本文最初发表于Law360，经授权在此转载。
A new trading platform is in the works for family offices, which will simplify the deal-making process for private market securities.[1] ShareNett Holdings LLC — a membership-based investment platform serving family offices backed by hedge fund billionaire Paul Tudor Jones — recently announced that its members will have access to Clearlist LLC, a trading platform to buy and sell shares of private companies.
The announcement is just the latest move in an increasingly active space: In the last two years, assets under the management of family offices has risen 38% to $5.9 trillion.[2] A large, and growing, portion of these assets are private, direct investments of the sort that ShareNett and Clearlist will facilitate.[3]
As family offices grow larger and more sophisticated, and engage in more direct investing, they must bear in mind the regulatory risks that this sort of activity can generate.
Unlike hedge funds or private equity funds, family offices can largely avoid state and federal securities regulations by taking advantage of a statutory exemptions. These exemptions alleviate onerous reporting and due diligence burdens; they also allow family offices to retain privacy and a significant level of control over their investments.
But the myriad statutory exemption requirements make it easy for burgeoning offices to stumble over tripwires and unknowingly lose their exempt status. For example, offering an employee performance-based compensation or having the office serve too many family members would violate exemptions from broker-dealer laws, the Securities Act, the Investment Company Act and anti-manipulation laws.
Losing these exemptions has significant legal consequences. It removes a key selling point for the investment model: little to no regulatory oversight.
Once outside the protection of these exemptions, family offices fall under the watchful eye of state and federal enforcement agencies. Nonexempt family offices must comply with onerous reporting and due diligence requirements among other regulatory obligations. Public disclosures, in particular, impose a substantial burden on ultra-wealthy families that prize privacy.
Although access to resources like Clearlist will simplify family offices’ deal making, they should scrupulously guard applicable securities exemptions. Below are five common pitfalls that family offices should cautiously navigate as they grow with the ease of private company trading.
1. Compensation
Growing family offices usually require more sophisticated employees. These employees often have backgrounds in investment banking, private equity or hedge funds, where performance-based compensation is the norm.
Certain compensation structures, however, risk securities exemptions. Profit allocation, such as carried interest, transaction-based compensation, or compensation based on the disposition of a transaction are all examples of compensation structures that could risk exemption from the Investment Advisers Act.[4]
2. Investing With Third Parties
Family offices should also be mindful of securities exemptions when investing with third parties. For example, coinvesting with hedge funds, private equity funds and real estate funds or entering a joint venture may trigger regulation by the Commodity Futures Trading Commission.[5] As a result, family offices should carefully structure these partnerships to retain their securities exemptions.
3. Multiple Investment Vehicles
As more family members join the family office, internal conflict often arises between subsets of the family, either branches or generations, over investment strategy. Disagreements usually center on issues such as majority or minority control, active or passive management style, and asset classes.
To appease these competing objectives, managers may create separate investment vehicles within the same family office. But these vehicles threaten the Securities Act exemption, triggering public disclosures of sensitive information and internal and external due diligence requirements.
4. Marketing
Marketing materials may imperil exemptions as well. If family offices hold themselves out to the public as investment advisers, then they will be regulated like other public investors. Particularly when coinvesting with third parties, family offices should scrutinize their content and distribution of marketing materials.
5. Size
The sheer size of family offices also may jeopardize exemptions because securities regulations distinguish exempt investment vehicles from hedge funds and private equity funds by the number of members and the amount of assets under management. For example:
- The Securities Exchange Act exemption caps the amount of assets under management.[6]
- The Investment Company Act exemption caps the number of family members within an office.[7]
- The Investment Advisers Act and Securities Act exemptions have net worth benchmarks for each family member.[8]
So, as new generations and branches join family offices, investment and legal professionals must ensure each member and the collective family office remain within the confines of these size restrictions.
Streamlined trading, growing balance sheets and heightened sophistication are a boon to family offices. Families of wealth need to not rely on the high fees of outside financial advisers to grow their wealth and pass it on to the next generation. But as family offices grow, so too should their securities compliance measures in order to preserve exemptions from securities regulations.
[4] 15 U.S.C. § 80b et seq.
[5] 7 U.S.C. § 1 et seq.
[6] 15 U.S.C.§78a et seq.
[7] 15 U.S.C §80a et seq.
[8] 15 U.S.C.§80b et seq.
