Structuring a Private Investment Fund inside and outside of the U.S.

The risk of litigation due to a misunderstanding is real.? If U.S investors are going to be supplying funds to your non-U.S owner-managed business, then we have suggested some aspects of the Private Investment Fund (located in the US) that will serve to facilitate investor protection.

Custodying all funds in the U.S is not a good idea. Nor is basing the entire PIF in the U.S a good idea. One option for structuring your PIF could be:

·????? Use a non-U.S regulated fund manager.

·????? Register the regulated fund manager in Florida.

·????? Use both U.S custodians and non-U.S custodians.

This way the PIF is both US and non-US and as such, it is truly international.?

The potential for misunderstanding with US investors is very real. The implications of US litigation are very expensive and very real.? By having funds with a non-US custodian, if litigation in the U.S is launched it is possible for the local operating project to continue to operate using working capital from the non-US custodian source.

A non-U.S custodian will be much more difficult and take more time for U.S litigation to freeze assets pending the beginning of the U.S litigation.

It has to be remembered at this time that in addition to the increased reporting there is also the fiduciary obligations that can form the basis for U.S litigation if there is a major misunderstanding with U.S investors.? So, regulator and proactive communication is absolutely important.

The structure of a Private Investment Fund.

?A Private Investment Fund is a regulated structure or platform.? It enables the owner manager to receive funds from investors or purchasers who have their money in regulated structures.? If you don't have a regulated structure you are going to experience a lot of problems getting your transaction completed.

?Fiduciary Duty and Private Investment Funds.

?When using a trust as an investment fund, fiduciary duty is intrinsic to the agreements between the Investment fund and the:

1.??? Regulated Asset manager

2.??? Company director or trustee.

???NOTE - Be sure to focus on the Director and investment manager agreements for express provisions on fiduciary duty.? Especially if you are using third party services providers to reduce upfront cost and you don't know your service providers that well.? Quite often service providers remove or extract fiduciary duty provision provisions.? So above all things make sure the lawyer you are working with helps you negotiate fiduciary duty provisions.? If you have a service provider that does not want to include fiduciary duty, or wants very narrow provisions for it, that should tell you all you need to know.?

?Remember your OM is going to be commending these arrangements to your investors. Savvy investors will ask you want protection you have in place for their benefit.

?The New Private Fund adviser rules address the above three points with reporting that ultimately has to be explained to investors. Achieving balance so that the non-U.S owner manager has the ability to operate and make decisions is important.? A PIF remains a better choice than public listing and independent board members that investors can vote for.?

Hiring An Asset Manager.

?Many owners will want to hire an asset manager when beginning a project.? They are able to avoid among other things:

1.??? The setup cost

2.??? Regulated license application process.

3.??? Capital Reserve

?You have to of course engage an asset manager for hire carefully.? Things to consider include the agreement between the Asset manager and the Private Investment Fund and your investors.? If the owner manager is not a regulated asset manager then there will be a Sponsor.? But as a sponsor of the PIF, you have to bring all this together so that potential investors see that international risk is mitigated.? Investor Communication is absolutely important for the Regulated Asset manager.

?So you have to hire a regulated asset manager that is willing to provide regular communications.

If you hire a regulated asset manager that is not based or registered in the U.S, then your fund is outside of the US Private Fund Adviser rules. ?The options you have may include:

·????? Joint Venturing with a US asset manager.

·????? Going to US investors with a non-U.S fund in the first instance.

You can also consider setting up your own Regulated Asset Manager and registering a branch in the US at the state and federal level so that the Private Fund Adviser rules apply.

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When you know… You can Trust.