Watch the video here: https://youtu.be/ufAfv31p7Z0
Hedge fund registration. Everybody asked me about it. Well, I want to start a hedge fund. Do I have to register do I have to register and it’s an amorphous amorphous question, right and it’s not knocking anybody for asking the questions. The right thing to do always ask questions, especially when you’re entering into something this complex, but it’s a bit amorphous because it involves a few different elements of Securities Law. Okay, and so keeping it in the context of security. So in the crypto space think of your IC o — — token or just generally speaking your standard Financial product security hedge fund. You know, the question is what what do I have to register for? Do I have to in fact register? And so you have to worry about two things when you’re talking about hedge fund and starting up a hedge fund one is the Investment Company act.
Okay registration, they’re under and then registering number two as a registered investment advisor, right and both of those are separate and kind of independent elements of the process, right and as a general rule number one or the Investment Company act all hedge funds have to register with the SEC. Now, there’s two important exemptions to that which you’re going to rely on if you’re going to start a hedge fund. The biggest one is section 3C. One of the Investment Company act which basically says hedge funds with up to a hundred accredited only. Okay so credit it only investors are exempt from registration. So again, we go back to the definition of an accredited investor, you’re talking about million dollar net worth exclusive of your personal residence or $200,000 for an individual over the last two years in net income $300,000 for a couple. Or an entity trust or defined benefit plan with 5 million in net assets. So 3C 100 or less accredited investors another exemption 3 C7 which allows for up to 2000 k2000 investors, but as a higher standard right has a higher standard of of investor must be qualified sophisticated investors, which have a five million dollar net worth requirement.
So generally speaking the three C7 exemption is used for larger institutional backed hedge funds your startup hedge fund is always almost always going to go under the 3 C1 3 C1 exemption which limits you to a hundred a hundred accredited only investors. So that’s that’s part one part two is registered investment advisor registration, right and this involves again, only Securities. We’re not talking about Commodities will talk about Commodities at a later date, but for registered investment, And advisor registration the SEC has a scheme and the states have a scheme. Right? And so the SEC says to the extent that you are managing under a hundred and fifty million in net Assets in the fund. You do not have to register as a registered investment advisor. So a hundred fifty unless you’re exempt from SEC registration, but the state as a general rule the state that you are domiciled in and operate from okay generally speaking will require you to register as a as a registered investment advisor in that state, right because again, you have state blue sky and you’ve got like your federal SEC schemes now several States notably California, New York, Pennsylvania have exemptions. That’s a private funds right private funds funds that are private not held as like a publicly-traded partnership or any way that are exempt from registration. So No, being located one of those locales exempt you from registering with with those States as a registered investment advisor.
Of course, the general rule is if you are exempt from registered investment advisor registration, you cannot earn a performance fee. Okay, a performance fee unless you are earning it from accredited investors only so it kind of jives with the 3 C1 exemption from the Investment Company act where you’re only taking in accredited investors. So, you know, it’s for this to really work from the startup hedge fund perspective. You’re looking at accredited investors and you’re looking at you know, looking at some of the exemptions from registered investment advisors. And again, this is only for Securities Commodities is a different bird because of the type of product. So when you’re talking about like Bitcoin Bitcoin Futures things of that nature of the rules change a little bit and that sort of baguettes its own its own missive from me in a later date, which although I’ll get Here shortly, but but generally speaking to kind of wrap up hedge fund startup Investment Company act registered investment advisor registration. Those are what you have to be concerned with and there’s exemptions that you can take advantage of they do limit you in the sense of you know, who you’re going to approach and how you’re going to Market to but in reality it’s probably the best and only way that you’re going to get off the ground especially if you don’t have prior industry experience certain licenses things of that nature and don’t want to take some finneran exam. So in any event hit me up if you have questions is a very complicated area and I get the question a lot.
So I figured why not. Let’s talk about it 80 at Tracy firm.com Bitcoin — lawyer dot-org. I’ll talk to you later. Cheers.
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A former competitive rugby player, serial entrepreneur and, trader attorney, Adam S. Tracy offers over 17 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s experience ranges from commodities trader for oil giant BP, initial public offerings, M&A, to initial coin offerings, having represented both startups to NASDAQ-listed entities. As an early Bitcoin adapter, Adam has promoted growth of cryptocurrency and offers a unique approach to representing crypto-clients. Based in Chicago, IL, Adam graduated from the University of Notre Dame with dual degrees in Finance and Computer Applications and would later obtain his J.D. and M.B.A. from DePaul University. Adam lives outside Chicago with his six animals, which is illegal where he lives.
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