To start, it is worth highlighting the differences between European and US regulatory regimes. European regulations seek to impose standardised environments for investment managers and their funds, while national rules still govern their marketing.
Consequently, European managers often approach the US with the same mindset when offering funds in another European country. Marketing in the US, however, is quite straightforward as there is no notification procedure as exists under AIFMD. Rather, non-US managers should consider how US regulation of investment advisers and funds applies to their proposed activities.
Navigating us securities laws
European managers can navigate US securities laws by using a framework of exemptions. The main ones, described in brief below, can significantly reduce, and in some cases eliminate the full scope of regulation imposed on the US funds industry. It is also important for non-US managers to understand how the tax status of US investors affects their decisions. However, there isn’t scope to consider those in this article.
An offering of fund interests in the US requires registration under the Securities Act of 1933. Nonetheless, section 4(a)(2) of the act provides an exemption from registration for transactions “not involving a public offering.” Consequently, non-US managers may conduct private placements in the US. Rule 506 in Regulation D of the Securities Act provides standardised safe harbours for private offerings involving: (i) a limited number of US persons; or (ii) US persons who meet minimum net worth requirements (called “accredited investors”).
It should be noted that the minimum net worth requirements for qualified purchasers are higher than those applicable to accredited investors, though most institutions are capable of satisfying both.
As with any other type of issuer of securities, a fund is required under the Investment Company Act of 1940 to register with the Securities and Exchange Commisson (SEC) and comply with the Act’s intricacies. There are several exemptions available, though the two most common concern non-public offerings to: (i) a limited number of persons (less than 100); or (ii) limited types of investors who meet minimum net worth thresholds (qualified purchasers), but without a prescribed limit as to number of investors. It should be noted that the minimum net worth requirements for qualified purchasers are higher than those applicable to accredited investors, though most institutions are capable of satisfying both.
Who should register?
European managers marketing in the US will also be subject to regulation as an investment adviser. Historically, private fund managers did not typically register with the SEC. However, following the Dodd-Frank Act, the SEC generally required all advisers to register with the SEC, subject to limited exemptions.
These exemptions include: (i) a foreign private adviser exemption applicable to foreign managers who oversee less than USD25 million in assets (among other requirements); and (ii) a private fund adviser exemption, which exempts advisers to private funds if they manage less than USD150 million in assets.
Such “exempt reporting advisers” (ERAs) are required to notify with the SEC and file periodic reports, much in the same way that US managers are required to notify under AIFMD private placement rules, though they are not subject to full SEC oversight.
Careful planning and organisation
It is worth noting that there are other regulators and ancillary laws applicable to funds in the US, such as the Commodity Exchange Act, which regulates most derivative transactions. As a result, fund managers may need to conduct analysis regarding the CEA and accompanying regulations, though again, many investment advisers are able to rely on recognised exemptions from full registration, or devise a structural solution if the manager is only trading a small amount of commodity interests.
In conclusion, careful planning and organisation by European managers affords them significant latitude to raise capital in the US while still conforming to local rules.
More news on the fund industry in Paperjam’s Alfi supplement.