Company Name: DEF Fund
Public Availability Date: Dec. 07, 1983
INQUIRY LETTER 1
JONES, DAY, REAVIS & POGUE
ONE CENTURY PLAZA, SUITE 3600, 2029 CENTURY PARK EAST
LOS ANGELES, CALIFORNIA 90067
(213) 553-3939
June 16, 1983
Office of Chief Counsel
Division of Corporation Finance
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: DEF Fund Request for Rule
501(a)(5) and Rule 501(e)(1)
Gentlemen:
On behalf of the DEF Fund, an Ohio general partnership (the "Fund") we enclose
an original and seven copies of our request for confirmation that the Division
of Corporation Finance (the "Division") of the Securities and Exchange
Commission agrees that (i) if in connection with any particular investment, the
combined net worth of all Participants is sufficient to satisfy the standard set
forth in Rule 501(a)(5) when applied to such investment, the Fund will be an
"accredited investor" within the meaning of Rule 501(a) in connection with such
investment, and therefore in such instances, an excluded purchaser under
501(e)(1), and (ii) the Fund should be counted as one purchaser for the purposes
of calculating the number of purchasers under Rule 505(b) and 506(b) pursuant to
Rule 501(e)(2). For the purposes of interpreting whether or not the Fund is an
accredited investor as defined in Rule 501(a)(5) it may be assumed that in any
transaction herein relevant, the Fund will purchase at least $150,000 of the
securities being offered for the consideration of the types enumerated in Rule
501(a)(5) (i)-(iv).
The Fund was organized in 1980
as a general partnership under the laws of the state of Ohio to invest in
properties and business ventures or interests therein for the benefit of
partners in a professional partnership engaged in the general practice in, among
other areas, the corporate, securities, real estate and tax areas (the "Law
Firm"). Each partner of the Fund ("Participant") must be an active partner of
the Law Firm at the time of such persons admission as a Participant. The
organization of the Fund allows the partners of the Law Firm who so elect to
pool the collective expertise, credit and economic leverage for their purposes
of making investments which, because of (a) the time constraints involved in
professional practice, (b) credit requirements associated with such investments,
or (c) the amount to be invested, would otherwise be unavailable to individual
partners in the Law Firm, could be made only at substantially greater credit
cost or could not be made on negotiated terms. To date, the Fund has made seven
investments involving aggregate capital commitments of approximately two million
dollars ($2,000,000).
Since a primary purpose of the
Fund has been to pool the credit of partners, the Fund had to be organized as a
general partnership and, under applicable Ohio law, each Participant is jointly
and severally liable for each of the Funds obligations. The Partnership
Agreement provides, among other things, that no Participant may withdraw
voluntarily from the Fund without the consent of the Participants, that
participation in new investments by the Fund is limited to those who are active
partners in the Law Firm, that interests in the Fund are freely transferable
among those who are then Participants and that the Fund may acquire a
Participants interest in the Fund upon the death of such Participant or the
termination of such Participants status as a partner in the Law Firm.
The Fund is administered by an
Investment Committee consisting of Participants who are elected from time to
time by Participants having a majority of the capital interests in the Fund. In
addition to performing all routine administrative tasks for the Fund, the
Investment Committee, as the representative of Participants having a majority of
the capital interests in the Fund, is given broad powers and duties including
the following:
(1) To review all potential
investments and determine their suitability for the Fund. In this connection,
the Investment Committees duties include not merely an analysis of whether the
investment, as presented by the sponsors, is consistent with the Funds
investment objectives of capital appreciation from high quality investments, but
also whether the investment meets other investment guidelines of the Fund. These
include evaluation of the Funds and Participants fixed and contingent
liabilities by reason of credit obligations or other obligations associated with
the investment, credit requirements for the investment such that individual
participation by Participants would either be precluded or could occur only at a
credit cost substantially higher than the credit cost associated with Fund
borrowings, a minimum investment amount (usually not less than $200,000) such
that the Funds economic leverage will permit it to negotiate basic terms of the
investment at inception and will result in its ability to control or
significantly affect decisions subsequently made by all investors in the
investment and a variety of other criteria relating to a determination that the
investment would not be inconsistent with the interests and professional
obligations of the Law Firm.
(2) To make all investments
exclusively in the name of the Fund.
(3) To incur credit obligations
in connection with borrowings necessary to make investments or cover operating
costs of the Fund, to incur obligations to make deferred capital contributions
or deferred installment payments in connection with investments and to pledge
Funds property, obtain letters of credit or otherwise provide security for the
Funds obligations relating to any such borrowings or deferred or installment
payments.
If the Investment Committee
determines that a potential investment meets the Funds investment criteria, it
notifies all current Participants and all non-participating partners in the Law
Firm. To the extent that there is evidence of sufficient interest to make the
investment, the Investment Committee arranges a presentation of the investment
by the sponsors or underwriters, as the case may be. If there is sufficient
willingness to participate in the investment at the minimum levels fixed by the
Investment Committee, the Investment Committee will commit the Fund to the
investment.
All economic and tax incidents
associated with an investment are allocated to Participants who agree to provide
the capital for such investment in strict proportion to the capital they have
committed to supply. Nevertheless, the investment is made solely in the name of
the Fund. Sponsors or underwriters deal exclusively with the Fund through the
Investment Committee and are not aware of the identity or contribution levels of
particular Participants or manner in which the investment may be allocated among
Participants. The joint and several credit of the Fund is committed in
connection with the investment. Participants who choose not to participate in
particular investments, are nevertheless, as a matter of Ohio law, jointly and
severally liable in connection with all Fund obligations associated with the
investment and Fund property in which such Participants have an allocated
interest may be pledged to secure Partnership obligations in connection with
such investment. Such Participants are also jointly and severally liable for all
Fund expenses.
We have advised the Fund that,
in our opinion:
(1) If in connection with any
particular investment, the combined net worth of all Participants is sufficient
to satisfy the standard set forth in Rule 501(a)(5) when applied to such
investment, the Fund will be an "accredited investor" within the meaning of Rule
501(a) in connection with such investment, and therefore in such instances, an
excluded purchaser under 501(e)(1); and
(2) The Fund should be counted
as one purchaser for the purposes of calculating the number of purchasers under
Rule 505(b) and 506(b) pursuant to Rule 501(e)(2).
The Fund has not been organized
for the specific purpose of acquiring securities in connection with any
particular investment. As noted above, the principal purposes of the Fund are to
combine the credit of partners in the Law Firm for the purposes of permitting
them to obtain credit at rates more favorable than would be available to them
individually, to make investments of sufficient size so that the Funds economic
bargaining power permits it to negotiate the terms upon which investments will
be made and to exercise significant influence over decisions by all investors in
connection with such investments, to pool the available expertise of the
partners in the professional partnership and to increase the liquidity of each
such partner in connection with his investments by reason of his ability to
transfer his interest in the Fund to other Participants.
All Fund investments are made
in the name of the Fund, Participants, as such, do not participate directly with
entities in which the Fund has investments, all Participants become obligated
for all credit obligations associated with investments of the Fund, whether or
not they choose to participate in connection with any particular investment, and
no investment may be made by the Fund unless the Investment Committee has
approved the investment as being consistent with the investment objectives and
guidelines of the Fund. In this latter connection, since the Investment
Committee is designated by Participants having a majority of the capital
interests in the Fund, Fund investments require, in effect, the approval of at
least Participants having a majority of the capital interests in the Fund,
whether or not such Participants choose to participate in any particular
investment. The facts and circumstances relating to the Funds formation,
operation and purposes are clearly distinguishable from those recited in
connection with the below-referenced letters.
We believe that our opinion
with respect to the aggregation of net worths of the individual general partners
of the Fund is confirmed by the Divisions answer to question 18 in Sec. Act
Release No. 33-6455 (March 3, 1983) (the "Interpretive Release") and letter re
Smith Barney, Harris Upham & Co. dated July 14, 1982 ("Smith Barney").
We are mindful of the
Divisions positions in the answer to question 59 in the Interpretive Release
and letter re Madison Partners, Ltd. 1982-1 dated January 18, 1983 ("Madison
Partners") and letter re Kenai Oil & Gas, Inc. dated April 27, 1979 ("Kenai Oil
& Gas"). However, we believe that the facts and circumstances relating to the
Fund are clearly and substantively distinguishable from those described in the
Interpretive Release and replies to previous no-action requests involving
solicitations of limited partners in existing limited partnership to make
investment decisions in connection with possible participations in newly formed
entities or amendments to partnership agreements for the purposes of making
specific investments not contemplated in connection with the formation of the
limited partnerships.
Please confirm that the
Division will recommend that Rules 501(a) and 501(e) be interpreted in a manner
such that, under the facts and circumstances described in this letter, (i) that
the Fund is an "accredited investor" within the meaning of Rule 501(a) in
connection with each investment with respect to which the combined net worth of
the Participants meets the standard set forth in Rule 501(a)(5) and the
requirements of Rule 501(a)(5) are satisfied, and therefore, in such instances,
an excluded purchaser under Rule 501(e)(1) and, (ii) the Fund otherwise will be
counted as one purchaser for purposes of Rules 505(b) and 506(b).
Very truly yours,
Ronald L. Fein
INQUIRY LETTER 2
JONES, DAY, REAVIS & POGUE
1700 UNION COMMERCE BUILDING
CLEVELAND, OHIO 44115
TELEPHONE(216) 696-3939
October 26, 1983
Office of Chief Counsel
Division of Corporation Finance
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Supplement to June 16, 1983
DEF Fund Request for Rule 501(a)(5) and Rule
501(e)(1)
Gentlemen:
On behalf of the DEF Fund, an Ohio general partnership (the "Fund"), we enclose
an original and seven copies of this supplement to our letter dated June 16,
1983, requesting confirmation that the Division of Corporation Finance (the
"Division") of the Securities and Exchange Commission agrees that (i) if in
connection with any particular investment, the combined net worth of all
Participants is sufficient to satisfy the standard set forth in Rule 501(a)(5)
when applied to such investment, the Fund will be an "accredited investor"
within the meaning of Rule 501(a) in connection with such investment, and
therefore in such instances, an excluded purchaser under 501(e)(1), and (ii) the
Fund should be counted as one purchaser for the purposes of calculating the
number of purchasers under Rule 505(b) and 506(b) pursuant to Rule 501(e)(2).
Capitalized terms used in our letter dated June 16, 1983 will have the same
meaning when used herein.
You have asked us to confirm by
letter the following matters discussed during our conference of August 18, 1983:
1. The Fund was established and
operates as a significant component of the ancillary benefits provided to those
who are active partners of the Law Firm. It exists as an entity separate from
the Law Firm principally for reasons of administrative convenience. Accordingly,
no person may become a Fund Participant unless, at the time of his or her
admission as a Participant, such person is an active partner in the Law Firm.
Absent unusual circumstances, any Participant in the Fund who dies or otherwise
ceases to be an active partner in the Law Firm will be required to withdraw as a
Participant of the Fund. In no circumstance will a non-active partner or the
estate or representative of a deceased partner in the Law Firm be permitted to
participate in any new investment by the Fund.
A significant portion of the
Funds operating and overhead costs are treated as Law Firm expenditures.
Substantial support services provided to the Fund by the Law Firm include those
of partners, associates, paralegals and staff in investigating and evaluating
possible investments, negotiating the terms and conditions upon which
investments will be made, preparing and reviewing all investment documentation,
administering the Funds internal legal affairs and day-to-day operations,
monitoring the Funds various investments, counselling partners in the Law Firm
concerning the appropriateness of particular investments to their particular
circumstances, preparation of tax returns and a variety of ancillary services.
The costs of all such services as well as a variety of other incidental costs of
operating the Fund are borne by the partners of the Law Firm whether or not such
partners are Participants in the Fund and without regard to the extent of any
partners interest in the Fund.
2. The Fund effects a
substantial pooling of the capital and credit of its Participants with respect
to all investments. The decision to become a Participant in the Fund, therefore,
involves a commitment of capital and credit far in excess of that required in
connection with any particular investment of the Fund. Since all Participants
are general partners of the Fund, their joint and several credit is available to
the Fund with respect to all obligations of the Fund, including obligations
relating to investments to which one or more Participants have made no specific
capital commitment. The scope of the Funds investment activities are also
intended to be much broader than the investment interests or objectives of any
particular Participant. Consequently, partners in the Law Firm first electing to
become Participants in the Fund understand that they will incur joint and
several liability substantially in excess of their respective interests in
particular Fund investments.
Aside from contingent liability
associated with any investment, the Fund regularly incurs substantial liability
in connection with deferred capital contribution commitments. These are
frequently evidenced by promissory notes executed solely in the name of the
Fund. Since these obligations for deferred capital contributions are solely in
the name of the Fund, all those who are Participants at the time such
obligations are incurred are jointly and severally liable. In addition, the Fund
has regularly made short-term unsecured borrowings to cover operating cash flow
requirements and assist Participants in meeting their respective investment
obligations to the Fund. These short-term borrowings, often incurred in
connection with particular investments, have also been made solely in the name
of the Fund and on the joint and several credit of all of the Participants.
The Investment Committee of the
Fund is authorized to make, and has made, assessments for working capital
necessary to meet incidental out-of-pocket expenditures of the Fund. These
assessments are made on the basis of the relative amount of capital contributed
or committed to be contributed to the Fund by each Participant and have been
used to provide reimbursement for travel expenses or expenses of experts used in
connection with the evaluation of possible investments, including investments
ultimately rejected by the Fund.
3. Each prospective Fund
investment is approved or disapproved by a majority of the Funds Participants.
The Fund invests in particular investments only if the Investment Committee
approves and only at the level approved by the Investment Committee. The
Investment Committee is appointed by Participants in the Fund having a majority
of the aggregate capital commitments to the Fund. Although an individual
Participant may choose to fund a particular investment up to the level permitted
by the Investment Committee and be allocated a commensurate participation in it,
he can neither avoid financial responsibility resulting from a decision by the
Investment Committee that an investment should be made, nor cause the Fund to
make an investment on his behalf if it has been disapproved by the Investment
Committee. Those are collective partnership decisions; not individual decisions.
In summary, we believe that the
Fund is a single purchaser within the plain meaning of the express provisions of
Rules 505(b) and 506(b) which are the controlling provisions on this question;
that the Commissions position denying single purchaser status in the Madison
Fund and Kenai Oil & Gas no-action letters referred to in our June
16, 1983 letter involved facts clearly distinguishable from those set forth in
this and our June 16, 1983 letters, and circumstances clearly inconsistent with
the plain meaning of the express provisions of Rules 505(b) and 506(b) and
comparable provisions in Rule 146; and that the facts and circumstances
described in this and our June 16, 1983 letters establish that there is no
public policy or interest relating to the protection of investors to support an
interpretive position that the Fund should not be treated as a single purchaser.
We hope that this letter is
responsive to your request for confirmation of the matters set forth herein and
that the Division will recommend that Rules 501(a) and 501(e) be interpreted in
a manner such that, under the facts and circumstances described in this and our
June 16, 1983 letters, (i) the Fund will be an "accredited investor" within the
meaning of Rule 501(a) in connection with each investment with respect to which
the combined net worth of the Participants meets the standard set forth in Rule
501(a)(5) and the requirements of Rule 501(a)(5) are satisfied, and therefore,
in such instances, an excluded purchaser under Rule 501(e)(1) and, (ii) the Fund
otherwise will be counted as one purchaser for purposes of Rules 505(b) and
506(b).
Very truly yours,
Ronald L. Fein
Irvin A. Leonard
Enclosures
STAFF REPLY LETTER
November 7, 1983
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF CORPORATION FINANCE
Re: DEF Fund
Incoming letters dated June 16 and October 26, 1983
You have asked for interpretive advice as to the application of Rules 501(a)(5)
and 501(e) of Regulation D under the 1933 Act to the DEF Fund, a general
partnership organized to make certain investments. Specifically, you have asked
whether the DEF Fund may be regarded as a single purchaser for purposes of its
purchase of securities in offerings that are exempt under Regulation D and, if
so, whether the combined net worth of all the Funds general partners may be
considered in determining the net worth of the Fund.
On the basis of the facts
presented in your letters, this Division is of the view that the DEF Fund may be
treated as a single purchaser under Rule 501(e)(2). Further, the Division is of
the view that in considering whether the Fund is an accredited investor under
Rule 501(a)(5), the combined net worth of the general partners may be used to
satisfy the requirement in that provision that the total purchase price not
exceed 20% of the purchasers net worth at the time of sale.
Because these positions are
based on the representations in your letters, any different facts or conditions
could require different conclusions.
Sincerely,
David B.H. Martin, Jr.
Special Counsel
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