Private Equity

Many investors seek out investment alternatives to traditional stocks and bonds. Investing in non-publicly traded companies can be risky. But it may offer higher profits. Private equity investments offer an alternative to the stock market. However, private equity funds are still regulated by federal securities law.

Before investing in or getting involved with a private equity fund, make sure you understand the risks and security regulations. Talk to an experienced private equity lawyer for legal advice about private equity investment activities.

What Is Private Equity?

Private equity is an alternative investment strategy for investors to diversify from traditional stocks and bonds. Private equity funds are less regulated and volatile, but they can mean bigger returns for beneficial owners. Private equity often uses money from institutional investors and high-net-worth people.

Private equity involves investments in companies that are not part of public stock exchanges. Private equity firms can invest money in private companies or public companies with the aim of selling the companies later for a profit. Venture capital fund and hedge fund groups can also use private equity funds.

Who Manages Private Equity Funds?

Private equity funds are actively managed investments. Funds are usually organized as limited partnerships for a set period of time. Investment professionals manage the fund and identify investment opportunities. Investment managers generally operate as general partners, while investors act as limited partners.

Private equity fund managers have a fiduciary duty to the equity fund investors. Under federal securities laws, private fund managers are fiduciaries. They have fiduciary duties — whether or not it’s a registered fund with the U.S. Securities and Exchange Commission (SEC).

Fund managers have a duty of loyalty and a duty of care. They can’t waive their duties. Their duties generally require:

• Performing adequate due diligence
• Managing in the best interests of the fund
• Monitoring investment performance
• Disclosing any conflicts of interests

Is Private Equity Regulated by Federal Securities Laws?

Several federal and federal laws regulate investments and securities. This applies to both public and private investment management. Federal securities laws include:

• Securities Act of 1933
• Securities Exchange Act of 1934
• Investment Company Act of 1940
• Investment Advisers Act of 1940
• Sarbanes-Oxley Act of 2002
• Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010
• Jumpstart Our Business Startups Act of 2012

Private equity funds are securities under the Securities Act. The securities must be registered with the SEC. If the funds invest in private portfolio companies, these stocks or securities may also be registered with the SEC.

Federal securities laws apply to some private equity investments. But many securities laws only apply to public offerings. Under private placement rules, some securities laws don’t apply to private equity investments.

Regulation D has additional exceptions from securities regulation requirements. Rule 506 provides an exemption for accredited investors or those considered financially sophisticated purchasers. This rule limits some general solicitation and advertising.

How Do Private Equity Funds Differ From Public Investment Funds?

Private equity funds are separate from publicly traded investments. They don’t have the same registration and reporting requirements as public investments. Qualifying private investments are exempt from some federal registration requirements. However, federal law still regulates the conduct of fund manager advisers. Even with exemptions from some federal regulations, the SEC still regulates most private fund advisers.

What Are the Advantages of Private Equity Investments?

The primary draw for investing in private equity is the chance for higher returns on investments. Typically, private equity investments perform better than traditional stocks. Many of these private funds also have lower volatility than other high-return investments. Investing in private equity funds is also another way for investors to diversify their portfolios.

What Are the Disadvantages of Private Equity Investment Vehicles?

Private equity investments aren’t for everyone. They’re generally aimed at sophisticated investors who understand the risks involved in unregistered securities. Exempted private equity funds without securities registration requirements have less transparency for investors when evaluating the investment.

Private equity funds don’t have the liquidity of traditional stocks. Investments are often tied up for 10 years or more. These are long-term investments, and they aren’t bought and sold like public stocks. Private equity investment often requires high minimum investments. High minimums are more than most investors can afford.

How Can a Securities Law Attorney Help? 

Private equity investments involve large amounts of money. You need to protect your investments if there are problems with how the fund manager handles fund assets. Dishonest equity managers can self-deal or fail to disclose conflicts of interest. If you have questions about private equity disputes, talk to an experienced private equity lawyer.