What is a Qualified Client and why is it important for my hedge fund?

Thanks to inVigor Law Group for the great blog post:

Today, we will be discussing the definition of “qualified client(s)” and why the definition of qualified clients is important to your hedge fund.

Performance Fees and the Qualified Client

Most hedge fund managers charge clients a performance fee between 10-40% of returns, with an industry standard of 20%. Performance fees are the fees that a hedge fund manager charges for successful investment returns. For example, if a hedge fund portfolio returns 25% in a given year, the hedge fund manager may charge investors a 20% performance fee on top of his management fee (typically 1-2% of assets). So, if an investor invested $100,000 and the fund returned 25%, the investor would receive a $20,000 return (Return to fund on investor’s money ($25,000) – 20% performance fee ($5,000) = Return to investor (R$20,000). Performance fees can only be charged to qualified clients. To read the rest of the article, click here.

Raising Capital in Washington State: Rule 506

In a recent post I provided an overview of raising capital under Washington States WAC 460-44A-505 (Rule 505). Today, I’m going to explain another exemption provided for by Federal and State law under which a company can raise capital, Rule 506. The basics of Rule 506, codified in WAC 460-44A-506, are as follows:

1) There is no maximum offering amount;

2) You can sell to an unlimited number of accredited investors;

2) You cannot sell to more than 35 non-accredited investors (you don’t want to sell to any non-accredited investors, however).

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of 1929. In light of this, the most important factor in any securities offering is the disclosure of risks associated with the investments. Under the Rule 506 exemption, there is no prescribed format for presenting the disclosure document, but you must disclose all the material information necessary to allow potential investors to make an informed decision.

Filing Procedures

The following must be filed with the Securities Division of the Department of Financial Institutions:

1. A manually signed copy of the Form D filed electronically with the SEC.

2. $300 filing fee (checks should be made payable to the “Washington State Treasurer”); and

3. A report of the date of first sale to a resident of the State of Washington, or an indication that sales have yet to occur (may be included in cover letter).

The notice filing for the offering must be submitted to the Securities Division no later than 15 days after the first sale or receipt of a signed subscription agreement from a resident of the State of Washington, unless the due date falls on a Saturday, Sunday, or holiday, in which case the due date is the next business day.

You must file the Form D with the SEC as well as the Securities Division in order to qualify for the exemption.

For more information about Seattle Business Law, consider contacting a Seattle Business Attorney.

How Can A Simple Noncompete Agreement Benefit Your Business?

Thanks to Gavin Johnson of inVigor Law Group who wrote the following article on the iVLG blog.

Two of the most valuable assets of your business are the goodwill and the intellectual property that you’ve developed. A noncompete agreement can be instrumental in protecting these aspects of your business from a wide range of problems with departing employees, including the spread of trade secrets and other confidential information to your competitors. Today’s post will discuss the legal requirements you should keep in mind in order for your noncompete to be enforceable, and some of the potential benefits of using a noncompete agreement in your business. Click here to read the rest of the article.

If you’d like to learn more about Seattle Business Law, contact us today.

Raising Capital in Washington State: Rule 505

In my last post I provided an overview of raising capital under Washington States WAC 460-44A-504 (Rule 504). Today, I’m going to explain another exemption provided for by Federal and State law under which a company can raise capital.

The Washington Uniform Limited Offering Exemption (ULOE) codified in WAC 460-44A-505 allows for an offering amount up to a maximum of $5,000,000 regardless of the location of investors. Additionally, this type of offering requires:

1)      The offering cannot be sold to more than 35 non-accredited investors, regardless of residency;

2)      You can sell to an unlimited number of accredited investors;

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of 1929. In light of this, the most important factor in any securities offering is the disclosure of risks associated with the investments. Under the ULOE exemption, there is no prescribed format for presenting the disclosure document, but you must disclose all the material information necessary to allow potential investors to make an informed decision. The Securities Division of Washington recommends that you use a document called the Small Company Offering Registration Form U-7 (See here) to help guide the process of risk disclosures.

Filing Procedures

The Department of Financial Institutions has a great outline on it’s website of the filing procedures required for this type of offering.

For more information about Bellevue Business Law, consider contacting a Bellevue Business Attorney.

Raising Capital in Washington State: Rule 504

Last week I provided an overview of raising capital in Washington State. Today, I’m going to dive into one exemption provided for by Federal and State law under which a company can raise capital.

The Small Offering Exemption (SOE) codified in WAC 460-44A-504, allows for an offering amount up to a maximum of $1,000,000 regardless of the location of investors. Additionally, this type of offering requires:

1)      The offering cannot be sold to more than 20 non-accredited investors Washington;

2)      You can sell to an unlimited number of accredited investors and investors residing outside the State of Washington subject to the $1,000,000 offering limit;

Disclosure Requirements

As discussed in our last post, the Securities Act of 1933 and 1934 were primarily put into place to protect investors in the wake of the stock market crash of 1929. In light of this, the most important factor in any securities offering is the disclosure of risks associated with the investments. Under the SOE exemption, there is no prescribed format for presenting the disclosure document, but you must disclose all the material information necessary to allow potential investors to make an informed decision. The Securities Division of Washington recommends that you use a document called the Small Company Offering Registration Form U-7 (See here) to help guide the process of risk disclosures.

Selling Constraints

As we’ve discussed on this blog before, private placement offerings do not allow the issuer to advertise or attempt any general solicitation under this exemption. Additionally, no commissions or payment can be made to anyone for soliciting potential purchasers.

Also, if the issuer is planning on selling to non-accredited investors, the issuer must make a reasonable effort to determine that the investment is financially suitable for the investors, or that the investor meets the sophistication standard. An investment is considered financially suitable if the total investment dos not exceed 10 percent of the purchaser’s net worth.

For more information about Bellevue Business Law, consider contacting a Bellevue Business Attorney.

Raising Capital in Washington State

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You’ve exhausted all sources of funds for your business: family loans, bank lines of credit, and other sources of small business capital. However, you need additional capital to expand, grow and take your business to the next level. It’s time to start thinking about raising capital from investors through a securities offering.

This is the first post of my new series on raising capital and the various options available for your business.

As a brief primer, you should know that all businesses considering a securities offering must comply with federal and state securities laws. The Securities Act of 1933 and 1934 were put in place to protect investors after the market crashed in 1929 and prior to this point in time, securities were chiefly governed by state law. The two main objectives of the Acts were: 1) to require that investors receive significant (or “material”) information concerning securities being offered for public sale; and 2) to prohibit deceit, misrepresentations, and other fraud in the sale of securities to the public.

In order to raise capital for your business via a securities offering, you must either register the securities or find an exemption. If you only remember one thing this article, remember this: securities MUST be registered UNLESS you find an exemption. Nearly all small businesses who are raising capital via a securities offering do so under an exemption because the process and reporting requirements of registering securities is extremely lengthy and expensive.

So what kind of exemptions exist?

The most common types offering exemptions relied upon by small business issuers are commonly referred to as “Regulation D”, or “Reg D” offerings. Regulation D is a set of rules enacted by the federal SEC pursuant to the Securities Act of 1933 which provides exemptions from registration for offerings meeting certain criteria. Many states have enacted rules to facilitate the offering of Regulation D exemptions, including the State of Washington.

There are three exemptions contained in federal Regulation D: Rule 504, Rule 505, and Rule 506. The Washington counterparts to these rules are WAC 460-44A-504 (also known as the Small Offering Exemption or “SOE”), WAC 460-44A-505 (also known as the Uniform Limited Offering Exemption or “ULOE”), and WAC 460-44A-506, respectively.

In our next post, we will dive into the pros and cons of each of these Rules in order to determine which is best for your business.

To learn more about Bellevue Business Law, consider contacting a Bellevue Business Attorney.

Is Your LLC Member-Managed or Manager-Managed?

While it is a simple little box to check on the Washington Secretary of State website, with it comes important ramifications. What I’m referring to is the box that asks whether the Members will govern the LLC, or if a Manager will be designated. The answer to this question can drastically change the outcome of litigation and the performance and enforcement of contracts.

Members of an LLC are like shareholders of a corporation. They typically own equity interest in the company, have voting rights and, in the case of member-managed LLC’s, manage the affairs of a corporation. A manager of an LLC, on the other hand, does not have to own equity in the company and acts more like an officer or director of a corporation. If an LLC is manager-managed, then the manager(s) has the sole authority to make decisions for the LLC and is the only one who may bind the LLC. Typically, if a manager is appointed, the LLC’s operating agreement (also called “LLC Agreement”) will lay out the role and duties of the Manager. A typical clause designating manager authority looks as follows:

“The Manager shall have the sole and exclusive right to manage the business of the Company and shall have all powers and rights necessary, appropriate or advisable to effectuate and carry out the purposes and business of the Company.”

In addition to laying out the role and duties of the manager, it is extremely important for the operating agreement to explain in detail how the manager is to be appointed and removed. In particular, the operating agreement should address whether the manager can be removed with or without cause and what percentage interest of members is needed to take action.

While it may seem like an insignificant box to check on the Secretary of State Corporations website, there are serious ramifications in choosing whether your LLC will be member-managed or manager-managed so choose carefully.

For more information about Bellevue Business Law, consider contacting a Bellevue Business Attorney.