Cryptocurrency hedge fund attorney Adam S. Tracy explains how crypto based hedge funds can comply with the requirements of the Investment Company Act.
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A former competitive rugby player, serial entrepreneur and, trader attorney, Adam S. Tracy offers over 17 years of progressive legal and compliance experience in the areas of corporate, commodities, cryptocurrency, litigation, payments and securities law. Adam’s experience ranges from commodities trader for oil giant BP, initial public offerings, M&A, to initial coin offerings, having represented both startups to NASDAQ-listed entities. As an early Bitcoin adapter, Adam has promoted growth of cryptocurrency and offers a unique approach to representing crypto-clients. Based in Chicago, IL, Adam graduated from the University of Notre Dame with dual degrees in Finance and Computer Applications and would later obtain his J.D. and M.B.A. from DePaul University. Adam lives outside Chicago with his six animals, which is illegal where he lives.
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TRANSCRIPTION:
There are an abundance of crypto funds out there, and many of them aren’t complying with the Investment Company Act. And, there are two main exemptions from the Investment Company Act 3: the 3C1 Fund and the 3C7 Fund. A 3C1 Fund limits you a 100 owners, right? So think of a 100 investors or 99 if you’re set up in a general partnership, because general partner counts as one, and so you’re exempt from registration up until and including the point where you hit 100 investors. You can use 506, you can sell to non-accredited and other elements of reg D, and you’re exempt from registration. If you want go over 100 investor limit, then you’re a 3C7 Fund. The 3C7 Fund says you can go up to two thousand investors, but those investors have to be qualified, and that qualified status is actually higher than accredited, right? So qualified purchasers must have at least 5 million in investments, or if they’re an entity, the entity must be owned by qualified purchasers. So you have the flexibility of having far more investors, but yet you have the threshold for obtaining those investors as much higher. So it’s something to obviously consider when you’re structuring your funds. Do you want to have one large fund that’s a 3C7 but perhaps limits the the pool of investors, or do you separate that and have multiple funds, right, to stay as a 3C1 Fund and have different funds that are each themselves exempt under 3C1. But there’s a multitude (I see him everyday) of crypto related hedge funds, and people kind ignore the Investment Company Act because they think that they don’t necessarily qualify as one because they’re doing crypto or what have you. But you do, because irrespective the oldest debate and discussion on what exactly crypto is from a legal perspective, you’re not selling crypt. What you’re selling is a security, because you’re selling a, you know, purchase interest — a unit interest in the fund, right, a limited partnership interest. So you’re definitely within the ambit of the securities world. Just the underlying assets may or may not be securities. But you know, there’s been hedge funds for everything from racehorses to cargo containers, so in those each were under the ambit or within the exemption from the Investment Company Act. So that’s my two cents. Adam Tracy. Check me out. TracyFirm.com, at@tracyfirm.com and hope to hear from you. Thanks.
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