Form 13H11-22
    • § 11:5.4 : Disclosure Required by Form 13H11-23
    • § 11:5.5 : Large Trader Identification Number11-24
    • § 11:5.6 : Recordkeeping, Reporting, and Monitoring by Broker-Dealers11-24
    • § 11:5.7 : Unidentified Large Traders11-25
    • § 11:5.8 : Foreign Entities11-25
    • § 11:5.9 : Confidentiality11-25
  • § 11:6 : Section 13(f)11-25
  • § 11:7 : The Hart-Scott-Rodino Act11-27
    • § 11:7.1 : Overview11-27
    • § 11:7.2 : Exemptions11-28
      • [A] : Transactions Solely for Investment Purposes11-28
      • [B] : Acquisition of Non-Voting Securities11-30
      • [C] : Certain Acquisitions of Voting Securities by Institutional Investors11-30
    • § 11:7.3 : Aggregation of Funds Under Common Control11-30
  • § 11:8 : Resales of Privately Placed Securities11-31
    • § 11:8.1 : Overview11-31
    • § 11:8.2 : Exemptions from Registration11-32
      • [A] : Section 4(1) Exemption11-32
      • [B] : Rule 14411-32
      • [C] : Rule 144A11-34
      • [D] : Section 4(1-1/2) Exemption11-35
  • § 11:9 : Allocation of New Issues11-36
    • § 11:9.1 : FINRA Rule 513011-36
      • [A] : Overview11-36
      • [B] : Exemptions11-37
    • § 11:9.2 : FINRA Rule 513111-37
      • [A] : Overview11-37
      • [B] : Spinning Prohibition11-38
      • [C] : Exceptions11-38
    • § 11:9.3 : Applicability to Private Equity Firms and Funds11-39
    • § 11:9.4 : New Issue Certifications11-39
    • § 11:9.5 : Allocating Profits and Losses11-39
  • § 11:10 : Rule 105 Under Regulation M11-40
  • § 11:11 : Short Sale Regulation11-41
    • § 11:11.1 : U.S. Regulation11-41
      • [A] : Regulation SHO11-41
      • [B] : Dodd-Frank Act11-42
    • § 11:11.2 : International Regulation of Short Sales11-43
  • § 11:12 : Ownership Levels in Highly Sensitive Industries11-43
  • § 11:13 : Regulation of Commodity Pool Operators and Commodity Trading Advisors11-44
    • § 11:13.1 : Overview11-44
    • § 11:13.2 : Exclusions and Exemptions from CFTC Regulation11-46
      • [A] : CFTC Regulation Section 4.711-46
      • [B] : Other Exemptions for CPOs and CTAs11-46
        • [B][1] : Exemptions for CPOs11-47
        • [B][2] : Exemptions for CTAs11-48
  • § 11:14 : Privacy Regulation11-49
    • § 11:14.1 : Overview11-49
    • § 11:14.2 : FTC Regulation11-51
      • [A] : Financial Privacy Rule11-51
    • § 11:14.3 : Regulation S-P11-54
    • § 11:14.4 : Other Privacy Regulations11-56
    • § 11:14.5 : Practical Guidance11-58
  • § 11:15 : Foreign Corrupt Practices Act11-58
  • § 11:16 : Bank Regulations11-60
    • § 11:16.1 : Volcker Rule11-60
    • § 11:16.2 : Developments Regarding Private Equity Investments in U.S. Banks11-62
Chapter 12: ERISA
  • § 12:1 : Overview12-2
    • § 12:1.1 : Substantive Requirements Under ERISA and the Internal Revenue Code12-3
    • § 12:1.2 : Exemptions12-3
      • [A] : Twenty-Five Percent Benefit Plan Investor Exemption12-3
      • [B] : Operating Company Exemptions12-4
      • [C] : Other Plan Asset Rule Exemptions12-4
      • [D] : Qualified Professional Asset Manager Exemption12-5
  • § 12:2 : ERISA Requirements12-7
    • § 12:2.1 : Plans Covered by ERISA and the Plan Asset Regulation12-7
    • § 12:2.2 : Section 404—Fiduciary Duties12-7
      • [A] : Interpretational Issues12-8
    • § 12:2.3 : Section 406(a): Prohibited Transactions with Parties-In-Interest12-9
    • § 12:2.4 : Section 406(b): Prohibited Transactions Involving Self-Dealing12-11
    • § 12:2.5 : ERISA Liability12-11
  • § 12:3 : Exemptions from ERISA’s Plan Asset Rules12-12
    • § 12:3.1 : Limitation on Ownership by Benefit Plan Investors: Twenty-Five Percent Ownership Test12-12
      • [A] : Twenty-Five Percent Ownership Limit12-12
      • [B] : Determination of Twenty-Five Percent Ownership12-13
      • [C] : Fund of Funds Investing in Private Funds12-14
    • § 12:3.2 : Operating Companies12-15
      • [A] : Venture Capital Operating Companies12-15
      • [B] : Real Estate Operating Companies12-19
      • [C] : VCOC Status During a “Distribution Period”12-20
      • [D] : Practical Considerations12-21
        • [D][1] : Opinions and Certificates12-21
        • [D][2] : Fund Manager Representations12-22
        • [D][3] : Tracking Ownership by Benefit Plan Investors12-22
        • [D][4] : Valuation Difficulties12-22
        • [D][5] : Other Disclosures and Representations12-23
        • [D][6] : Special Considerations for Private Equity Funds of Funds12-23
Chapter 13: Anti-Money Laundering
  • § 13:1 : Overview13-1
  • § 13:2 : AML Regulation of Financial Institutions13-3
    • § 13:2.1 : The PATRIOT Act13-3
    • § 13:2.2 : Proposed AML Program Requirements for Unregistered Investment Companies13-3
    • § 13:2.3 : Proposed AML Program Requirements for Investment Advisers13-6
    • § 13:2.4 : OFAC Regulations13-7
    • § 13:2.5 : Practical Suggestions for AML Compliance13-7
      • [A] : Know Your Investor Procedures13-8
      • [B] : High Risk Investors13-9
      • [C] : Non-U.S. Shell Banks13-10
      • [D] : Suspicious Activity Monitoring and Reporting13-10
      • [E] : Delegation of AML Responsibilities13-11
    • § 13:2.6 : Other Regulations13-12
  • § 13:3 : The Money Laundering Control Act of 198613-13
  • § 13:4 : Conclusion13-13
Chapter 14: Seed Investors and Other Strategic Investors
  • § 14:1 : Overview14-2
  • § 14:2 : Seed Capital Transactions14-3
    • § 14:2.1 : The Benefits of the Seed Deal14-4
    • § 14:2.2 : Structural Components of a Seed Deal14-5
      • [A] : The Nature of the Seed Investment14-6
        • [A][1] : Investment in a Managed Account14-6
        • [A][2] : Investment in an Investment Fund14-7
        • [A][3] : Investment in a Satellite Fund14-7
        • [A][4] : Other Strategic Relationships14-8
        • [A][5] : Providing Operating Capital or Operational Support to the Fund Manager14-9
      • [B] : Economic Participation in the Fund Manager’s Business14-10
      • [C] : Management Rights of Seed Investors14-12
      • [D] : Investor Rights of Seed Investors14-14
      • [E] : Covenants and Representations in Seed Arrangements14-14
        • [E][1] : Arrangements That Benefit the Fund Sponsor14-15
        • [E][2] : Arrangements That Benefit the Seed Investor14-15
      • [F] : Regulatory Issues14-16
        • [F][1] : Conflicts of Interest14-16
        • [F][2] : Securities Exchange Act Requirements14-17
    • § 14:2.3 : Information Sharing14-18
    • § 14:2.4 : Parties Subject to Registration and Regulation14-18
  • § 14:3 : Later-Stage Strategic Acquisitions14-19
    • § 14:3.1 : Overview14-19
    • § 14:3.2 : Key Features of Strategic Acquisitions14-19
      • [A] : The Purchase Price14-20
      • [B] : Earnouts14-20
      • [C] : Control Issues14-21
      • [D] : Platform Issues14-22
      • [E] : Employees Who Are Not Selling Equity Owners14-23
Chapter 15: Ongoing Global Issues and Lessons Learned from the 2008 Global Financial Crisis
  • § 15:1 : Overview15-1
  • § 15:2 : Fund Formation15-2
    • § 15:2.1 : Other Sources of Capital; Co-investor15-2
    • § 15:2.2 : Fund Terms—Bargaining Power of Limited Partners15-3
    • § 15:2.3 : Fundraising Periods15-6
  • § 15:3 : Fund Operations15-7
    • § 15:3.1 : Limited Partner Defaults15-7
    • § 15:3.2 : Transfers15-8
    • § 15:3.3 : Status of Existing and New Deals15-10
      • [A] : Existing Deals15-10
      • [B] : New Deals15-11
    • § 15:3.4 : Longer Investment Periods15-12
    • § 15:3.5 : Fund Dissolution15-12
  • § 15:4 : Regulations15-14
    • § 15:4.1 : Proposed Carried Interest Tax Legislation15-14
    • § 15:4.2 : Short Selling Restrictions15-15
    • § 15:4.3 : Volcker Rule15-15
    • § 15:4.4 : Insider Trading15-15
    • § 15:4.5 : Derivatives15-16
    • § 15:4.6 : Alternative Investment Fund Managers Directive15-16
Chapter 16: Appendix A: Limited Partnership Agreement
Chapter 17: Appendix B: Investment Management Agreement
Chapter 18: Appendix C: Guarantee
Chapter 19: Appendix D: Corporate Law: Fund Counsel's Opinion Letter to Fund Limited Partners
Chapter 20: Appendix E: Securities Law: Fund Counsel's Opinion Letter to Fund Limited Partners
Chapter 21: Appendix F: Tax Law: Fund Counsel's Opinion Letter to Fund Limited Partners
Chapter 22: Appendix G: Certificate of General Partner in Connection with Tax Law Opinion Letter from Fund's Counsel
Chapter 23: Appendix H: Delaware Limited Liability Company, Certificate of Formation
Chapter 24: Appendix I: Delaware Limited Partnership, Certificate of Limited Partnership
Chapter 25: Appendix J: Side Letter Agreement
Chapter 26: Appendix K: Transfer Agreement
Chapter 27: Appendix L: Term Sheet
Chapter 28: Appendix M: Sample Amendment Procedure
Chapter 29: Appendix N: Subsequent Closings Language
Chapter 30: Appendix O: Miscellaneous Covenants for Partners of (General Partner/Manager)
Chapter 31: Appendix P: Excerpts from a Subscription Agreement
Chapter 32: Appendix Q: Comparison of Hedge Fund and Private Equity Terms
Chapter 33: Appendix R: Institutional Limited Partners Association--Private Equity Principles
Chapter 34: Table of Authorities
Chapter 35: Index to Private Equity Funds

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