Company Name: Robert T. Willis, Jr., P.C.
Public Availability Date: 01-18-1988
INQUIRY LETTERRobert T. Willis, Jr., P.C.
Eight Piedmont Center, Suite 315
Atlanta, Georgia 30305
TELEPHONE (404) 233-5534 September 25, 1987 Mr. Richard Wulff
Chief
Office of Small Business Policy
Stop 7-10
The Securities and Exchange Commission
450 5th Street, NW
Washington, D.C. 20549 RE: OPINION REQUESTED FOR NON-INVESTMENT COMPANY POOLED FUND
REGULATION D-RULE 505 AND 506 Dear Mr. Wulff: The purpose of this letter is to ask you to confirm I correctly understand the
law set forth in this letter concerning the above referenced matter (questions
summarized at the end of the letter). My Firm has been a registered investment
advisor under the 1940 Act since 1983 (file number 801-18528). We are, and since
our original registration have been, in good standing with the SEC. The Firm
manages investment portfolios for individuals and small pension plans. The
investments utilized are primarily government and corporate bonds, money market
instruments, and high quality blue chip-type stocks. Most of our account sizes
range from $300,000 to $1,000,000. We do not advertise in any manner and
essentially all of our new business comes from referrals. We simply act as
decision-makers and have no affiliation, direct or indirect, with any broker.
Each client has a separate custodial account with an independent bank or
brokerage firm. Each account is managed separately and in accordance with that
account's written investment policy. We meet with each client every three or
four months to review their portfolio and provide them written portfolio
reports. OBJECTIVE OF PROPOSED FUND Over the last 18 months or so, several of our pension clients have asked us
about managing personal accounts for executives of the company. For example, the
executives who are also trustees of the company plan have been pleased with the
way we have managed the plan assets and want us to independently manage some
personal funds for them. This is the most common need we want to address. Less
importantly, we occasionally are referred clients who are under our minimum
account size and who we do not accept. Our minimum account size is $400,000. For
those existing clients who want us to accept a personal account, and for new
referrals, both of which are under our minimum account size of $400,000, we want
to establish a commingled fund. The fund would probably have a $100,000 unit size, although we might make a few
exceptions for a $25,000 to $50,000 unit size. It would simply be a balanced
fund and essentially managed in the same manner as our separate accounts. It is not economical for us to accept and manage 20 new $100,000 accounts.
However, if we could accept those same 20 $100,000 investors, and pool them
together so that we could manage one pooled account, it would be more economical
for us. And, each individual investor in that fund would benefit from better
diversification, reduced brokerage commissions on larger lots, etc. The
following facts are pertinent to the registration requirements: 1) The fund would always have less than 100 investors. 2) A public offering would not be made. 3) There would be no advertising. The initial investors would be existing
clients whom we have had an investment relationship with for over one year and
whom have previously expressed an interest in us managing funds for them.
Thereafter, new investors would come to us by referral. There would be no
mailings, or other forms of advertisement or solicitation. 4) Although the fund would be open-ended and receive new investors' funds on an
ongoing and continuous basis, it would never receive more than $5,000,000 in any
twelve month period. 5) Cumulatively, the fund would never have more than 35 non-accredited
investors. NATURE OF FUND ENTITY The fund will be a limited partnership with our Firm as the corporate general
partner and investment advisor to the fund. All the investors will be limited
partners. There will be a written limited partnership agreement. Each investor
will receive a quarterly statement. The partnership will not be subject to tax
and will be treated as a conduit with the tax characteristics flowing out
pro-rata to each partner. A major brokerage firm or bank will be the custodian for the fund. As with all
existing separate clients, the firm will never have custody or control over the
assets or provide brokerage. It will simply have investment management
discretion. The partnership agreement will include the written investment
management agreement with our firm. The only fund expense will be the investment management fee of 1.5% of assets
(on an annualized basis-billed quarterly). There will be no brokers involved to
sell the fund, therefore there will be no sales commissions or charges in any
manner. For each $1 an investor invests in the fund, the entire $1 will be
invested undiminished by any expenses. All accounting, legal, and other related
expenses will be borne by our firm in setting up the fund. So there will be no
set up or initial sales charges to come out of the investors' investment in the
fund. The only charge will be the quarterly investment management fee which will
be charged to the overall fund so each investor's account will be charged
pro-rata. The fund will be open-ended and will accept new investors on an ongoing and
continuous basis. However, it will never receive more than $5,000,000 during any
twelve month period. NOT AN INVESTMENT COMPANY Pursuant to Section 3(c)(1) of the 1940 Act, the proposed fund, nor my Firm,
would be considered an "investment company". That is because there will always
be less than 100 investors and there will be no public offering. The non-public
offering guidelines specified by Reg. D Rule 505 and 506 will be met. REGULATION D-RULE 505 AND 506 The fund would never have more than 35 non-accredited investors. Actually, we
plan to have as few as 10 or 15 non-accredited investors, if any. To summarize,
the requirements of Rules 505 and 506 will be met because: .The fund nor the Firm is an investment company. .There will always be less than 100 investors. .There will be no public offering and no advertising. .There will always be less than 35 non-accredited investors. .There will be no broker or salesmen involved and therefore no sales
commissions. No underwriter will be involved. .The fund will receive less than $5,000,000 during any twelve month period. DISCLOSURE REQUIREMENTS The only filing requirement with the SEC would be Form D. The issuer (my Firm),
or the securities, would not be subject to any other registration, filing or
disclosure requirements with the SEC. If the fund had no non-accredited investors, there would be no disclosure
requirements whatsoever to the investors. If there are any non-accredited
investors, then a memo including the information required by part I of Form S18
would be required to be given to each investor (accredited and non-accredited). Even if we had no non-accredited investors, we plan to provide each investor
(accredited or non-accredited) a letter or memo that contains the information
required by part I of Form S18. That memo would also include the partnership
agreement and investment management contract. This would simply be a protective
measure on our part to make sure we have covered all the bases and we would also
sent a copy of this memo to the SEC (recognizing such a copy to the SEC is not
required). The partnership fund interests (units) will be non-transferable and
non-resalable. Each unit will include a legend regarding transfer restrictions. SPECIFIC QUESTIONS We respectfully request the SEC to write us addressing the following: 1) Is our overall understanding of the securities law and SEC rules as outlined
above correct? If not, please specify where our understanding is wrong. 2) Do we correctly understand the investment company definition excludes the
fund and the firm being classified as an investment company? 3) Do we understand Reg. D Rule 505 and 506 correctly and would we qualify
thereunder? 4) Do we understand the disclosure requirements regarding Form D correctly? 5) Do we understand the disclosure requirements regarding the S18 memo (Part I
of S18) correctly? 6) Regarding the audited financial statement requirement, we do not believe it
is material to the investors' understanding of the fund. The initial financial
statement would be totally immaterial as the fund would only have a minimum
capitalization of $100 or so. There would be no assets or liabilities to report.
Even after the fund was established and new investors came to us by referral;
the financial statements of the fund would be immaterial to their understanding
of how their money would be managed. The most recent custodian's report (such
custodian being independent, separate and not affiliated with our Firm), that
would provide a list of all the investment assets, would be the only pertinent
financial information. We could provide this custodian's report to the investor.
As to the financial statements on our investment management firm, again, they
would be immaterial. Closely-held corporations pay out all the earnings as
compensation or retirement plan benefits and essentially the only assets are
office furniture and equipment. There are no liabilities except for current
accounts payable and payroll taxes. Accordingly, are we correct that providing
investors audited financial statements would not be required because they would
not be material or significant to an investor's understanding of how the fund
will be operated? 7) Form S18 Part I does not require an exhibit including an opinion of legal
counsel. Our disclosure memo would make it clear that legal counsel's opinion
had not been obtained regarding the securities, the issuer, tax, or any other
matter. It would make it clear each investor would have to consult its own legal
counsel concerning these matters. Am I correct that it is not necessary, nor it
is it required in this situation, for legal counsel's opinion to be obtained?
And, am I correct that a legal counsel's opinion is not required by Part I Form
S18? 8) As long as the fund receives less than $5,000,000 from additions by existing
fund investors and/or initial investments by new fund investors, in any twelve
month period, the open-ended nature of the fund is immaterial and will not
effect the funds ability to qualify for exemption treatment under Rule 505 and
506? 9) The foregoing excludes the securities and the issuer from SEC registration? Your response to these items would be very much appreciated. If you have any
questions, please call me. Respectfully yours, ROBERT T. WILLIS, JR., P.C. Robert T. Willis, Jr., CPA, CFA RTWjr/ab cc: Secretary of States: Georgia, Florida, North Carolina
South Carolina and Tennessee STAFF REPLY LETTERDecember 17, 1987 RESPONSE OF THE OFFICE OF SMALL BUSINESS POLICY
DIVISION OF CORPORATION FINANCE RE: Robert T. Willis, Jr., P.C.
Incoming letter dated September 25, 1987 You have requested that the Division take a no-action position with respect to
the availability of Regulation D for a proposed transaction. As the Commission
stated in its adopting release for Regulation D, the staff will not issue
no-action letters on whether or not transactions satisfy the requirements of the
regulation. Your letter, however, does present interpretive issues to which we
will respond. We understand that your firm, a registered investment adviser under the
Investment Advisers Act of 1940, presently manages investment portfolios for
individuals and small pension plans. You propose to establish an open-end fund
(the "Fund") in the form of a limited partnership with your firm acting as the
general partner and investment adviser. You intend to conduct the offering under
Rules 505 and 506 of Regulation D. You indicate that interests in the Fund would be offered to existing clients and
to new investors through referrals. Rule 505 and 506 offerings are subject to
the prohibition on general solicitation or general advertising found in Rule
502(c). This Division has interpreted this provision to require in most cases a
substantive relationship between an issuer or its agents and the offerees before
commencement of a securities offering. If interests in the Fund are offered to
persons who may not have had a prior existing relationship with the issuer, we
would be unable to conclude that there would be no general solicitation for
purposes of Rule 502(c). You are of the view that the disclosure requirements of Form S-18 are applicable
to your proposed offering if any sales are made to non-accredited investors.
Regulation D does not require that specific information be furnished to
purchasers if an issuer sells to only accredited investors. However, if sales
are made to non-accredited investors, the issuer is required to furnish the
information specified in Rule 502(b)(2). Rule 502(b)(2)(i)(A) directs a
non-reporting issuer to Form S-18 as a guide for the preparation of its
Regulation D disclosure document. The rule further provides that if Form S-18 is
not available to the issuer, it should follow that form of registration that the
issuer would be entitled to use. Because Form S-18 may not be used by an
investment company, the Division is of the view that Form N-1A, the registration
statement for open-end management investment companies, should be referred to in
complying with Rule 502(b)(2)(i)(A). Under Rule 502(b)(2)(i) an issuer is obligated to furnish the information
specified by the applicable form "to the extent material to an understanding of
the issuer, its business, and the securities being offered." If the information
called for by the form is not material to an investor's understanding, the
issuer may elect to present alternative information. Whether information is
material to investors depends upon the facts and circumstances attending each
case which only the issuer will know and be able to evaluate. Accordingly, this
Division is unable to express a view as to the materiality of audited financial
information in a Regulation D disclosure document, because the issuer is in the
best position to assess this matter based upon the particular facts and
circumstances of its offering. It should be noted however that Form N-1A
specifically requires the presentation of certain financial information. Rule 502(b)(2)(iii) provides that the issuer need not furnish the exhibits that
are required as part of a registration statement if the issuer identifies the
contents of the exhibits and makes them available to purchasers upon written
request prior to purchase. Part C of Form N-1A specifies the exhibits which are
required to be filed with the Commission. The contents of these exhibits should
be identified, and the exhibits should be made available to purchasers upon
written request. You indicate that interests in the Fund will be offered on a continuous basis
and that the Fund will not receive more than $5,000,000 in any twelve month
period. If interests in the Fund are offered under Rule 506, there would be no
limitation on the offering amount. However, if interests are also offered
pursuant to Rule 505, the maximum amount of the offering would be $5,000,000.
You should be aware that the scope of an offering is not defined as any 12 month
period. If Fund interests are offered pursuant to Rule 505, the offering amount
may not exceed $5,000,000 regardless of whether the offering continues for one
year or a longer time period. If the Rule 505 offering is terminated and
followed by a waiting period of at least 6 months, a new Rule 505 offering may
then commence. However, the offering amount of the second offering must be
reduced by sales made within the prior 12 month period. The Division of Investment Management has asked us to inform you that Section
3(c)(1) of the Investment Company Act of 1940 ("Act"), excepts from the
definition of an investment company any issuer whose outstanding securities are
beneficially owned by not more than one hundred persons and that is not making
and does not presently propose to make a public offering of its securities. The
representations in your letter of September 25, 1987, indicate that interests in
the proposed fund will be beneficially owned by less than 100 persons and will
not be sold in a public offering. Based on these representations, it appears
that your proposed fund would be excepted from the definition of investment
company by virtue of Section 3(c)(1). You should note that while offerings made in conformity with Rule 506 of
Regulation D are deemed not to involve a public offering for purposes of Section
3(c)(1), offerings made in compliance with Rule 505 are not necessarily
non-public within the meaning of the Act. See e.g., San Jose Capital Corp. (pub.
avail. Feb. 14, 1983), in which the staff declined to take a no-action position
under Section 3(c)(1) where the issuer was making an offering in reliance on
Rule 505. Rule 506 sets forth conditions under which an offer and sale of
securities will be deemed not to involve any public offering within the meaning
of Section 4(2) of the Securities Act. In contrast, Rule 505 exempts an issue of
securities under Section 3(b) of the Securities Act and does not purport to
cover transactions not involving any public offering. Thus, whether an offering
made under Rule 505 is a non-public offering within the meaning of the Act will
depend on all the facts and circumstances. Because these positions are based upon the representations made to the Division
in your letter, it should be noted that any different facts or conditions might
require different conclusions. Sincerely, John D. Reynolds
Special Counsel
Office of Small Business Policy
|
