Happy Friday, Funds Family!

⚠️ Today we’ll cover a few laws you don’t want to accidentally violate.

For an in-depth review of the cornerstone laws of the investment fund world, check out these articles:

• Securities Act of 1933

• Investment Company Act of 1940

• Investment Advisers Act of 1940

• State Investment Advisers Laws

Now, let’s hit a few under-appreciated legal regimes whose tentacles extend to investment funds. 🐙 

Ask your lawyer to help you comply!

By the way, big shoutout to Kareim Oliphant for co-authoring this issue. 🙌 

1. ERISA

ERISA (Employee Retirement Income Security Act) is a law governing retirement money.

Key sources of retirement money in investment funds include:

• Pension funds

• IRAs

• 401ks

If 25% or more of an investment fund’s commitments come from benefit plan investors (retirement accounts, generally), the fund becomes regulated by ERISA.

👀 If a fund is subject to ERISA, it must adhere to heightened fiduciary duties and other burdensome regulatory requirements.

While there are technically some ways to get around this (called VCOC or REOC), the most common strategy for investment funds is simple:

✅ Keep your fund to less than 25% retirement money.

2. CFIUS

CFIUS (Committee on Foreign Investment in the United States) is a U.S. governmental committee that reviews foreign investments in U.S. businesses for national security risks.

🏦 CFIUS typically steps in if a foreign investor:

• Gains control over a U.S. business;

• Makes a non-controlling investment in a U.S. business involved in sensitive sectors like technology, critical infrastructure, or personal data; or

• Makes an investment in a U.S. real estate deal near a military base, port, or airport.

A foreign person's indirect investment in a U.S. business through an investment fund typically won’t trigger CFIUS review if:

1. The fund is managed solely by a non-foreign GP;

2. The foreign person has no control over investment or compensation decisions (or decisions made by the GP); and

3. The foreign person has no access to material nonpublic information through their role on an advisory board.

If CFIUS gets concerned, it can recommend that the President of the United States block a transaction or require certain conditions to address national security risks. 🧑‍⚖️ It even has the authority to unwind deals that have already closed!

To avoid CFIUS issues, it’s generally best practice to ensure that foreign investors are passive and do not have access to sensitive information.

📃 Most investment fund LPAs have a CFIUS section confirming that foreign LPs do not have power over investment decisions and may be excluded from the fund’s LP advisory committee.

3. Broker-dealer laws

🚨 Beware of paying people money to help you fundraise!

Here’s the rule: You cannot pay success-based compensation to someone for helping you raise money unless that person is a FINRA-registered broker-dealer. Please print this out and tape it to your bathroom mirror.

There are gaggles of unlicensed broker-dealers running around offering to help you raise money. 🦆 

⚠️ Beware of them!

The unlicensed broker-dealer may have penalties imposed on them.

But the fund itself isn’t safe either! Per Section 29(b) of the Exchange Act, any investor who invested through an unregistered broker-dealer has a right of recession. This means they can get their money back and cancel their investment. Not good! 📉 

If you’re going to hire someone to help you raise money, it’s generally safer to pay them a salary or some other form of compensation that is not tied to successful fundraising.

This can often be frustrating for GPs to hear, but it’s the law. Ask your lawyer!

4. Corporate Transparency Act

The Corporate Transparency Act went into effect in January of 2024 and affects a wide range of business entities.

In short, each new entity (corporation, LLC, limited partnership, etc.) must now register with FinCEN.

📆 New entities must register within 90 days of formation, and entities formed before 2024 have until January 1, 2025, to register.

When registering, each entity must disclose:

• Each individual exercising “substantial control” over the entity

• Each individual that beneficially owns at least 25% of the entity

There are various exemptions from needing to register, but most fund, GP, and management company entities must register (unless the fund entities are registered - not exempt - from laws like the Investment Company Act and the Investment Advisers Act).

The video below shows how you can make these filings. 👇️ 

5. Commodity Exchange Act

Funds trading in commodity interests (futures, options, swaps) may be subject to CFTC regulation under the Commodity Exchange Act (CEA). 💹 

In some cases, funds may need to register as Commodity Pool Operators (CPOs) or claim an exemption. However, many funds rely on the Rule 4.13(a)(3) “de minimis” exemption, which you can apply for through the NFA.

This is something to ask your lawyer about!

Thanks for reading, everyone.

Have a great weekend! 🙌 

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.