The Primerus Paradigm - Winter 2014 Page 45

W I N T E R 2 0 1 4

Filings protocol:

Form U-2, Form D (SEC & State
Notice Filings) and filing fees.

FINRA private equity filings
Rule5123

Compliance Manual

Private Equity and
Private Funds

Regulatory Considerations

Private Equity

Private equity involves the non-public
issuer's securities and/or an issuer's
(public or private) non-public securities.
The non-public nature of the securities
depends upon the respective registration
exemptions. Exemptions apply at the
issuer level for project finance purposes
and at the fund level for private funds.
Common registration exemptions for
project finance include §4(2) of the
Securities Act of 1933, as amended, and
Regulation D promulgated thereunder.
Within Regulation D, the most common
exemption is Rule 506. A quick
summary of some of the private equity
exemptions appears below:

Focus on Regulatory Exemptions to
Maintain Unregistered Status
Partial List

Private Equity Exemptions
Regulation D
Most Common Retail Private Equity
Exemption Rule 506:

Raise unlimited amount of money

"Unlimited" Accredited Investors
and up to 35 unaccredited investors

No general solicitation

Preempts state substantive law

See §12(g)(1) of the Securities Act
and the JOBS Act for maximum number
of investors
Other Considerations:

Accredited Investor definition

Accredited Investor entities not
formed to purpose of investing in
offering

Purchases cannot be underwriters
(reasonable care standard 502(d))

Transfer restrictions and restrictive
legends

Form D federal filing

Blue Sky Form D and ancillary
notifications/fees

Audits for financials if sold to non-
Accredited Investors

Heightened scrutiny for accredited
status tie to subscription agreement

No general solicitation, except
pursuant to the Jobs Act

Preexisting relationships common
practice to demonstrate absence of
general solicitation

Integrated offerings: six-month gap to
avoid presumption of integration

Other factors For Offering Integration:

Whether the sales are part of a single
plan of financing;

Whether the sales involve issuance of
the same class of securities;

Whether the sales have been made at
or about the same time;

Whether the same type of
consideration is being received; and

Whether the sales are made for the
same general purpose.

Rule 144A: Institutional Offerings
QIBs $100 million (discretionary/
nonaffiliated) and Entity Type
Regulation S
Overseas Offerings

Best sold to QIBs

Be aware of local marketing
regulations overseas, particularly to
retail clients

Bicameral Offerings Separate
Subscription Agreements Advisable

Private Funds

Traditionally, any unregistered collective
investment initiative that pools fractional
investment interests in reliance upon
registration exemptions of the Investment
Company Act of 1940, as amended,
for the purposes of investing in the
securities of another company (excludes
direct investments/project finance). Two
of the common exemptions are briefly
referenced below. However, an extensive
filing may be required on Form PF,
depending upon the type of fund that
exists.
Private Investment Company
Basic Exemption, Section 3(c)(1)

Aggregate 10% owners count their
owners

Knowledgeable employee generally
exempt from 100 investor threshold
Institutional Private Investment
Company
Section 3(c)(7) Qualified Purchaser

i. Natural person who owns

$5,000,000 in "investments"

ii. Gertain family companies & estates

that own $5,000,000 in investments

iii. Owns/invests for other QPs

(discretionary basis) $25,000,000
in investments

Cannot mix 3(c)(1) & 3(c)(7) funds
must be separate offerings/feeders