Alternative Funds 2025 Comparisons

The United States is the world’s largest and most predominant jurisdiction for the formation of alternative funds and boasts the largest number of alternative asset managers in the world. In recent U.S. Securities and Exchange Commission (SEC) filings, investment advisers have reported more than USD25 trillion in private fund gross asset value, amongst tens of thousands of funds.

Under the US federal securities laws, US investment advisers are governed by a robust regulatory framework. In addition, the US federal securities laws cover many aspects of fund formation and the offerings of fund interests. Other US federal and state rules may apply depending on a number of factors, including the nature of the fund’s investment activities and/or the advisory activities of an investment adviser.

The regulatory landscape for private funds is complex, but many rules proposed by the SEC and other regulatory authorities have either been rescinded or postponed in 2025. Significant new rules from recent years are still in force, which include those relating to the protection of customer information and advertisements and marketing communications. Proposed rules that have been rescinded or delayed include those relating to beneficial ownership reporting, addressing conflicts of interest in predictive data analytics, the safeguarding of customer assets, outsourcing, cybersecurity risk management, status as a “dealer” and anti-money laundering.

Alternative funds are formed to accommodate a variety of investment strategies. The strategies of “closed-end” private funds will typically be structured to target investments in one or more segments of a company’s capital stack (eg, venture capital funds, growth equity funds, buyout funds, distressed funds or credit funds).

Open-ended funds will generally permit investors to invest in or redeem from the fund periodically, often subject to restrictions such as redemption gates or lock-ups. Open-ended funds will typically pursue a more liquid portfolio, although these structures can also be designed to accommodate illiquid investments (eg, using a “side pocket” structure).

Both closed- and open-ended alternative funds formed in the USA will typically involve several key entities, including:

• Funds: Funds targeting US investments typically will be formed as Delaware limited partnerships or limited liability companies. Depending on the tax needs of the investors, US and non-US investors may invest in these structures directly or indirectly via one or more feeder vehicles or in parallel funds or other alternative fund structures. In the USA, Delaware is widely known as the “go-to” jurisdiction for entity formation given, among other things, its wide recognition, well-developed body of case law, robust legal protections, freedom to contract, and low startup costs (with Texas and Nevada gaining recognition for many of the same reasons). Also, its state courts are highly experienced in resolving complex business disputes and generally known for respecting the freedom to contract. Other US states or non-US jurisdictions will be used where appropriate to accommodate particular tax, regulatory or other legal needs.
• General Partner or Other Managing Entity (eg, Managing Member or Manager): They have the legal power to act on behalf of the fund. Depending on the structure and tax characteristics, this entity also typically receives the “carried interest” or “incentive/performance allocation” (although it is not unusual for the profits interests to be allocated to a special purpose vehicle).
• Management Company or Investment Adviser: They are appointed to provide investment advisory services to the fund, employ the investment team, provide management or investment advisory services and generally manage the day-to-day operations of the fund. This entity typically receives a management fee for its services.
• Other related entities may be formed to accommodate the tax, regulatory and other legal needs of the investment adviser or the fund and its investors.

Alternative funds and investment advisers are subject to a variety of regulations under US federal and state laws. The below outlines the basic US federal regulatory regime for alternative funds; depending on the facts and circumstances, other rules may apply.

U.S. Securities Act of 1933 (the “Securities Act”)

Alternative funds are subject to the US rules concerning private placements when interests are offered to US persons, or via US jurisdictional means. Offers and sales of securities in the United States may only be made pursuant to a registration statement filed with, and declared effective by, the SEC, or in accordance with an exemption from these registration requirements. Alternative funds typically rely on the registration exemption provided by Section 4(a)(2) of the Securities Act, and the “safe harbour” provided by Rule 506 under Regulation D under the Securities Act (“Regulation D”). Section 4(a)(2) is a private placement exemption available to issuers for sales of their securities “not involving any public offering.” Section 4(a)(2) does not expressly provide details of what constitutes a valid private placement, so most alternative funds rely on the safe harbour provisions set forth in Regulation D. Rule 506(b) of Regulation D generally requires:

• Limitation on Manner of Offering: There should be no general advertising or “general solicitation”.
• Limitations on Resale:
1. Offering materials should include special legends regarding US selling and transfer restrictions.
2. Each purchaser should represent in the fund’s subscription agreement that it is acquiring the interests for its own account and not with a view to resale or distribution thereof, and each purchaser should further undertake that it will only resell the interests in accordance with the Securities Act and the fund’s transfer restrictions.
• Nature of and Limitation on Number of Purchasers: Offers and sales of interests should only be made to institutions and individuals that qualify as “accredited investors” (“accredited investors”), as defined in Regulation D. Rule 506(b) does allow for offers and sales to up to 35 financially sophisticated investors so long as those non-accredited investors are provided with disclosures that are similar to what would be required in a public/registered offering.
• “Bad Actor” Disqualification: The fund, the general partner or the management company can be subject to disqualification if they have committed “bad acts”. The fund itself can be disqualified if more than 20% of its securities are owned by investors who are “bad actors”.
• SEC Filing: Form D must be filed with the SEC within 15 days of the fund’s first sale of securities, and any annual amendments thereto must be filed while the offering is ongoing.

Rule 506(c) is a separate safe harbour that has no restrictions on the use of general advertising or general solicitation, but all investors must be “verified” as accredited investors. Like Rule 506(b), Rule 506(c) has the same limitations on resale and is subject to “bad actor” disqualification. The overwhelming majority of alternative funds rely on Rule 506(b).

Offerings by US domiciled funds to non-US investors will generally be made in accordance with Regulation D. Offerings by non-US domiciled funds to non-US investors will generally be made in accordance with Regulation S under the Securities Act, which provides that registration under the Securities Act is not required when the offer and sale of a security occurs outside the United States in an offshore transaction and there are no directed selling efforts in the United States with respect to such sale.

U.S. Investment Company Act of 1940 (the “Investment Company Act”)

The Investment Company Act regulates “investment companies”, which are broadly defined as companies that engage primarily in “investing, reinvesting, owning, holding or trading in securities”. To avoid being subject to the onerous requirements of operating as a registered investment company under the Investment Company Act, many alternative funds are structured to rely on certain exclusions from the definition of an investment company. Most common are Section 3(c)(7) and Section 3(c)(1) of the Investment Company Act.

• Section 3(c)(7) provides an exclusion for a privately offered fund whose interests are beneficially owned by “qualified purchasers”. “Qualified purchasers” generally include (i) individuals, family-owned businesses, and trusts for family members that own USD5 million or more in “investments”; (ii) a trust (not addressed in (i)) that is not formed for the specific purpose of acquiring securities, and where the trustee or other person authorised to make decisions with respect to the trust, and each settlor or other person who has contributed assets to the trust, qualifies as a qualified purchaser; (iii) entities that own and invest at least USD25,000,000 in investments and that were not formed for the purpose of making the investment; and (iv) entities exclusively owned by qualified purchasers.
• Section 3(c)(1) provides an exclusion for a privately offered fund whose interests are beneficially owned by not more than 100 beneficial owners (this limit is increased to 200 for certain qualifying venture capital funds). A fund structured under Section 3(c)(1) must adhere to various “anti-pyramiding” rules that are designed to prevent circumventing the 100-investor limit. Where a fund forms two parallel funds, one a 3(c)(1) private investment fund with 100 or fewer non-qualified purchasers and the other a 3(c)(7) qualified purchaser fund with an unlimited number of qualified purchasers, the two funds are not integrated for purposes of determining whether the first qualifies under the applicable exemption.

U.S. Investment Advisers Act of 1940 (“Advisers Act”)

See 2.3 Disclosure/Reporting Requirements and 3.3 Regulatory Regime for Managers.

U.S. Commodity Exchange Act (CEA)

The CEA generally governs the futures and derivatives markets. In the United States, securities and futures are subject to separate regulatory regimes. The U.S. Commodity Futures Trading Commission (CFTC) and U.S. National Futures Association (NFA) serve as the derivative industry’s regulatory and self-regulatory authorities. If a fund will trade any amount of exchange-traded futures contracts, options on futures contracts or swaps (collectively, “Commodity Interests”) as part of its investment strategy, for all practical purposes, the fund will fall within the definition of a “commodity pool”. The operator (ie, sponsor or general partner) of a commodity pool must register with the CFTC as a commodity pool operator (CPO) and must become a member of the NFA unless it can avail itself of an exemption. The investment manager to a commodity pool generally must register with the CFTC as a commodity trading adviser (CTA) and become an NFA member unless it can avail itself of an exemption. These registration requirements are generally subject to narrowly drawn exceptions or exclusions. See 2.3 Disclosure/Reporting Requirements and 3.3 Regulatory Regime for Managers for further information regarding CFTC registration.

U.S. Securities Exchange Act of 1934 (“Exchange Act”)

The Exchange Act generally governs the issuers of registered securities and regulates broker-dealers. In general, under the Exchange Act, all sales of interests in a fund must either be made by the “issuer” (ie, the fund) or a registered broker-dealer. If there will be no independent selling agents and the fund will be making all sales, the broker-dealer registration requirement generally is not implicated, unless the issuer hires or otherwise employs marketing personnel whose compensation is tied to the sales made by them. See 4.7 Compensation and Placement Agents.

ERISA

Under the Employee Retirement Income Security Act’s (ERISA) Plan Asset Regulation, when “Benefit Plan Investors” acquire 25% or more of the equity interests in a fund, the Benefit Plan Investors are deemed to have an interest in the underlying assets of that investment, unless the investment meets one of the exceptions. These funds are typically referred to as “plan asset funds”. Individuals responsible for the investment and management of plan asset funds are subject to ERISA’s fiduciary responsibility provisions and certain prohibited transaction provisions under both ERISA and the U.S. Internal Revenue Code (“Code”). If these obligations are breached, the fund’s sponsor and/or investment adviser can incur substantial liabilities and penalties. A Benefit Plan Investor is an (i) employee benefit plan subject to title I of ERISA; (ii) individual retirement accounts, Keogh Plans and other employee benefit plans that are not subject to ERISA but are subject to the prohibited transaction rules of Code §4975; and (iii) other entities the assets of which are deemed to be plan assets based on investment from entities listed in (i) and/or (ii) above.

State Regulation

Alternative funds and investment advisers will be required to comply with state securities laws (so-called “blue sky” laws) and related regulations, the application of which may (in part) be pre-empted by certain of the federal securities laws mentioned above.

An investment adviser or management company that falls within the definition of “investment adviser” under the Advisers Act generally must register with the SEC, unless it (i) is prohibited from registering under the Advisers Act because it has less than USD25 million of regulatory assets under management; (ii) has less than USD100 million of regulatory assets under management and is registered with and subject to examination by a state; or (iii) qualifies for an exception from the Advisers Act’s registration requirement (see 3.3 Regulatory Regime for Managers). A sponsor that registers with the SEC as an investment adviser will be required to, among other things:

• file a Form ADV with the SEC and keep it current by filing periodic amendments, including an annual amendment;
• comply with the “brochure rule”, which requires most advisers to provide clients and prospective clients with information about the adviser’s business practices and its principals’ educational and business backgrounds (most advisers satisfy this requirement by providing part 2 of Form ADV);
• maintain accurate and current books and records and be subject to inspection and examination by the SEC staff;
• complete Form PF filings, which contain more detailed information on the funds it manages or advises, and which are required to be filed on an annual or quarterly basis or more frequently with respect to certain events;
• adopt and maintain written policies and procedures that are reasonably designed to prevent violations of the Advisers Act and related regulations and have a code of ethics governing employee behaviour (including personal trading reporting, and restrictions and enforcement of certain insider trading procedures);
• comply with the Marketing Rule (see 3.3 Regulatory Regime for Managers); and
• only charge performance-based fees (ie, carried interest) to investors that are “qualified clients” as defined in Rule 205-3 under the Advisers Act.

CPOs and CTAs have specific filing and reporting requirements under the CEA, the CFTC’s rules and the rules of the NFA. 

Managers registered as CPOs must generally:

• distribute monthly or quarterly account statements to pool participants within 30 days of month-end or quarter-end;
• distribute an annual report to pool participants within 90 days of the pool’s fiscal year-end; and
• file Form PQR with the NFA on a quarterly basis, providing specific information about the manager and the commodity pools that it operates.

Managers registered as CTAs must generally:

• file Form PR with the NFA within 45 days after the quarters ended in March, June and September; and
• file a year-end report within 45 days of the calendar year end.

Managers that are registered as CPOs and/or CTAs may rely on certain exemptions to avoid certain of their record-keeping and disclosure requirements for a fund. See 3.3 Regulatory Regime for Managers.

US alternative funds are predominantly established by US promoters and sponsors. Non-US advisers may also establish US funds for various purposes. In order to avoid integration of their US investment advisory activities with their global business operations, some non-US investment advisers may form separate US-affiliated investment advisers.

See Section 3.4 Tax Regime for Managers.

Registration Under the Advisers Act

Section 202(a)(11) of the Advisers Act generally defines an “investment adviser” to mean any person who, for compensation, engages in the business of advising others as to the value of securities or as to the purchase or sale of securities, or who, for compensation and as part of a regular business, issues analyses or reports concerning securities.

An adviser that falls within the definition of “investment adviser” may have to register under the Advisers Act and be subject to its substantive requirements, unless an exemption applies (see 2.3 Disclosure/Reporting Requirements).

Exemptions from Registration under the Advisers Act. Common exemptions from registration as an investment adviser under the Advisers Act for private fund managers are as follows:

• The private fund adviser exemption applies to advisers who solely manage private funds with less than USD150 million in assets under management in the United States. An adviser may be required to file as an exempt reporting adviser depending on its principal place of business and its regulatory assets under management.
• The venture capital fund adviser exemption applies to advisers who advise solely venture capital funds.
• The foreign private adviser exemption applies to non-US advisers with limited US client and investor bases (ie, less than USD25 million in assets under management from US clients and investors, and fewer than 15 such clients and investors).
• The SBIC exemption applies to investment advisers who solely advise entities that have received from the Small Business Administration notice to proceed to qualify for a licence as a small business investment company under the Small Business Investment Act of 1958.

Fiduciary Duties and Anti-fraud Protections

An investment adviser (whether registered or unregistered) is a fiduciary with respect to all its clients. Advisers owe duties of loyalty and good faith to clients, and must act in accordance with those duties, including by providing full and fair disclosure of all material facts to current and prospective investors, and an affirmative duty to use reasonable care to avoid misleading clients.

Section 206 of the Advisers Act contains broad “anti-fraud” provisions that make it unlawful for an investment adviser to directly or indirectly engage in the following:

• devices, schemes or artifices to defraud any client or prospective client;
• transactions that operate as a fraud or deceit upon any client or prospective client;
• when acting as principal for its own account, knowingly selling any security to or purchasing any security from a client for its own account, without disclosing to the client in writing the capacity in which it (or an affiliate) is acting and obtaining the client’s consent before the completion of the transaction; and
• any act, practice or course of business that is fraudulent, deceptive or manipulative.

Commodity Exchange Act

Registration requirements

If a fund invests in Commodity Interests, the fund will fall within the definition of a “commodity pool”. The operator (ie, sponsor or general partner) of a commodity pool must be registered with the CFTC as a CPO and must become a member of the NFA unless it can avail itself of an exemption.

Many managers that only invest in Commodity Interests on a limited basis rely on an exemption from registration as a CPO found in CFTC Regulation 4.13(a)(3). Rule 4.13(a)(3) provides an exemption for managers that operate pools whose interests are exempt from registration under the Securities Act of 1933, restrict participation to accredited investors, certain family trusts formed by accredited investors and “knowledgeable employees” and either (i) the aggregate net notional value of the fund’s commodity interest positions does not exceed 100% of the liquidation value of its portfolio, or (ii) the aggregate initial futures margin and options premium needed to establish the fund’s commodity interest positions does not exceed 5% of the liquidation value of its portfolio. A registered CPO also can rely on Rule 4.13(a)(3) for qualifying funds, which exempts the registered CPO from most of the disclosure and record-keeping obligations it otherwise would have for the fund.

CFTC Rule 4.14(a)(10), together with Section 4m(l) of the CEA, exempts any person from the requirement to register as a CTA, provided that such person has not during the prior 12 months furnished commodity trading advice to more than 15 persons and such person does not hold itself out generally to the public as a CTA. For an adviser with its principal place of business outside the USA, the adviser need only count US-based clients for purposes of such 15-client limitation. In order to rely on the “de minimis” exemption in CFTC Rule 4.14(a)(10), no regulatory filing or approval is necessary.

Generally, CFTC regulations require all commodity pools sponsored by registered CPOs to have a “disclosure document” (ie, a private placement memorandum) that contains certain disclosures prescribed by regulation and which must be reviewed by the NFA, unless an exemption from such requirement is available.

If a CPO limits the investors in a fund solely to “qualified eligible persons” (QEPs) as defined in CFTC Rule 4.7, the CPO is exempt from the requirement that its pool have a disclosure document reviewed by the NFA, nor must any voluntary disclosure document contain required CFTC disclosures other than a required disclaimer (although the document must contain all relevant information and disclosures so as not to make the document materially misleading).

Generally, QEPs are accredited investors that meet a portfolio requirement (either USD4 million in securities or USD400,000 in futures margin or options on futures premium, or some proportional combination of the foregoing). Qualified purchasers, “knowledgeable employees”, certain regulated entities or investment professionals, as well as non-US investors generally, are also deemed to be QEPs. The practical impact of the definition of a QEP is that funds relying on Section 3(c)(1) to avoid registration as an investment company typically have subscription agreements that include representations regarding QEP status, whereas funds relying on Section 3(c)(7) can rely on the representation that the investor is a qualified purchaser.

US Securities Exchange Act of 1934 (the “Exchange Act”)

Section 15(a) of the Exchange Act provides that it is unlawful for any broker or dealer to make use of any means of interstate commerce in the United States to effect any transactions in, or induce the purchase or sale of, any security, unless it is registered with the SEC or an exemption from registration is available. Generally, a broker is a person engaged in the business of effecting transactions in securities for the account of others for a commission, and a dealer is a person engaged in the business of buying and selling securities for such person’s own account through a broker or otherwise. For the most part, an issuer of securities (such as a fund) should not be deemed to be a dealer since it is not both buying and selling its securities. Furthermore, an issuer (such as a fund) should not be considered a broker because the securities it is selling are not being sold for the “account of others”; rather, they are being sold by the issuer for its own account.

Unlike an issuer, however, an issuer’s employee or its general partner’s employees may be deemed to be selling securities for the account of others for a commission. See 4.7 Compensation and Placement Agents.

Rule 10b-5 under the Exchange Act provides for liability for any material misstatement or omission in connection with the purchase or sale of a security involving the use of US jurisdictional means.

Tax Considerations for US Managers

Fund managers are generally formed as limited partnerships or LLCs and are pass-through entities for US federal income tax purposes. As such, these entities are not subject to entity-level federal income taxes but are subject to the special carried interest rules discussed under 3.6 Taxation of Carried Interest. Additionally, US fund managers often utilise two entities: a “management company” to receive the management fee, and the general partner of the fund to receive the carry. This has several benefits for US managers, including providing flexibility as to who participates in the economics of each entity as well as minimising state tax consequences to the principals. The management company can be structured as an LLC, an S corporation or as a limited partnership. Various tax considerations (including US self-employment tax considerations, desire to treat equity owners as employees, etc) affect which structure should be used by any given fund.

Tax Considerations for Non-US Managers

Whether a non-US manager will be subject to US federal income tax will depend on whether the manager is engaged in a trade or business in the United States. Whether a manager is engaged in a trade or business in the United States is heavily dependent on the applicable facts and circumstances, but two important factors in such determination are whether the activities conducted in the United States are essential and directly related to the production of income, and whether the manager has a physical presence, such as an office or employees, in the United States. A non-US fund manager may find it beneficial to form a US subsidiary that is taxed as a corporation for US federal income tax purposes to conduct managerial activities in the United States, rather than exposing the non-US fund manager itself to any US federal income tax liability or reporting obligations.

If a fund has a US-based general partner or investment manager, such general partner or investment manager’s US presence should generally not cause a non-US fund or a non-US investor in a fund to be subject to US federal income tax as long as the activities of the fund consist predominately of passively investing in securities.

However, if a fund acts as a dealer in securities, the fund will be deemed to generate ECI for its non-US investors and UBTI for its US tax-exempt investors if such dealing activities occur in the United States. Additionally, activities, such as loan origination and investing in real estate and certain so-called “US real property holding corporations” can also be expected to generate ECI and UBTI for non-US investors.

Carried interest is a tax-efficient way to compensate principals of the general partner of the fund. Carried interest reflects a right to future undetermined profits of the fund above a certain performance threshold, and accordingly is not taxable upon grant by the general partner of the fund. Furthermore, carried interest allocations are not taxed as compensation. Instead, the character (as ordinary income, short-term capital gain or long-term capital gain) of amounts allocated with respect to carried interest is the same as it was when recognised by the partnership, except that long-term capital gain recognised by a partnership on the sale of an asset held for not more than three years is treated as short-term capital gain (which, as at the time of publication, is taxed at the same rate as ordinary income) when allocated to a non-corporate holder of carried interest. In addition, capital gain recognised by a carried-interest holder on the sale of its carried interest is treated as short-term capital gain, rather than long-term capital gain if the carried interest was not held for more than three years prior to being sold.

Managers are permitted to outsource a substantial portion of their investment functions or business operations. Managers remain responsible for ensuring effective compliance with their regulatory obligations, even with respect to outsourced services. See 2.9 Rules Concerning Service Providers.

See 2.8 Local/Presence Requirements for Funds.

RIAs, CPOs and CTAs managing alternative funds are not subject to any regulatory capital requirements or other local substance requirements under applicable federal law and related SEC, CFTC and/or NFA rules (as applicable).

Section 205(a)(2) of the Advisers Act generally makes it unlawful for an RIA to enter into or perform any investment advisory contract unless the contract provides that no assignment of the contract shall be made by the adviser without client consent. For these purposes, an assignment includes any direct or indirect transfer or hypothecation (ie, pledging) of an advisory contract and any direct or indirect change in control of an RIA. Generally, any person who directly or indirectly owns more than 25% of the voting securities of an RIA is presumed to have control.

In 2025, the SEC withdrew its proposed new rules that would have required RIAs to, among other things, eliminate/neutralise conflicts of interest that result in placing the firm’s interests ahead of investors’ interests when using “covered technology” (eg, algorithms and artificial intelligence) in investor interactions.

On 12 June 2025, the SEC withdrew the proposed investment adviser rule addressing conflicts of interest from the use of artificial intelligence.

Common categories of investors include US government plans, corporate benefit plans, financial institutions, sovereign wealth funds, family offices, university and charitable endowments and high net worth individuals. Investments in funds are often structured to accommodate the tax and other legal and regulatory needs of certain investors.

No General Advertising or Solicitation

As highlighted in 2.3 Regulatory Regime for Funds and 3.3 Regulatory Regime for Managers, alternative funds typically offer interests to US investors in Rule 506(b) offerings and thus may not engage in general solicitation or general advertising in connection with the offering.

“Bad Actor” Disqualification

The SEC has adopted certain “bad actor” disqualification provisions for Rule 506 of Regulation D under the Securities Act. As a result of the Rule 506(d) bad actor disqualification, an offering of securities is disqualified from relying on Rule 506(b) and 506(c) of Regulation D if the issuer or any other person covered by Rule 506(d) has a relevant criminal conviction, regulatory or court order or other “disqualifying event”.

The final rule provides an exception from disqualification when the issuer is able to demonstrate that it did not know and, in the exercise of reasonable care, could not have known that a covered person with a disqualifying event participated in the offering. The steps an issuer should take to exercise reasonable care will vary depending on particular facts and circumstances.

SEC’s Marketing Rule

The SEC’s Marketing Rule (effective as of November 2022) applies to RIAs and was established to modernise rules governing advertisements and payments to solicitors and to comprehensively regulate marketing communications. Exempt reporting advisers are subject to the Advisers Act anti-fraud rule.

As defined under the Marketing Rule, an “advertisement” includes any direct or indirect communication an investment adviser makes that: (i) offers advisory services with regard to securities to prospective clients or private fund investors, or (ii) offers new investment advisory services with regard to securities to current clients or private fund investors. The first prong of the definition excludes most one-on-one communications and contains certain other exclusions. The definition also generally includes any endorsement or testimonial for which an adviser provides cash and non-cash compensation directly or indirectly (eg, directed brokerage, awards or other prizes, and reduced advisory fees).

The Marketing Rule generally prohibits:

• making untrue statements of a material fact (or omissions thereof);
• making material statements of fact without a reasonable basis (or the ability to substantiate such statements upon demand by the SEC);
• discussing potential benefits without providing fair and balanced treatment of associated material risks or limitations;
• referencing specific investment advice provided by the adviser that is not presented in a fair and balanced manner;
• including or excluding performance results, or presenting performance time periods, in a manner that is not fair and balanced; and
• including information that is otherwise materially misleading.

The Marketing Rule also prohibits the use of testimonials and endorsements in an advertisement, unless the adviser satisfies certain disclosure, oversight, and disqualification provisions, including:

• clear and prominent disclosure of whether the person giving the testimonial or endorsement (the “promoter”) is a client or is being compensated (together with additional disclosures regarding compensation and conflicts of interest); and
• adviser compliance and oversight of such testimonial or endorsement’s compliance with the marketing rule.

The rule prohibits the use of third-party ratings in an advertisement, unless the adviser provides disclosures and satisfies certain criteria pertaining to the preparation of the rating.

Finally, the rule generally prohibits including in any advertisement:

• gross performance, unless the advertisement also presents net performance;
• any statement that the SEC has approved or reviewed any presentation of performance results;
• performance results from fewer than all portfolios with substantially similar investment policies, objectives, and strategies as those being offered in the advertisement, with limited exceptions;
• performance results of a subset of investments extracted from a portfolio, unless the advertisement provides, or offers to provide promptly, the performance results of the total portfolio;
• hypothetical performance (which does not include performance generated by interactive analysis tools), unless the adviser adopts and implements policies and procedures reasonably designed to determine that the performance is relevant to the likely financial situation and investment objectives of the intended audience and the adviser provides certain information underlying the hypothetical performance; and
• predecessor performance, unless there is appropriate similarity with regard to the personnel and accounts; in addition, the advertising adviser must include all relevant disclosures clearly and prominently in the advertisement.

Marketing to US State and Local Government Entity Investors

Rule 206(4)-5 under the Advisers Act (the “Pay to Play Rule”) is generally designed to address pay-to-play abuses involving campaign contributions to government officials who are in a position to influence the selection of investment advisers to manage government client assets, including the assets of public pension funds and other public entities. Among other things, Rule 206(4)-5 prohibits certain investment advisers from providing investment advisory services for compensation to a government client for two years after the adviser or certain of its executives or employees makes a campaign contribution to certain elected officials or candidates who can influence the selection of certain investment advisers.

In soliciting investments from any US state or local government entities, investment advisers should consider any applicable US state or local lobbying rules that may apply.

Sponsors of private funds are able to raise capital from qualified high net worth investors based on the applicable exemptions under the Investment Company Act and Securities Act. For private funds structured to rely on the Section 3(c)(1) exemption of the Investment Company Act, the private fund’s securities can be held by no more than 100 US beneficial owners (inclusive of certain “anti-pyramiding” look-through rules). For private funds structured to rely on the Section 3(c)(7) exemption of the Investment Company Act, the private fund’s securities can be held solely by ultra-high net worth investors that qualify as “qualified purchasers” under the Investment Company Act. Sponsors are permitted to form two parallel funds, one 3(c)(1) private investment fund and the other a 3(c)(7) qualified purchaser fund, and the two funds are not integrated for purposes of determining qualification under the applicable exemption.

In addition to private funds, registered investment companies (such as mutual funds, exchange-traded funds (or ETFs), closed-end funds, business development companies (or BDCs), and interval funds) can offer interests to retail investors through registered offerings complying with the Securities Act and Investment Company Act disclosure and prospectus delivery requirements. Once securities are registered and sold (or listed) in a public offering, they are available to retail investors.

Alternative funds are subject to the requirements of the Securities Act concerning private placements of their securities to US persons or via US jurisdictional means. Most funds typically rely on the registration exemption provided by Section 4(a)(2) of the Securities Act, and the “safe harbour” of Rule 506 under Regulation D under the Securities Act. Sponsors seeking to access larger pools of high net worth investors using general solicitations or advertising may consider Rule 506(c) under Regulation D. Rule 506(c) allows issuers to offer and sell securities through general solicitation or advertising, provided that all purchasers are accredited investors and the issuer takes reasonable steps to verify each purchaser’s accredited status (beyond simply relying on purchaser representations). Sponsors relying on Rule 506 should be mindful of the authority of US states to enforce their anti-fraud laws and to require notice filings depending on the applicable state securities laws.