Close Menu Navigation
Open Categories Menu Non-Accredited Investors in Hedge Funds
Many start-up hedge fund managers want to know if their friends and family can invest in the start-up hedge fund. Most of the time, such friends and family do not fall within the definition of accredited investor under the Regulation D rules. The regulation D rules allow a maximum of 35 non-accredited investors to invest in any single offering. Because a hedge fund offering is continuous, the limit of 35 non-accredited investors is cumulative. That means that over the life of the fund there can be no more than 35 non-accredited investors (as opposed to 35 non-accredited investors in the fund at any single point in time).
While some managers will allow non-accredited investors to invest in their hedge fund, many managers will not because of two reasons. The first reason is that non-accredited investors, by definition, do not have as many assets and therefor are unlikely to make a significant investment into the hedge fund. Often the costs of having an investor with a small contribution outweigh the benefits of having the investor in the fund (especially if the fund is nearing the 99 investor requirement under Section 3(c)(1)). Such investors also probably will not fall within the definition of qualified clients so the manager would probably not be able to charge these investors a performance fee which is one reason managers will prefer not accept non-accredited investors if possible.
The second reason why managers tend to disallow non-accredited investors into the fund is that there is a perceived bias by regulators toward the non-accredited investor. In the event that the fund loses money, state securities regulators are going to be more sympathic towards a non-accredited investor than an accredited investor all things being equal. While we have seen no empirical studies suggesting this is the case, we feel this is probably a justified perception.
Typically hedge funds with non-accredited investors will need to have a yearly audit. This is in contrast to hedge funds without non-accredited investors which can, if properly documented in the hedge fund offering documents, choose whether or not to have an audit (although the default for most hedge funds is to have a yearly audit).
If you are contemplating having non-accredited investors in the hedge fund, you should discuss the pros and cons of this option with your hedge fund attorney. For related articles, please see:
[...] hedge funds utilize. Of great importance for hedge fund managers, the letter below discusses how non-accredited investors should be treated for the purpose of [...]
[...] Answer: I am not quite sure how this would happen but I believe there might be two separate ways. First, the investor may have lied in the hedge fund subscription documents. The subscription documents require the investor to make certain representations regarding the investor’s net worth. Generally hedge fund managers have no duty to inquire further about the representations made in the subscription documents. If this happens then generally the investor will not receive the protections under the law for non-accredited investors. [...]
[...] Non-Accredited Investor [...]
[...] Non-Accredited Hedge Fund Investors [...]