Prohibition Against General Solicitation

The offer and sale of securities within the United States is subject to concurrent federal and state regulation. In order to avoid the registration of securities offered to investors (e.g. interests in a domestic limited partnership or shares in an offshore corporation), the securities of hedge funds, domestic and offshore, are typically offered under the private placement "safe harbor" provisions of Regulation D or the safe harbor for offerings outside the United States pursuant to Regulation S of the Securities Act of 1933. Additionally, most states require notice filings and fees before investors may be solicited.

A hedge fund manager and any person acting on its behalf may not solicit an investment in the fund by any form of "general solicitation" or "general advertising." This includes any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, and any seminar or meeting whose attendees have been invited by any general solicitation or general advertising.

In the case of any relationship established as a result of a general solicitation or advertisement, a sufficient time must elapse between the establishment of the relationship and the investment in the hedge fund so that the offer will not be interpreted as being made via a general solicitation or advertising.

Establish A Pre-Existing Relationship

A pre-existing substantive relationship must exist between the hedge fund manager and the prospective investor prior to any solicitation to invest in the hedge fund. Once a pre-existing relationship exists between a prospective investor and the hedge fund manager, the manager may send a confidential private placement memorandum to such investor. Federal and state securities laws generally require that a placement memorandum be delivered to all non-accredited investors. In order to reduce liability, however, the manager, including any agents acting on its behalf, should provide all prospective investors with the most recent copy of the confidential private placement memorandum when soliciting an investment in the hedge fund.

Suitability

Prior to accepting an investment, the manager should have knowledge regarding the sophistication and financial condition of the prospective investor. Ordinarily, the manager will obtain knowledge of an investor's sophistication and financial condition by requiring a prospective investor to complete a questionnaire.

Using the Internet

Improper use of the Internet can expose a hedge fund and its manager to enforcement action by the SEC and jeopardize their ability to rely on the safe harbor of Regulation D or Regulation S of the Securities Act of 1933. A fundamental requirement of Regulation D and Regulation S is that there be no general solicitation or advertisement used in connection with the solicitation of an investment in a hedge fund. Hedge fund managers may not provide offering materials on a website, unless the offering materials are only provided to prospective investors who have a pre-existing substantive relationship with the manager.

Hedge fund managers establishing websites are advised to keep nominal information on the home page of a website, indicating the name of the hedge fund and requesting the viewer to provide their name and password to access additional information on any interior page. Contact information, past performance, investment strategy, experience of management and all other material specific to the hedge fund or the sponsor (assuming the sponsor is not registered as an investment adviser) should not be contained on the home page or any page that is accessible by the public. Hedge fund managers should not link any of the interior pages of their website to other websites.

A manager may supply information about the hedge fund on a third party's website if, in part, the following procedures are followed:

• The site is password protected;
• The home page of the site makes no reference to a specific hedge fund;
• The interior pages of the site are only available to prospective investors that complete a questionnaire establishing that they are "accredited investors;" and
• Prospective investors are required to wait 30 days following their qualification to access the site before investing in any of the posted funds (other than funds in which such prospective investor already has invested, has already been solicited or is already considering as an investment opportunity).

A hedge fund manager which posts information on a third party's website will not be deemed to be "holding itself out" to the public as an investment adviser if the posted information solely relates to a hedge fund and does not provide any information regarding other services or products offered by the manager.

Using Past Performance

The Investment Advisers Act of 1940 generally prohibits a hedge fund manager, regardless of whether it is registered as investment adviser, from engaging in any activity that is fraudulent, deceptive or manipulative. The staff of the U.S. Securities and Exchange Commission has defined these activities to prohibit certain forms of advertising.

Hedge fund managers must be careful to disclose all material facts when presenting past performance to prevent unwarranted inferences and may distribute either actual performance results or model performance results to prospective investors.

When distributing performance results, the following guidelines should be followed to avoid such performance results from being deemed misleading:

• Discuss the effect of any material market or economic conditions on the performance;
• Deduct performance and management fees, sales loads, brokerage commissions or other expenses that the investor would have paid;
• Indicate whether and to what extent the results reflect the reinvestment of dividends, gains or other earnings;
• Disclose the possibility of loss;
• When comparing results to an index, discuss all material differences relevant to the comparison; and
• Discuss any material conditions, objectives or investment strategies used to obtain the results portrayed.

Using Performance Achieved At a Prior Hedge Fund

Subject to any agreements that may have been entered into by a manager and his/her former employer, generally, a hedge fund manager may use the performance achieved while employed with another hedge fund, provided that:

• The hedge fund currently being managed and the hedge fund previously managed by the manager have substantially similarly investment objectives, policies and the strategies;
• No other person played a significant role in the day-to-day management of the previous fund;
• The previous hedge fund's performance is presented separately from the current hedge fund's performance with no greater prominence than the current hedge fund's performance; and
• There is clear disclosure that the current hedge fund and the previous hedge fund are separate funds and that the past performance of the previous hedge fund is not indicative of the past or future performance of the current hedge fund.

Distributing Past Recommendations

A hedge fund manager may distribute a list of past securities transactions provided that the list contains all of the securities transactions made within, at least, the last 12 months. The list of past securities transactions must include the name of each security, the date and nature (purchase or sale) of the transaction, the market price at the time that the security was purchased or sold, the price at which the transaction was executed and the present market price (or most recently practicable date) of the transaction. In addition, the first page of the list of the past recommendations, must also state: "It should not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities on this list."

Solicitors - Third Party Marketers

A hedge fund manager, regardless of whether it is registered as an investment adviser, may engage solicitors, commonly referred to as third party marketers, to introduce prospective investors to the manager. Solicitors normally enter into a referral fee agreement with the manager, whereby the solicitor receives a monthly fee (presumably, for reimbursement of expenses), a percentage of the performance fee generated, if any, as well as the management fee, from any investor introduced to the manager by the solicitor. Although referral fee agreements may be terminated by either party, referral fee agreements usually require the sponsor to continue paying the solicitor the percentage of income generated from the performance and management fees charged to the investor introduced by the solicitor until such time that the investor no longer maintains an investment relationship with the manager.

In connection with soliciting investments in a hedge fund, solicitors are subject to the same legal limitations as the hedge fund manager and its employees and affiliates.

In order to receive compensation for having introduced an investor to a hedge fund manager, under both federal and state securities laws:

• Solicitors may need to be registered representatives of a registered broker-dealer; and
• The agreement governing the relationship between the hedge fund manager and the solicitor should be entered between the manager or an affiliate thereof, and the registered broker-dealer employing the solicitor.

A hedge fund manager should avoid posting information on a website maintained by a third party solicitor.

Conducting Due Diligence on the Solicitor

Prior to engaging a solicitor, a hedge fund manager should conduct due diligence. If the manager does not possess the skill set necessary to conduct due diligence, it should employ a professional to conduct due diligence on the solicitor. Key areas of concern include:

• The solicitor's conflicts of interest, such as a clear disclosure of all sources of income received by the solicitor and other hedge fund managers represented by the solicitor;
• The method and level of due diligence conducted by the solicitor of each prospective investor;
• The information provided by the solicitor to prospective investors;
• The licenses (e.g. Series 7) held by the solicitor;
• The sources and amount of capitalization of the solicitor. Determine whether the solicitor's business is properly funded; and
• The corporate structure of the solicitor and the identity of its principals.

Entering into an Agreement with a Solicitor

Solicitation fees paid to a solicitor should only be paid pursuant to a written agreement between the manager and the solicitor. The existence of the agreement must be disclosed to each prospective investor introduced by the solicitor. The written agreement typically contains the following information:

• A description of the services to be provided by the solicitor;
• The amount of compensation to be paid to the solicitor and the circumstances of payment (e.g. will the solicitor be compensated for a referral by a person previously referred);
• A carve out of prospective investors with whom the sponsor of the manager has already established a relationship but who have yet to make an investment in the specified product;
• Representations by the solicitor that it will perform its services in compliance with applicable law and pursuant to the terms of the referral fee agreement;
• A description of the products for which the solicitor has been engaged to raise assets (e.g. a specific hedge fund, all of the hedge funds in existence at the time of entering into the solicitation agreement or including all hedge funds to be formed in the future);
• Indemnification from the solicitor's actions;
• Representations that the solicitor will provide a written disclosure document to prospective investors containing:
  • The name of the solicitor;
  • The name of the manager and the product;
  • The nature of the solicitor's and manager's relationship; and
  • A statement that the solicitor will be compensated by the manager and the terms of such compensation.

A hedge fund manager should receive from each prospective investor introduced by a solicitor, prior to or at the time of accepting an investment in a hedge fund, a signed and dated acknowledgment of receipt of the solicitor's written disclosure statement and, if applicable, a copy of Part II of the manager's Form ADV or its equivalent.

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