I used to run a small hedge fund, so send me a private message if you have any questions that you would like my input on. The fund I traded focused on short-term trading of equities and options.
I don't want to get into issuing legal advice here. This area can be tricky if you're not a fulltime practitioner in it, and I'm not. I will say the question Puffy raised is a good one. The question is whether a small group of people can pool their funds and give a power of attorney to one person to trade it, without running afoul of the law. First, as noted above it whether you use an LLC or a partnership is not relevant to the SEC and state laws regulating investment advisers. Those are merely vehicles. It's what you do with it that matters. Hedge funds are unregistered but they do have limits, the most obvious being the 99 investor limit and the requirement that investors be "accredited", meanign >1mill in assets or >220k in compensation, as Iunderstand it. I am not aware of there being any kind of "friends and family" exemption, although I think as a practical matter it would not be an enforcement priority. My worry would be that a disappointed investor could sue for return of his investment. Seems to me that would be a pretty solid case if you were running what would legally be a hedge fund and accepting non-accredited investors.
The problem with "pooling money" in an llc or LP is that you will most likely be considered to have created and sold an "unregistered security" under federal and/or state laws (i.e., the interest in the llc in exchange for the trading capital). Strict compliance with state and federal securities laws is required sell unregistered securities. Violation of such laws allows the investors to receive a full refund as well as other damages and attorneys fees--not to mention criminal penalties. Be very careful.
Roger, Good point, although I suppose he would try to fit under the private offering exemption. So you're worrying about issuing unregistered sec's, Investment Company Act, hedge fund restrictions and possible state law issues. I think you are being very appropriate in not using this forum to advertise your service, but I and I think others would be interested in your estimate of what a low cost effort would run, using totally boilerplate doc's, etc.
Why is putting capital into a partnership for trading purposes any different then capital for any other business endeavor? If I form a partnership to buy and sell automobiles and take on partners who put up capital am I selling an unregistered security? In addition if the automobile trading business is unsuccessful because of some bad deals are the partners some how entitled to sue for their investment and damages? Thanks for responses, again I realize that responses are not legal advice only opinions based on interpretations or previous experiences
AAA, You are right most--if not all--hedge funds are private placements which are exempt from state and federal registration. However, as you probably know, each state has its own disclosure requirements--even for private placements--and many require the filing of certain documents (i.e., Blue Skying Reqts) even though its not an actual "registration." Reg. D also requires certain disclosures and the filing of Form D. Document preparation costs and filing fees vary greatly depending on the funds primary jurisdiction, the number of states where the fund intends to solicit investors, whether the fund will incorporate futures products in its investment/trading strategy (i.e., whether the fund will also require registration as a commodity pool) and the structure of the fund (i.e., master-feeder, fund of funds, multiple classes of shares, etc.). I'm sorry I can't be more specific on the costs in this forum.
Given what has been discussed here it would seem to me that there are a lot of businesses in the U.S. who have run a foul of securities laws by selling unregistered securities.
There are certain exemptions from securities registration requirements for certain private placements. It's a safe harbor but one surrounded by lots of reefs with sharp rocks. Anytime you are dealing with securities you also have to be careful you do not run afoul of the applicable state laws, whcih can have more stringent requirements. Basically, anytime you are taking other people's money, the government takes a very strong interest in what you're doing. My advice is to get some assistance from someone who does this all the time. Shop around and get a good deal for sure, but this is not something to try to do on your own unless you are a lawyer or maybe CPA with experience and reference to model documents. Roger, You mentioned hedge funds that use futures. Do I understnad you correctly that they also have to register with the CFTC as pools? Doesn't that mean the principals have to be registered as CTA's? That puts the NFA into their business as well.
AAA, Yes and no. Funds that invest in futures contracts (including e-mini contracts) are considered commodity pools and must make additional disclosures and are subject to certain CFTC regulations and audits by the NFA or CFTC. However, the fund manager does not have to be registered as a CTA only as a commodity pool operator (CPO). Funds/Pools can get an exempt from certain disclosures, reporting and recordkeeping requirements if they invest no more than 10 percent of the fund's net assets in futures. However, such funds/pools are still subject to audits and other regulations.