Key Terminology

Accredited Investor

The federal securities laws define the term accredited investor in Rule 501 of Regulation D as:

  • a bank, insurance company, registered investment company, business development company, or small business investment company;
  • an employee benefit plan, within the meaning of the Employee Retirement Income Security Act, if a bank, insurance company, or registered investment adviser makes the investment decisions, or if the plan has total assets in excess of $5 million;
  • a charitable organization, corporation, or partnership with assets exceeding $5 million;
  • a director, executive officer, or general partner of the company selling the securities;
  • a business in which all the equity owners are accredited investors;
  • a natural person who has individual net worth, or joint net worth with the person’s spouse, that exceeds $1 million at the time of the purchase, excluding the value of the primary residence of such person;
  • a natural person with income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years and a reasonable expectation of the same income level in the current year; or
  • a trust with assets in excess of $5 million, not formed to acquire the securities offered, whose purchases a sophisticated person makes.

High Water Mark

When a private fund deploys a high water mark, the managers of the fund agree that they will only take their incentive fee if the limited partners account is above the highest value reported for the account.  As an example:  Let’s say you invested $50,000 and the fund did well and generated $5,000 of profit, then the manager would take their incentive fee (which varies by fund) but for this example we will use 20%.  So your account has a value after the incentive fee is taken of $54,000.  The next quarter your account is down to $52,000.  The manager will not take their incentive fee until your account is above $54,000 which is the “high water mark.”

Mark To the Market

Mark to the market is a method used by private funds to determine the value of the fund on the closing date of the period (which could be monthly, quarterly etc and is defined by the offering document.) Mark to the market simply means the fund will take the closing value of all its positions as per the market price to determine the value of the overall fund.  Once this “mark” is determined, individual investor account values are then calculated after fees.

Private Offering Document or Offering Memorandum

These terms are used interchangeably and refer to the full disclosure document and details that govern the private investment fund. It will include risk disclosures, methodology of the fund, management of the fund, fees, accounting, legal governance and your rights as a limited partner.  This document is typically extensive and can be as many as 100 pages.  An investor should read the offering document and not let the size or legal language in the opening deter them from understanding the rules of the fund.  Many fund managers will supply supplemental material that is written in an easier to understand format but this material does not replace the offering memorandum and an investor should understand what the Offering Memorandum includes.

Subscription Document

The subscription document is included with the Private Offering Memorandum and may be the appendix or a separate document.  The Subscription document is the application to participate in the investment offering. So, if you were to decide you wanted to become an investor, you would be required to complete the subscription documents in full and submit it to the fund’s management with your investment dollars.