Most U.S. hedge funds are formed as limited partnerships. Limited partnerships are intended to provide two benefits: flow-through tax treatment and limited liability for the limited partners. The hedge fund manager usually acts as the general partner and contributes a significant amount of capital to the fund. Section 5 of the Securities Act of 1933 (1933 Act) states that securities must be registered before they are sold, unless the securities are exempt from registration. In general, interests in a limited partnership are considered securities. Most hedge funds avoid cumbersome securities registration by claiming a "private offering" exemption under the safe harbor of Rule 506 of Regulation D under the 1933 Act. Under Rule 506, the general partner may not advertise to attract potential investors to the hedge fund. Rule 506 places no limit on the amount of the offering or the number of "accredited" investors. However, the number of "non-accredited" investors is limited to 35. If sales of interests in the hedge fund are made only to accredited investors, no specific disclosure to the investors is required. If sales are made to one or more non-accredited investors, the same kind of information must be provided as the investor would receive in connection with an offer of interests in a registered fund. Such information includes: audited financial statements, an opinion of counsel as to the legality of the securities being offered, the material tax consequences of investing in a limited partnership, risk factors, plan of distribution, and the use of proceeds.

If a hedge fund is claiming an exemption from registration based on the safe harbors provided by Regulation D under the 1933 Act, the fund must file a Form D with the SEC within 15 days after the initial closing of the hedge fund offering. Form D requires much less disclosure of information than is required by Section 5 of the 1933 Act.


source: CME