The private placement memorandum is important for three major functions: disclosure, explanation, and marketing. Although the first two functions are related, they should be considered separately in order to underscore the regulatory component of each new fund. A pnvate placement memorandum must explain to potential investors the fund's operations, features, and strategies. Part and parcel of this explanation is the disclosure of risks associated with investment and features an investor would reasonably consider in determining whether to invest in the fund. Finally, the pnvate placement memorandum should sell the fund, so a significant portion should be dedicated to the fund management and other items the promoters consider to represent benefits of the fund, all in accordance with the disclosure requirements.
The partnership agreement/operating agreement is the document that actually supports the operational functions and disclosures made in the pnvate placement memorandum. This document is the seminal document of the fund operations, dictating how the fund will be managed, and should be controlling in the event of an inconsistency or discrepancy between it and the pnvate placement memorandum.
Strategies for Giving the Most Favorable Terms to the Fund
Because the fund must sell itself to the market, terms are often dictated by the market itself. Strategically, it is important for fund promoters to be cognizant of the fact that most fund terms interrelate and the impact of changes to one term may have negative effects on other terms. Perhaps the best way for fund promoters to gain the most favorable terms is by demonstrating to the market the fund's benefits and how it is differentiated from other funds. After all, gaining favorable terms for the fund is a function of nsk versus reward. The fund and its promoters can keep more favorable terms if they can decrease the nsk component to the potential investors. Typically, major fund economic terms should be fleshed out in principle during the initial evaluation stage of fund organization (i.e., taking the executive summary to the market). At this time, the market will enlighten the promoters on what will be acceptable terms, and thereafter the fund should be built around these terms, with only minor modifications made later.