(This guest post is a response to a Business Insider post which was sceptical about a new hedge fund offering a minimum investment of just $1,000. The author is the founder of that fund. Nothing here shall be construed as advice about starting a fund)
The Securities Act of 1933 requires a hedge fund to furnish certain information “to any purchaser that is not an accredited investor” at a reasonable time prior to sale. If it were illegal for a hedge fund to offer for sale securities to non-accredited investors, then the federal securities law would not permit, much less describe the process for, a hedge fund to furnish non-accredited investors with information relating to the sale of its securities. See Securities Act of 1933, Regulation D, Section 502(b)(1). http://www.law.uc.edu/CCL/33ActRls/rule502.html
Hedge funds are permitted under federal securities laws to offer their securities to non-accredited investors, under Regulation D, Sections 504, 505, and 506. For example, Sections 505 and 506 permit hedge funds to sell securities to “35 purchasers” without regard to their net worth and / or accredited investor status. Section 506 even references non-accredited investors by requiring that these types of investors have “such knowledge and experience in financial and business matters.”
The particular exemption which I relied upon, as Counsel for my hedge fund, is Regulation D, Section 504(b)(1)(i), (ii) of the Securities Act of 1933. These exemptions do not limit the sale of securities to accredited investors. See http://www.law.uc.edu/CCL/33ActRls/rule504.html.
In her article, “Woman Launches Hedge Fund From Her Apartment With Only $1,000 Minimum Investment,” Courtney Comstock states that “we’re not even sure how it’s legal, given the requirement that hedge fund
investors be accredited and have a net worth of at least $1 million.” Because there is no such legal requirement, my hedge fund is in full compliance with all applicable securities laws.
Therefore, Ms. Comstock’s statement had no basis in fact and law and should never have been published.
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