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December 14, 2006

New Minimum Net Worth for Hedge Fund Investors : $2.5 Million

posted by MR WAVETHEORY at 12/14/2006 05:18:00 PM
The SEC raised the minimum net worth for a hedge fund investor from $1 million to $2.5 million Wednesday.

The proposals include the following:

* Antifraud Provision under the Investment Advisers Act of 1940. The proposal would make it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements or to otherwise defraud investors or prospective investors in that pool. The rule would apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act. Under the proposed rule, a pooled investment vehicle would include any investment company and any company that would be an investment company but for the exclusions in sections 3(c)(1) or 3(c)(7) of the Investment Company Act.

* Amendments to Private Offering Rules under the Securities Act of 1933. The proposals would define a new category of accredited investor that would apply to offers and sales of securities issued by hedge funds and other private investment pools to natural persons. The proposed definition would include any natural person who (a) meets either the net worth test or income test specified in rule 501(a) or rule 215, as applicable, and (b) owns at least $2.5 million in investments, as defined in the proposed rules.

The five-person agency approved the new increase unanimously. The SEC is next expected to put the proposal out for public comment before making a final decision later. The vote marked the first change since 1982, when the minimum net worth requirement-known as the accredited investor standard-was set at $1 million.

The proposal also made it fraudulent for a hedge fund to make false or misleading information to its clientele.

The hedge fund industry has grown to its current size via expanding from its original investor base of rich people and institutional clientele to include the more mainstream investor. According to the HFN Asset Flow Report, the asset class is at $1.786 trillion worldwide. Although the new requirement will not impact those already invested, the new minimum will shut the door to a lot of less affluent people who would have otherwise sought entry into the asset class.

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