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  Legal Pitfalls to Avoid When Setting Up and Managing a Fund - Ron Geffner

Ron Geffner: Oftentimes, perspective clients come to our firm with a general sense of assets that they plan on managing. Either through a group of investors that they’ve spent their career developing relationships with or what’s called a C-transaction where some investor, either a family office or institutional investor, will be providing the manager with a significant amount of assets that justifies their launch of the product and their concern timing, their concern is cost, their concern is regulatory requirements, regulatory liability. Hopefully, most of them have spent their career focusing on downside risk, so it’s very logical for them to spend time focusing on that. Timing, a domestic fund should take, on average, four to six weeks, not including any regulatory requirements. An offshore fund is about six to eight weeks. Costs vary. It wouldn’t be fair for me to suggest one price fits all. It certainly doesn’t, it depends on the needs of the prospect.

Also, in many cases, they’ve never run a business prior and it’s finding somebody who they can go to to shepherd them not only through the process of forming the product, but helping them manage the product. I find and I’ve been very willing to give up my time to our clients that even after the product is launched and I’ve reached out to people, very few people want to maintain a very active and intimate relationship, which would be in their best interest to do that because we represent several hundred funds. Every day, there’s a different issue that arises for one of our clients, from which all of our other clients may find that they can learn from. Part of being a good lawyer is being a good business provider. There are a lot lawyers that can dot Is and cross Ts, that know how to draft placid memos, that’ll pick up the phone and answer you other than when I’m being interviewed now and I hear my phone ringing.

It’s oftentimes hard to get guidance from somebody, having to fire a person, having to hire people, make tough decisions, dealing with the regulatory issue and not knowing psychologically and emotionally how to handle that in the context of the business and knowing that you can go to your team necessarily to ask them a question unless you know the answer to your question and you’re trying to build support for it or having them vet it. What you want to do is surround yourself with people on the service side that act as your think tank, that they’re there – if it’s done correctly – to surround you for the next 20-30 years and those are the relationships I enjoy the most with our clients where we’ve learned so much about each other over the years that we can protect them from themselves at times and there’s no defenses or barriers put up. Don’t hire somebody if you don’t trust them. First and foremost, no matter what anybody tells you how wonderful they are, if you have a trust issue, don’t feel that you’re a priority in their lives, then you should consider an alternative option. Separately, if you’ve hired somebody and you feel that you’re not getting the right attention, have a constructive conversation with them.

Oftentimes, people will communicate their frustration about other service providers either their former lawyer or some other person who’s a counterparty and the best thing is to be straightforward with them and try to work with one another. It behooves you to stay in business with them. You asked what the biggest mistake that we often see people make is. We see this not only at the launch, we see this at times where managers are concerned about their revenue or their economic cost. The biggest mistake we see tenfold more often than any secondary mistake – while it seems self-serving, it is not intended to be that way – is people cutting corners. We’ve had people sign agreements with marketing firms, with employees, with seed capital, entering into pipe transactions or other agreements with their business and while they’re great at what they do and even if they were a lawyer because 10% of our clients are often people that have gone to law school or who had practiced law, but they’re no longer practicing is having your firm look at that information.

If you trust them, it won’t be an issue and if it’s an economic issue, you should sit down and discuss what the alternatives are with them. As silly as it sounds, a payment plan or maybe a referral then to another firm that’s within your budget, but you generally want somebody who does this every single day of their lives to look at the work and make sure it’s done in accordance and best served to protect you. There are times that no matter what experience any of us has, you need more than one set of eyes to look at it because it requires two or three people because it’s subjective or it’s a judgment call. It’s your business, it’s really, really important and if you don’t do that, we’ve seen breaches of contract that resulted in insider trading. We’ve seen the equivalent of indentured servitude. I’m not kidding, I thought slavery was out. We had a client who signed a contract with another firm where they were in a position unable to enforce their requirements, their service. We’d never guided the client in that regard.

While it’s uncommon, it happens more than I’d like – it’s still not the majority – but we see people from time to time modifying their own offering documents. What they don’t realize is it’s like breaking the seal on a warranty of a machine that you get from a manufacturer. If your document’s dated January 1, 2000 and it’s five years later and you go and you modify your document, you move the addresses and it’s that simple, you just change your date on your placid memo, you now have created a problem for everybody because the tax section that should be current as of the new five-year date may be aged and antiquated and stale. There may be other regulatory changes that have occurred, definitional terms. It also causes concern by your service providers as to what other changes is this person making or our name maybe in the document. We’ve seen people sometimes have a habit of doing it, so in a three-year period they’ll change it once. Another three-year period they change it a second time. All of a sudden, there are three versions of a document that have been received by different investors at different times and the changes were even clear because they maybe may have made a change in one sentence not realizing that there are representations that run contradictory to that one sentence and through other places. Now you have documents that are just wrong.

To give you a true life experience, a few months ago my phone rings. It’s an investor from a fund client of ours, didn’t understand the question. The client had given me a heads-up that this investor would call me. Investor makes a reference to a paragraph. I’m looking at the electronic copy I have of the document, it’s not in there. I asked the perspective investor to send me a copy of the document. They send me a copy of the document and fortunately for me and fortunately for our client, I knew the document was changed without our knowledge. In part, the easiest telltale was offshore accounts had moved from one firm to another and yet it was left with the correct partner’s name, but an incorrect firm’s name even though it was a newer deed. There were other changes that were embarrassing to the client. They lost the investor and we had to go through multiple iterations of the document, which then cost the fund tens of thousands of dollars more than it would have cost because we had to reverse engineer to whom documents were sent to, what do they say and trying to fix the paper trail. That’s just an example, but by far, that is the biggest issues we’ve seen with managers.