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Regulation of Private Funds in the United States: Navigating the Path to Compliance for Latin American Fund Managers

2 MAY 2024 | JUAN PABLO CAPPELLO

At PAG Law we have helped about 30 Latin American managers set up their venture and private equity funds in the past few years. Over and over again we have had to educate these managers on how they can raise capital for their funds from U.S.-based investors. For Latin American fund managers targeting U.S.-based investors, understanding the intricacies of the United States regulatory environment is crucial. Mistakes can literally have legal, and even possibly criminal, consequences.

The U.S. presents a dynamic landscape where compliance can often seem like a labyrinth, particularly when it comes to the regulation of private funds under the Investment Company Act. Here, we’ll delve into the essentials, unpacking the complexity and offering clarity to help you navigate this crucial aspect of fund management.¹

Understanding the Basics: The Investment Company Act
At the heart of private fund regulation in the U.S. is the Investment Company Act of 1940. This foundational piece of legislation primarily aims to minimize conflicts of interest and protect investors in investment companies, which broadly include private funds. However, not all private funds must register with the Securities and Exchange Commission (SEC) — exemptions exist, and knowing these can offer significant strategic advantages.
Key Exemptions: Sections 3(c)(1) and 3(c)(7)
  1. Section 3(c)(1) – This exemption is tailored for smaller funds. A fund can avoid SEC registration if it has no more than 100 beneficial owners and does not publicly offer its securities. This setup is ideal for fund managers who prefer maintaining a limited and close-knit investor base.

  2. Section 3(c)(7) – Aimed at larger, more sophisticated funds, this exemption allows private funds to skip SEC registration provided they only admit “qualified purchasers” — individuals with significant investment assets exceeding $5 million, or entities with investments of $25 million or more. This exemption is particularly suited for managers aiming to attract high-net-worth individuals and institutional investors.
The Qualifying Venture Capital Fund
A special mention is deserved for the “qualifying venture capital fund,” a subcategory under Section 3(c)(1). These funds can have up to 250 beneficial owners, provided the fund does not exceed $10 million in assets. The caveat? They must adhere to stringent investment limitations, primarily investing in qualifying venture capital investments which are typically direct equity holdings in private startups.
Practical Implications for Compliance
Strategic structuring and ongoing vigilance. For instance, counting beneficial owners under Section 3(c)(1) is not always straightforward — the SEC’s “look-through” provision can complicate this count, potentially impacting your fund’s compliance status. Moreover, the introduction of new regulatory considerations and amendments to existing laws means that compliance is not a set-it-and-forget-it task. Regular consultation with legal experts to navigate these changing waters is advisable.
Conclusion
For Latin American fund managers looking to attract U.S.-based investors, mastery of the U.S. regulatory environment is not optional but a critical necessity. The nuanced understanding of regulations like the Investment Company Act can be the difference between flourishing and floundering in the competitive landscape of private funds. This understanding not only aids in maintaining compliance but also strategically positions the fund to attract discerning investors who value transparency and regulatory adherence. In closing, while the regulatory hurdles may seem daunting, they are not insurmountable. With the right guidance and a thorough understanding of the regulatory framework, fund managers can effectively navigate this complex landscape, ensuring both compliance and success in the U.S. investment market. Our team at PAG Law has decades of experience helping funds of all sizes ensure compliance with U.S. law so fund managers can focus on their core business of building value for their investors.
PAG.LAW has represented more than 1,000 entrepreneurs in the United States, Latam, and beyond over the last 10 years. Our position as industry leaders has imbued our team with a deep understanding of the market and its players.
¹Other important regulations to consider include those relating to the fundraising process and those relating to the regulation of fund managers.

This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every individual, every company, and every situation is different. There is no “one size fits all” solution. Also, we are not tax advisors or tax experts and do not offer tax advice. Readers are advised to seek professional advice before acting on any information contained in this article. The author and publisher are not liable for any damages or negative consequences arising from any use of the information presented in this article.

Regulation of Private Funds in the United States: Navigating the Path to Compliance for Latin American Fund Managers

#image_title

2 MAY 2024 | JUAN PABLO CAPPELLO

At PAG Law we have helped about 30 Latin American managers set up their venture and private equity funds in the past few years. Over and over again we have had to educate these managers on how they can raise capital for their funds from U.S.-based investors. For Latin American fund managers targeting U.S.-based investors, understanding the intricacies of the United States regulatory environment is crucial. Mistakes can literally have legal, and even possibly criminal, consequences.

The U.S. presents a dynamic landscape where compliance can often seem like a labyrinth, particularly when it comes to the regulation of private funds under the Investment Company Act. Here, we’ll delve into the essentials, unpacking the complexity and offering clarity to help you navigate this crucial aspect of fund management.¹

Understanding the Basics: The Investment Company Act
At the heart of private fund regulation in the U.S. is the Investment Company Act of 1940. This foundational piece of legislation primarily aims to minimize conflicts of interest and protect investors in investment companies, which broadly include private funds. However, not all private funds must register with the Securities and Exchange Commission (SEC) — exemptions exist, and knowing these can offer significant strategic advantages.
Key Exemptions: Sections 3(c)(1) and 3(c)(7)
  1. Section 3(c)(1) – This exemption is tailored for smaller funds. A fund can avoid SEC registration if it has no more than 100 beneficial owners and does not publicly offer its securities. This setup is ideal for fund managers who prefer maintaining a limited and close-knit investor base.

  2. Section 3(c)(7) – Aimed at larger, more sophisticated funds, this exemption allows private funds to skip SEC registration provided they only admit “qualified purchasers” — individuals with significant investment assets exceeding $5 million, or entities with investments of $25 million or more. This exemption is particularly suited for managers aiming to attract high-net-worth individuals and institutional investors.
The Qualifying Venture Capital Fund
A special mention is deserved for the “qualifying venture capital fund,” a subcategory under Section 3(c)(1). These funds can have up to 250 beneficial owners, provided the fund does not exceed $10 million in assets. The caveat? They must adhere to stringent investment limitations, primarily investing in qualifying venture capital investments which are typically direct equity holdings in private startups.
Practical Implications for Compliance
Strategic structuring and ongoing vigilance. For instance, counting beneficial owners under Section 3(c)(1) is not always straightforward — the SEC’s “look-through” provision can complicate this count, potentially impacting your fund’s compliance status. Moreover, the introduction of new regulatory considerations and amendments to existing laws means that compliance is not a set-it-and-forget-it task. Regular consultation with legal experts to navigate these changing waters is advisable.
Conclusion
For Latin American fund managers looking to attract U.S.-based investors, mastery of the U.S. regulatory environment is not optional but a critical necessity. The nuanced understanding of regulations like the Investment Company Act can be the difference between flourishing and floundering in the competitive landscape of private funds. This understanding not only aids in maintaining compliance but also strategically positions the fund to attract discerning investors who value transparency and regulatory adherence. In closing, while the regulatory hurdles may seem daunting, they are not insurmountable. With the right guidance and a thorough understanding of the regulatory framework, fund managers can effectively navigate this complex landscape, ensuring both compliance and success in the U.S. investment market. Our team at PAG Law has decades of experience helping funds of all sizes ensure compliance with U.S. law so fund managers can focus on their core business of building value for their investors.
PAG.LAW has represented more than 1,000 entrepreneurs in the United States, Latam, and beyond over the last 10 years. Our position as industry leaders has imbued our team with a deep understanding of the market and its players.
¹Other important regulations to consider include those relating to the fundraising process and those relating to the regulation of fund managers.

This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every individual, every company, and every situation is different. There is no “one size fits all” solution. Also, we are not tax advisors or tax experts and do not offer tax advice. Readers are advised to seek professional advice before acting on any information contained in this article. The author and publisher are not liable for any damages or negative consequences arising from any use of the information presented in this article.

Regulation of Private Funds in the United States: Navigating the Path to Compliance for Latin American Fund Managers

#image_title

2 MAY 2024 | JUAN PABLO CAPPELLO

At PAG Law we have helped about 30 Latin American managers set up their venture and private equity funds in the past few years. Over and over again we have had to educate these managers on how they can raise capital for their funds from U.S.-based investors. For Latin American fund managers targeting U.S.-based investors, understanding the intricacies of the United States regulatory environment is crucial. Mistakes can literally have legal, and even possibly criminal, consequences.

The U.S. presents a dynamic landscape where compliance can often seem like a labyrinth, particularly when it comes to the regulation of private funds under the Investment Company Act. Here, we’ll delve into the essentials, unpacking the complexity and offering clarity to help you navigate this crucial aspect of fund management.¹

Understanding the Basics: The Investment Company Act
At the heart of private fund regulation in the U.S. is the Investment Company Act of 1940. This foundational piece of legislation primarily aims to minimize conflicts of interest and protect investors in investment companies, which broadly include private funds. However, not all private funds must register with the Securities and Exchange Commission (SEC) — exemptions exist, and knowing these can offer significant strategic advantages.
Key Exemptions: Sections 3(c)(1) and 3(c)(7)
  1. Section 3(c)(1) – This exemption is tailored for smaller funds. A fund can avoid SEC registration if it has no more than 100 beneficial owners and does not publicly offer its securities. This setup is ideal for fund managers who prefer maintaining a limited and close-knit investor base.

  2. Section 3(c)(7) – Aimed at larger, more sophisticated funds, this exemption allows private funds to skip SEC registration provided they only admit “qualified purchasers” — individuals with significant investment assets exceeding $5 million, or entities with investments of $25 million or more. This exemption is particularly suited for managers aiming to attract high-net-worth individuals and institutional investors.
The Qualifying Venture Capital Fund
A special mention is deserved for the “qualifying venture capital fund,” a subcategory under Section 3(c)(1). These funds can have up to 250 beneficial owners, provided the fund does not exceed $10 million in assets. The caveat? They must adhere to stringent investment limitations, primarily investing in qualifying venture capital investments which are typically direct equity holdings in private startups.
Practical Implications for Compliance
Strategic structuring and ongoing vigilance. For instance, counting beneficial owners under Section 3(c)(1) is not always straightforward — the SEC’s “look-through” provision can complicate this count, potentially impacting your fund’s compliance status. Moreover, the introduction of new regulatory considerations and amendments to existing laws means that compliance is not a set-it-and-forget-it task. Regular consultation with legal experts to navigate these changing waters is advisable.
Conclusion
For Latin American fund managers looking to attract U.S.-based investors, mastery of the U.S. regulatory environment is not optional but a critical necessity. The nuanced understanding of regulations like the Investment Company Act can be the difference between flourishing and floundering in the competitive landscape of private funds. This understanding not only aids in maintaining compliance but also strategically positions the fund to attract discerning investors who value transparency and regulatory adherence. In closing, while the regulatory hurdles may seem daunting, they are not insurmountable. With the right guidance and a thorough understanding of the regulatory framework, fund managers can effectively navigate this complex landscape, ensuring both compliance and success in the U.S. investment market. Our team at PAG Law has decades of experience helping funds of all sizes ensure compliance with U.S. law so fund managers can focus on their core business of building value for their investors.
PAG.LAW has represented more than 1,000 entrepreneurs in the United States, Latam, and beyond over the last 10 years. Our position as industry leaders has imbued our team with a deep understanding of the market and its players.
¹Other important regulations to consider include those relating to the fundraising process and those relating to the regulation of fund managers.

This article is not meant to provide legal or tax advice. It should be understood as a provocative, simplified overview to allow the reader to better consult its legal and tax advisors. Every individual, every company, and every situation is different. There is no “one size fits all” solution. Also, we are not tax advisors or tax experts and do not offer tax advice. Readers are advised to seek professional advice before acting on any information contained in this article. The author and publisher are not liable for any damages or negative consequences arising from any use of the information presented in this article.