HEDGE FUNDS
FUNDS TYPES & OFFERINGS: COMMODITIES/FUTURES FUNDS

Domestic commodity funds are exactly like domestic funds, with one major exception; As the name implies, commodities are traded in the fund, and for those of you interested in trading commodities and futures in your fund, you have an entirely new set of extensive regulations that you need to follow - those defined by the National Futures Association (NFA) and the Commodity Futures Trading Commission (CFTC).

As a general rule, if you make even a single trade in a futures or commodities contract, you need to be registered with the NFA/CFTC. There are exemptions from NFA/CFTC registration for:

small pools with less than $200,000 under management (if you do not take a fee for your management services);
pools that do not commit more than 10 percent of the fair market value of their assets to commodity trading positions; and
pools that only accept “Qualified Eligible Persons” (QEP) as investors. A QEP is similar to an accredited investor, but the hurdles are higher. For example, a QEP must have more than $200,000 in income for each of the past two years and own securities with a market value in excess of $1,000,000.

Each of these exemptions requires that you file your exemption request in advance with the NFA and the CFTC.

Much like a traditional domestic fund, you will probably want a Rule 506 filing under Regulation D of the Securities Act of 1933. A fund created under this filing allows you to accept up to 100 investors (but be careful if you have more than one fund – the investors from both funds get collapsed into one “bucket” used for counting the number of investors in your fund). A Rule 506 filing is unlimited as to the amount you can manage and accept from investors. In addition, under the National Securities Market Improvement Act (NSMIA) of 1996, your state filings are greatly simplified.

We find that a Rule 506 filing typically is your most effective and scalable choice. It is effective because there is a level of standardization associated with these filings, which allows your fees to be kept to a minimum and is scalable because with one filing, you can bring enough money under management to make your fund profitable to you. Of course, we can consider other filing options if those best serve your needs.

For a Rule 506 Filing, you must file a Form D with the SEC. This merely informs the SEC that an offering is underway. The SEC performs no review of your documents, and the SEC does not give you any “approval” of your offering documents. There is no fee for filing a Form D.

To maximize the efficiency, we combine the private placement memorandum document required by the Securities Act of 1933 with the disclosure document required by the NFA.

Under the Patriot Act, signed into law on Oct. 26, 2001, the Treasury Department is in the process of implementing several procedures to which all hedge funds must adhere. You will need to have an anti-money laundering compliance program, and you will need to submit a “notice” filing to the SEC.

Your SEC Form D, state Blue Sky and NFA filings will need to be updated periodically. The updates provide current information as to the total amount of sales you have made by state, as well as any other data the states and the NFA require (this varies by state).

There is a lot of data for you to process to get your fund set up properly. We make that as easy as possible for you by sending you a “terms sheet” that defines most of the sections in our standard documents. These terms change from fund to fund. Using this method allows us to minimize your fees while still providing you with a customized and fully reviewed (both by us and by our attorney) set of documents. The terms sheet includes the following information:

A short description of the data requested;
A sample from a composite of hedge funds that we have helped our clients form;
A discussion of various alternatives you can consider; and
A place for you to define how you want your fund set up.

We review this data and consult with you regarding your choices. We will discuss any issue we identify, answer any questions you might have, and develop the first drafts of your documents. As we refine your choices and finalize certain information, we generate additional drafts for your review.

GreenTrader is not a law firm, we work on your hedge fund development (business, registration, tax and accounting) and utilize outside independent attorneys (as your liaison).

If you have any questions or would like to get started, please email hedgefunds@greencompany.com and/or call us.