Non-retail pooled funds

Available vehicles

What are the main legal vehicles used to set up a non-retail fund? How are they formed?

Most funds that are excluded from regulation under the 1940 Act are referred to as private funds, regardless of the investment strategy pursued by the fund. Private funds may be organised in various forms, including as limited partnerships, limited liability companies (LLCs) and statutory trusts. Private funds are also frequently organised in non-US jurisdictions. The most common jurisdictions are Delaware for domestic funds and the Cayman Islands for offshore funds.

Most domestic funds are organised as Delaware limited partnerships, which have a general partner (GP) or sponsor that is responsible for the management of the private fund, while the limited partners (LPs) are passive investors. Typically, the GP delegates management responsibility to an investment adviser via an investment management agreement (IMA).

Delaware limited partnerships are formed under the Delaware Revised Uniform Limited Partnership Act by filing a certificate of limited partnership signed by the GP. Private funds structured as limited partnerships are governed by a limited partnership agreement (LPA), which provides a framework for the operations and structure of the limited partnership, and grants the GP authority to enter into agreements on behalf of the LPs. A private fund’s principal offering document is its private placement memorandum (PPM), which provides investors with information regarding the fund. The LPA, PPM, IMA and other organisational documents are not publicly filed.

A Delaware limited partnership must maintain a registered agent and office in Delaware. However, most limited partnerships hire a service provider to satisfy this requirement. LLCs are substantially similar to limited partnerships, but receive different tax treatment in certain jurisdictions.

Laws and regulations

What are the key laws and other sets of rules that govern non-retail funds?

Many of the key rules that govern the activities of private funds relate to their compliance with exceptions from US federal securities laws that would otherwise impose the regulatory requirements applicable to registered funds.

Private funds rely on exceptions from the registration provisions of the 1940 Act, most commonly section 3(c)(1) and section 3(c)(7). Section 3(c)(1) is an exception available to a fund with 100 or fewer investors, and section 3(c)(7) is an exception available to a fund offered only to ‘qualified purchasers’ (generally, natural persons with US $5 million in investments or institutions with US $25 million in investments). To rely on these exceptions, private funds must also conduct a private offering.

The SEC has promulgated a set of rules under the 1933 Act, collectively designated Regulation D, that provide a safe harbour for private offerings. Regulation D generally requires that a private offering be directed exclusively to accredited investors, although non-accredited investors may be admitted under certain circumstances. Historically, private funds could not use general solicitation or general advertising, including offerings made via the radio, newspaper or any other public medium. However, the SEC has recently allowed for the use of general solicitation, subject to certain conditions, including enhanced requirements to ensure that sales are made only to accredited investors. A general solicitation that complies with these conditions would not be deemed to be a public offering.

There are eight categories of accredited investors, although, in practice, most investors typically fall under one of the following:

  • an individual with a net worth (or joint net worth with spouse) in excess of US$1 million, excluding the value of their primary residence;
  • an individual with income in excess of US$200,000 (or US$300,000 joint income with spouse) in each of the previous two years and who reasonably expects to have income in excess of US$200,000 (or joint income in excess of US$300,000) in the current year; and
  • a corporation, partnership or LLC with assets in excess of US$5 million that was not formed for the specific purpose of acquiring the securities offered.

Private funds are excepted from the governance and other restrictions of the 1940 Act; consequently sponsors enjoy extraordinary latitude in structuring the operations of the fund. However, managers of private funds (other than certain private funds that invest in real estate) are investment advisers. All investment advisers operating in the United States (regardless of registration status) are fiduciaries to their clients and are, among other things, subject to anti-fraud provisions of federal and state law.


Must non-retail funds be authorised or licensed to be established or marketed in your jurisdiction?

No. Private funds are not subject to authorisation or licensing requirements in the United States, although funds that seek to rely on the safe harbour provisions of Regulation D discussed above must make a brief notice filing known as Form D. Additionally, to the extent that sales are made in a particular state, funds must generally make a state notice filing and pay a state filing fee.


Who can market non-retail funds? To whom can they be marketed?

As described in question 7, a person engaged in the business of marketing a private fund in the United States is generally subject to registration as a broker-dealer, although a limited issuer exemption may be available to personnel of the sponsor. Private funds are generally marketed only to accredited investors or qualified purchasers, as described in question 24.

Ownership restrictions

Do investor-protection rules restrict ownership in non-retail funds to certain classes of investor?

The private offering exemption and rules discussed in questions 24 and 26 effectively restrict private funds from offering securities to investors without a minimum threshold of assets or income.

Managers and operators

Are there any special requirements that apply to managers or operators of non-retail funds?

Generally no, except that if a private fund is considered to be plan assets, the manager of the fund generally must comply with certain ERISA requirements. The requirements of ERISA and when a fund’s assets will be treated as plan assets are discussed in question 1.

Tax treatment

What is the tax treatment of non-retail funds? Are any exemptions available?

Like registered funds, most private funds organised as LPs or LLCs receive pass-through tax treatment under the IRC, meaning that the fund itself is not subject to federal income tax, but rather income and capital gains are passed through to the fund’s investors. See question 39 for a discussion of tax withholding rules applicable to foreign investors in private funds.

Asset protection

Must the portfolio of assets of a non-retail fund be held by a separate local custodian? What regulations are in place to protect the fund’s assets?

The assets of a private fund do not need to be held by a separate local custodian. However, in order to comply with the custody rule under the Advisers Act, a fund manager who is a registered investment adviser will generally maintain the assets of a private fund with a qualified custodian, and, among other things, will distribute the fund’s audited financial statements to investors within 120 days of the fund’s fiscal year end (180 days for funds that invest 10 per cent or more of their assets in third-party funds).


What are the main governance requirements for a non-retail fund formed in your jurisdiction?

The private fund’s GP has broad authority over the operations of the fund, subject to any limitations provided in the LPA. Unlike registered funds, US private funds are not required to have a board of directors or trustees. However, under state law and the Advisers Act, the GP owes certain fiduciary duties to each LP. Many LPAs of private equity and real estate private funds will establish an advisory committee of LPs that can receive disclosure or consent to conflicts of interest, or both, that arise during the life of the fund.


What are the periodic reporting requirements for non-retail funds?

Registered investment advisers must identify the private funds they manage on Form ADV, and must disclose certain information about the private fund, including the types, size, leverage, liquidity and the types of investors, on Form ADV or Form PF, or both. Form PF is required for all registered investment advisers with at least US$250 million in private fund assets under management. A private fund’s LPA will also typically provide for certain reports to be provided to the LPs, including financial statements, performance reports and annual tax reports.