consequences of such failure could be devastating to the prospects of such company, which in
turn could negatively affect the performance of the Fund.
Dependence on Reimbursement and Third-Party Pricing Policies for Products
The ability of the Fund’s portfolio companies to commercialize any product candidate
successfully also will depend in part on the extent to which reimbursement for these products
and related treatments will be available from government health administration authorities,
private health insurers and other organizations. Government authorities and third-party
payors, such as private health insurers and health maintenance organizations, decide which
medications they will pay for and establish reimbursement levels. A major trend in the U.S.
healthcare industry and elsewhere is cost containment. Government authorities and third-party
payors, particularly Medicare, have attempted to control costs by limiting coverage and the
amount of reimbursement for particular medications. Increasingly, third-party payors are
requiring that drug companies provide them with predetermined discounts from list prices and
are challenging the prices charged for medical products. Portfolio companies cannot be sure
that coverage and reimbursement will be available for any product that they commercialize,
and, even if these are available, the level of reimbursement may not be satisfactory.
Reimbursement may affect the demand for, or the price of, any product candidate for which a
portfolio company obtains marketing approval. Obtaining and maintaining adequate
reimbursement for a portfolio company’s products may be particularly difficult because of the
higher prices often associated with drugs administered under the supervision of a physician or
because a drug may be administered in combination with other drugs that may carry high
prices. A portfolio company may be required to conduct expensive pharmacoeconomic studies
to justify coverage and reimbursement or the level of reimbursement relative to other therapies.
If coverage and adequate reimbursement are not available or reimbursement is available only to
limited levels, a portfolio company may not be able to successfully commercialize any product
candidate for which it obtains marketing approval. This, in turn, could negatively affect the
performance of the Fund.
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There may be significant delays in obtaining reimbursement for newly approved drugs, and
coverage may be more limited than the purposes for which the drug is approved by the FDA or
similar regulatory authorities outside the United States. Moreover, eligibility for reimbursement
does not imply that any drug will be paid for in all cases or at a rate that covers a portfolio
company’s costs, including research, development, manufacture, sale and distribution. Interim
reimbursement levels for new drugs, if applicable, may also not be sufficient to cover a portfolio
company’s costs and may not be made permanent. Reimbursement rates may vary according to
the use of the drug and the clinical setting in which it is used, may be based on reimbursement
levels already set for lower cost drugs, and may be incorporated into existing payments for
other services. Net prices for drugs may be reduced by mandatory discounts or rebates required
by government healthcare programs or private payors and by any future relaxation of laws that
presently restrict imports of drugs from countries where they may be sold at lower prices than
in the United States. Third-party payors often rely upon Medicare coverage policy and payment
limitations in setting their own reimbursement policies. A portfolio company’s inability to
promptly obtain coverage and profitable payment rates from both government-funded and
private payors for any approved products that a portfolio company may develop could have a
material adverse effect on its operating results, its ability to raise capital needed to
commercialize products and its overall financial condition. This, in turn, could negatively affect
the performance of the Fund.
Political Risk; Current and Future Healthcare Reforms
Political events can have an impact on pharmaceutical and biotechnology companies. There can
be no guarantee that government’s role in the healthcare industry will not adversely impact the
performance of the Fund.
In both the U.S. and foreign markets, sales of healthcare products and services and their success
will depend in part on the availability of reimbursement from third-party payors such as
government health administration authorities, private health insurers, and other organizations.
The levels of revenues and profitability of providers of healthcare products and services may be
affected by the continuing efforts of governmental and third-party payors to contain or reduce
the costs of health care. Significant uncertainty exists as to the reimbursement status of newly
approved health care products. There can be no assurance that a company’s proposed products
or services will be considered cost-effective or that adequate third-party reimbursement will be
available to enable a company to maintain price levels sufficient to realize an appropriate return
on its investment.
Moreover, there continues to be significant interest among policy makers and government and
private payors in the United States and foreign jurisdictions in promoting changes in healthcare
systems to contain healthcare costs and improve the overall quality of care and wellness.
For example, on March 23, 2010, President Obama signed into law the Patient Protection and
Affordable Care Act, which Congress modified pursuant to the Health Care and Education
Reconciliation Act of 2010 (collectively, the “Act”). The Act expands insurance coverage to
more individuals, which could have a negative impact on the pharmaceutical industry. Among
the aspects of the Act that may have an adverse impact on the Fund are (i) mandatory annual
fees on pharmaceutical manufacturers, (ii) discounts of 50% on brand name prescription drugs
for certain Medicare Part D beneficiaries (i.e., those who are required to pay 100% of their
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prescription drug costs during the temporary “gap” from Medicare coverage until their
prescription drug costs reach the threshold for catastrophic coverage by Medicare), (iii) an
approval process for generic biologics and granting exclusive marketing rights to original
manufacturers for 12 years, (iv) increased drug rebates to the Medicaid program, and (v)
disclosure requirements for financial relationships between various healthcare entities.
Within the U.S., the pharmaceutical industry has been a particular focus of both state and
federal governments’ reform efforts. Other than reform measures adopted in the Act, proposed
reforms include, but are not limited to, the following:
• increasing regulation of pharmaceutical sales representatives;
• restricting direct to consumer advertising and off-label uses;
• limiting manufacturers’ access to marketing data;
• authorizing the importation of drugs from Canada and other foreign countries to lower
pharmaceutical costs to U.S. consumers;
• price discounts, formularies or rebates to government healthcare programs; and
• allowing government healthcare programs to negotiate prescription drug prices directly
with manufacturers.
While the Fund cannot predict which legislative or regulatory proposals will be adopted or
what affect the adopted proposals, including the Act, may have on the biopharmaceutical
companies in which the Fund invests, the pendency, approval or implementation of such
proposals could decrease the Fund’s anticipated returns or adversely affect its investment
opportunities.
Availability of Investment Capital
Many portfolio companies will require several rounds of capital infusions before reaching
maturity. The Fund and its co-investors may not provide all necessary follow-on capital to
portfolio companies. Accordingly, third-party sources of financing may be required. There is
no assurance that such additional sources of financing will be available, or, if available, will be
on terms beneficial to the Fund. Furthermore, the Fund’s capital is limited and may not be
adequate to protect the Fund from dilution resulting from multiple rounds of portfolio
company financings. If the Fund does not have capital available to participate in subsequent
rounds of financing, failure to participate may have a significant negative impact on the
portfolio company as well as the value of the Fund’s investment.
Economic and Market Risk
Companies in which the Fund invests may be sensitive to general downward swings in the
overall economy or in the healthcare technology sector. Changes in economic conditions,
including, for example, inflation rates, industry conditions, competition, technological
developments, political and diplomatic events and trends, tax laws and innumerable other
factors, none of which will be within the control of the General Partner, can affect substantially
and adversely the business and prospects of the Fund. A major recession or adverse
developments in the securities market might have an impact on some or all of the Fund’s
investments. In addition, factors specific to a portfolio company may have an adverse effect on
the Fund’s investment in such company. The General Partner may rely upon its own or a
portfolio company’s projections concerning the portfolio company’s future performance in
making investment decisions. Such projections are inherently subject to uncertainty and to
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certain factors beyond the control of the portfolio company and the General Partner. The
economic environment for all companies, and in particular for healthcare technology and startup
companies, may remain challenging. Business risks may be more significant in portfolio
companies embarking on a build-up or operating turnaround strategy and in smaller or
development stage portfolio companies. All portfolio companies may face intense competition,
changing business and economic conditions, risks of technological acceptance and obsolescence
or other developments that may adversely affect their performance.
Illiquidity of Portfolio Investments
Investments by the Fund generally will be illiquid securities acquired through privately
negotiated transactions. The Fund may be unable to realize its investment objectives by sale or
other disposition at attractive prices or will otherwise be unable to complete an exit strategy.
External factors beyond the General Partner’s control, such as overall economic conditions, the
competitive environment and the availability of potential acquirors of the Fund’s interests in
portfolio companies may shorten or lengthen the Fund’s holding period in such portfolio
companies. In some cases, the Fund may be prohibited by contract from selling such securities
for a period of time or otherwise may be restricted from the disposition of such securities.
Lack of Operating History
The Fund and the General Partner are newly formed entities, and, accordingly have no
operating history or investments upon which investors can evaluate the potential performance
of the Fund. The prior performance of the Fund Managers or their investments as described in
this Memorandum is not necessarily indicative of the Fund’s future results. There can be no
assurance that investments by the Fund will achieve returns comparable to the historical
performance reflected in this Memorandum, and in any event, the returns achieved by the Fund
will be subject to the Management Fee and the General Partner’s carried interest. Any given
investment made by the Fund may prove to be worthless, and there is a risk that investors
could lose money.
No Assurance of Profit or Distributions
The Fund’s task of identifying opportunities in private and public operating companies,
managing such investments and realizing a significant return for investors is difficult. Many
organizations operated by persons of competence and integrity have been unable to make,
manage and realize such investments successfully. There is no assurance that the investments
of the Fund will be profitable or that any distribution will be made to the Limited Partners.
Any return on investment to the Limited Partners will depend upon successful investments
being made by the Fund. The marketability and value of any such investment will depend
upon many factors beyond the control of the Fund. The Fund may not have sufficient cash
available to make tax distributions to the Partners. The expenses of the Fund may exceed its
income, and the Limited Partners could lose the entire amount of their contributed capital.
Accordingly, prospective investors should not subscribe to the Fund unless they can readily
bear the consequences of such a loss.
Competition
The business of identifying, structuring and implementing venture capital investments, along
with other investments within the strategy of NLV-III is highly competitive. The Fund will be
competing for investments against other groups, including institutional investors, investment
managers and industrial groups owned by large and well-capitalized investors. It is possible
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that competition for appropriate investment opportunities may limit significantly the number of
opportunities available to the Fund and adversely affect the terms upon which investments can
be made. There can be no assurance that the Fund will be successful in its efforts to identify
attractive investment opportunities, and it is possible that the Fund’s Commitments will not be
fully utilized if sufficient attractive investments are not identified and consummated by the
Fund during the Investment Period.
Management of the Fund
The General Partner will make decisions with respect to the management of the Fund. Limited
Partners have no right or power to take part in the management of the Fund. The Limited
Partners will not receive the detailed financial information issued by portfolio companies that
will be available to the Fund. Accordingly, the Limited Partners will not have the opportunity
to evaluate the relevant economic, financial and other information that will be utilized by the
General Partner in its selection of investments. An investor in the Fund must rely upon the
ability of the General Partner with the assistance of the Management Company to identify,
structure, and implement investments consistent with the Fund’s investment objectives and
policies. Accordingly, no person should purchase Limited Partner Interests unless such person
is willing to entrust all aspects of the management of the Fund to the General Partner.
Reliance on Management of Fund
The success of the Fund will be largely dependent upon the activities of the Fund Managers.
The loss of one or more of these individuals could have a significant adverse impact on the
business of the Fund and its financial performance.
Reliance Upon Portfolio Company Management
Although the Fund may seek representation on the board of directors of each of the portfolio
companies or otherwise provide management and strategic planning assistance, the Fund will
not have an active role in the day-to-day management of the companies in which it invests. To
the extent that the senior management of a portfolio company performs poorly, or if a key
manager of a portfolio company terminates employment, the Fund’s investment in such
company could be adversely affected.
Potential Conflicts of Interest
The Fund Managers will continue to devote a portion of their time to the business of the Sprout
Funds, NLV-I, NLV-II and to any future funds that they may organize in accordance with the
Partnership Agreement. Conflicts may arise in the allocation of investment opportunities and
the Fund Managers’ time among the Fund and other such partnerships and any such future
funds. Prospective investors should be aware that there may be occasions when the General
Partner, the Fund Managers, the Management Company and their affiliates will encounter
potential conflicts of interest in connection with the Fund’s activities. The Partnership
Agreement will contain certain protections for Limited Partners against conflicts of interest
faced by the General Partner and its partners, but will not purport to address all types of
conflicts that may arise. Moreover, as a practical matter, it may be difficult for Limited Partners
to subject the behavior of the General Partner, the Management Company and their partners to
close scrutiny.
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Profits Not Shared in Proportion to Contributed Capital
The capital contribution of the General Partner will represent only a small portion of the Fund’s
capital. Limited Partners may invest greater amounts and may receive a proportionately
smaller amount of the profits of the Fund than the General Partner. The General Partner may
have an incentive to make investments that are riskier or more speculative than if the General
Partner received allocations on a basis identical to that of the Limited Partners in the Fund or
was compensated on a basis not tied to the performance of the Fund.
Investment Opportunities
The General Partner may in certain circumstances allocate investment opportunities to prior
funds or potential successor funds. Allocation of investment opportunities will be made in
good faith by the General Partner. There can be no assurance that the allocation of investment
opportunities by the General Partner will not give rise to conflicts of interest between the
investors of the respective funds.
Long-Term Investment
An investment in the Fund is a long-term commitment, and there is no assurance of any
distribution to the Limited Partners prior to or upon liquidation of the Fund.
Illiquidity of Limited Partner Interests
The Limited Partner Interests are highly illiquid. There is no public market for the Limited
Partner Interests and none is expected to develop. Limited Partner Interests in the Fund may
not be assigned, transferred or encumbered without the prior written consent of the General
Partner. Voluntary withdrawals of Limited Partner Interests are not permitted, except in
limited circumstances where necessary to comply with laws or regulations applicable to a
Limited Partner. Consequently, a Limited Partner may not be able to liquidate their investment
in the event of a change in circumstances or for other reasons and, therefore, must be prepared
to bear the risks of owning its interest in the Fund for an extended period of time. The Limited
Partner Interests will not be registered under the Securities Act of 1933, as amended (the
“Securities Act”), or under the various “Blue Sky” or securities laws of the state or jurisdiction
of residence of any Limited Partner of the Fund. The Limited Partner Interests are being offered
only to “accredited investors” under an exemption in Section 4(2) of the Securities Act and the
rules of the Securities and Exchange Commission thereunder and exemptions under the various
applicable “Blue Sky” and other state securities laws.
Bridge Financings and Guarantees
From time to time, the Fund may lend to portfolio companies on a short-term, unsecured basis
or guaranty portfolio company obligations in anticipation of a future issuance of equity or longterm
debt securities. Such bridge loans would typically be convertible into a more permanent,
long-term security; however, for reasons not always in the Fund’s control, such long-term
securities may not issue and such bridge loans or guarantees may remain outstanding. In such
event, the interest rate on such loans or compensation for such guaranty (if any) may not
adequately reflect the risk associated with the unsecured position taken or guaranty given by
the Fund.
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Portfolio Company Leverage
To the extent that any investment is made in a portfolio company with a leveraged capital
structure, such investment will be subject to increased exposure to adverse economic factors
such as a significant rise in interest rates, a severe downturn in the economy or deterioration in
the condition of such company or its industry. If such a company is unable to generate
sufficient cash flow to meet principal and interest payments on its indebtedness, the value of
any equity investment by the Fund in such company could be significantly reduced or even
eliminated.
Investments in Public Companies
The Fund may invest in public companies or take private portfolio companies public.
Investments in public companies may subject the Fund to risks that differ in type or degree
from those involved with investments in privately held companies. Such risks include, without
limitation, greater volatility in the valuation of such companies, increased obligations to
disclose information regarding such companies, limitations on the ability of the Fund to dispose
of securities at certain times (including due to the possession by the Fund of material non-public
information), increased likelihood of shareholder litigation against such companies’ board
members, which may include the Fund Managers or other Management Company personnel,
regulatory action by the U.S. Securities and Exchange Commission and increased costs
associated with each of the aforementioned risks.
Hedging Techniques
From time to time, the Fund might have investments that are publicly traded, yet illiquid. The
General Partner might engage in hedging techniques, such as selling the corresponding shares
short “against the box,” to “lock in” or secure the value in an investment until it becomes liquid
and freely tradable. The Fund will only sell short a stock to the extent it holds a corresponding
long and illiquid position in the same company.
Portfolio Trading
The Fund does not generally intend to trade its assets for short-term profits, however, when
circumstances warrant, securities may be sold by the Fund without regard to the length of time
held. Any active short-term trading of the Fund will increase its rate of turnover and related
transaction expenses.
Non-U.S. Investments
The Fund may invest a portion of Fund’s total committed capital in the securities of issuers that
are organized outside of the U.S. and Canada. Investing in non-U.S. securities may involve
substantially greater risks than investing in U.S. securities including risks relating to (i) currency
exchange matters, including fluctuations in the rate of exchange between the U.S. dollar and the
various foreign currencies in which the Fund’s non-U.S. investments are denominated, and
costs associated with conversion of investment principal and income from one currency to
another; (ii) differences between the U.S. and non-U.S. securities markets, including potential
price volatility in and relative illiquidity of some non-U.S. securities markets; (iii) the absence of
uniform accounting, auditing and financial reporting standards, practices and disclosure
requirements, and differences in government supervision and regulation; (iv) certain economic
and political risks, including potential exchange control regulations, potential restrictions on
foreign investments and repatriation of capital and the risks associated with political, economic
or social instability, diplomatic developments, and the possibility of expropriation or
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confiscatory taxation; and (v) the possible imposition of non-U.S. taxes on income and gains
recognized with respect to such securities. While the General Partner will take these factors into
consideration in making investment decisions for the Fund and intends to manage the Fund in a
manner to minimize exposure to the foregoing risks, there can be no assurance that the General
Partner will be able to evaluate the risks accurately or that adverse developments with respect
to such risks will not adversely affect the value or realization of investments that are held by the
Fund in certain countries.
Reserves
As is customary in the industry, the General Partner may establish reserves for follow-on
investments by the Fund in portfolio companies, operating expenses (including the
Management Fee), Fund liabilities, and other matters. Estimating the appropriate amount of
such reserves is difficult, especially for follow-on investment opportunities, which are directly
tied to the success and capital needs of portfolio companies. Inadequate or excessive reserves
could impair the investment returns to the Limited Partners. If reserves are inadequate, the
Fund may be unable to take advantage of attractive follow-on or other investment opportunities
or to protect its existing investments from dilutive or other punitive terms associated with “payto-play”
or similar provisions. If reserves are excessive, the Fund may decline attractive
investment opportunities or hold unnecessary amounts of capital in money market or similar
low-yield accounts.
Diverse Investors
The Limited Partners may have conflicting investment, tax, and other interests with respect to
their investments in the Fund. The conflicting interests of individual Limited Partners may
relate to or arise from, among other things, the nature of investments made by the Fund, the
structuring or the acquisition of investments and the timing of disposition of investments. As a
consequence, conflicts of interest may arise in connection with decisions made by the Fund
Managers, including with respect to the nature or structuring of investments that may be more
beneficial for some Limited Partners than for others, particularly with respect to investors’
individual tax situations. In selecting and structuring investments appropriate for the Fund, the
General Partner will consider the investment and tax objective of the Fund and the Partners as a
whole, not the investment, tax or other objective of any Limited Partner individually.
Failure of Limited Partners to Fulfill Their Commitment Obligations
The Fund’s investments in portfolio companies will require capital calls on Limited Partners
over an extended period of time. Failure by a Limited Partner to meet a capital call could result
in the failure of the Fund to make desired investments, which could have adverse consequences
for the Fund and thus all of the Limited Partners. The failure by the Fund to receive a
significant portion of capital contributions due from Limited Partners in respect of their
Commitments could materially impair the Fund’s ability to realize its financial objectives. In
the event that a Limited Partner defaults, such Limited Partner may be subject to various
penalties, including forfeiture of all or a portion of its interest in the Fund, as provided in the
Partnership Agreement.
Risk of Dilution
Limited Partners subscribing for interests at subsequent closings will participate in existing
investments of the Fund, diluting the interest of existing Limited Partners therein. Although
such Limited Partners will contribute their pro rata share of prior capital contributions
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previously drawn down by the Fund (plus an additional amount thereon), there can be no
assurance that such payment will reflect the fair value of the Fund’s existing investments at the
time such additional Limited Partners subscribe for such interests.
Difficulty in Valuing Portfolio Investments and Distribution in Kind
Generally, there will be no readily available market for a substantial number of the Fund’s
investments and hence, most of the Fund’s investments will be difficult to value. The securities
in which the Fund will invest may be among the most junior in a portfolio company’s capital
structure, and thus subject to the greatest risk of loss. It is highly speculative as to the whether
and when a portfolio company will be able to register its securities so that the securities become
eligible for trading in public markets. Certain investments may be distributed in kind to the
Partners of the Fund. An investor that receives assets other than cash from the Fund may incur
costs and delays in converting those assets to cash.
Non-Controlling Investments
The Fund generally expects to make non-controlling investments in portfolio companies where
the Fund may not be able to control or effectively influence the business or affairs of such
entities. Portfolio companies in which the Fund’s investments are made may have economic or
business interests or goals which are inconsistent with those of the Fund, and the Fund may not
be in a position to influence those interests or goals or otherwise protect the value of the Fund’s
investments in such entities. In addition, although the Fund may seek board representation in
connection with its investments, there is no assurance that such representation, if sought, will
be obtained.
Service on Board of Directors
The Fund typically will seek to have observation or visitation rights or the right to designate
directors to serve on the boards of directors of the Fund’s portfolio companies. In addition,
affiliates of the General Partner may serve, from time to time, as officers or directors of the
portfolio companies. The foregoing rights and activities could expose the General Partner, its
affiliates and the assets of the Fund to regulatory action and/or lawsuits and claims by a
portfolio company, its security holders and its creditors. While the General Partner intends to
manage the Fund in a way that will minimize exposure to these risks, the possibility of
successful claims or lawsuits or adverse regulatory action cannot be eliminated, and such events
could have significant adverse effects on the Fund.
Material Non-Public Information
By reason of their responsibilities in connection with their other activities, certain affiliates of
the General Partner may acquire confidential or material non-public information or be
otherwise restricted from initiating transactions in certain securities. The Fund will not be free
to act upon any such information. Due to these restrictions, the Fund may be not be able to
initiate a transaction that it otherwise might have initiated and may not be able to sell an
investment that it might otherwise might have sold.
In their capacity as officers or directors, affiliates of the General Partner will be subject to
fiduciary or other duties to the portfolio company, which may adversely affect the Fund. For
example, the Fund may be prohibited from selling publicly traded securities of a portfolio
company if the General Partner or any of its affiliates is in possession of material non-public
information relating to such company.
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Recourse to the Fund’s Assets
The Fund’s assets, including any investments made by the Fund and any funds held by the
Fund, are available to satisfy all liabilities and other obligations of the Fund. If the Fund
becomes subject to a liability, parties seeking to have the liability satisfied may have recourse to
the Fund’s assets generally and will not be limited to any particular assets, such as the asset
representing the investment giving rise to the liability. Accordingly, investors could find their
interest in the Fund’s assets adversely affected by a liability arising out of an investment of the
Fund.
Contingent Liabilities on Disposition of Investments
In connection with the disposition of an investment in a portfolio company or otherwise, the
Fund may be required to make representations about the business and financial affairs of the
portfolio company typical of those made in connection with the sale of any business. The Fund
may also be required to indemnify the purchasers of such portfolio company to the extent that
any such representations turn out to be inaccurate. These arrangements may result in
contingent liabilities, which might ultimately have to be funded by the investors to the extent of
their Commitment to the Fund or previous distributions made to them.
Certain Litigation Risks
The Fund will be subject to a variety of litigation risks, particularly if one or more of its portfolio
companies face financial or other difficulties during the term of the Fund. Legal disputes,
involving any or all of the Fund, the General Partner, its partners or its affiliates, may arise from
the Fund’s activities and investments and could have a significant adverse effect on the Fund.
Indemnification
The Fund will be required to indemnify, among others, the General Partner, the general partner
of the General Partner, the Management Company, the Fund Managers, their respective
partners, members, employees, venture partners and affiliates, the Fund’s other agents and
members of the Advisory Board for liabilities incurred in connection with the affairs of the
Fund. Such liabilities may be material. For example, in their capacity as directors of portfolio
companies, the partners, managers, or affiliates of the General Partner may be subject to
derivative or other similar claims brought by security holders of such companies. The
indemnification obligations of the Fund would be payable from the assets of the Fund,
including the unused capital commitments of the Partners. If the assets of the Fund are
insufficient to pay such indemnification obligations, the Limited Partners may be required to
return distributions previously made to them in order to satisfy such obligations.
Changes
The Fund’s investment program is intended to extend over a period of years, during which the
business, economic, political, regulatory, and technology environment within which the Fund
operates may undergo substantial changes, some of which may be adverse to the Fund. The
General Partner will have the exclusive right and authority (within limitations set forth in the
Partnership Agreement) to determine the manner in which the Fund shall respond to such
changes, and Limited Partners generally will have no right to withdraw from the Fund or to
demand specific modifications to the Fund’s operations in consequence thereof. A major
recession or adverse developments in the securities or credit markets might have an impact on
some or all of the Fund’s investments. A sustained period of inactivity and/or low valuations
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in the public equity markets could result in substantially lower liquidation values and
substantially longer periods before liquidity is achieved in comparison with historical values,
which would reduce the returns that could be achieved by the Fund. In addition, factors
specific to a portfolio company may have an adverse effect on the Fund’s investment in such
company. The General Partner may rely upon its own or a portfolio company’s projections
concerning the portfolio company’s future performance in making investment decisions. Such
projections are inherently subject to uncertainty and to certain factors beyond the control of the
portfolio company and the General Partner. Prospective investors are particularly cautioned
that the investment sourcing, selection, management and liquidation strategies and procedures
exercised by partners of the General Partner in the past may not be successful, or even
practicable, during the Fund’s term.
Industry Specific Terminology
Prospective investors are cautioned that certain terms and phrases of common usage within the
venture capital industry may be misleading to those unfamiliar with such usage. In particular,
individuals who participate in the management of a fund often are referred to, in a colloquial
sense, as “general partners” even though they are not actually general partners of any
partnership. Prospective investors are reminded that the Fund will be a limited partnership,
that the General Partner will be a limited partnership, that the general partner of the General
Partner will be a limited liability company, and that the individuals directing the management
of the Fund through the General Partner will be members of such limited liability company. It
is not intended that the Fund will have any general partner other than the General Partner or
that any actual general partnership will in any manner be associated with the formation,
operation, dissolution or termination of the Fund. Prospective investors must not presume or
rely upon the existence of any actual legal entities other than the Fund, the General Partner and
the general partner of the General Partner. With respect to all matters involving industry
specific terminology, prospective investors are urged to consult with their own legal and other
advisors.
Fund and General Partner Not Registered
The Fund will not be registered under the Investment Company Act of 1940, as amended (the
“Investment Company Act”) pursuant to an exemption set forth in Sections 3(c)(1) and/or
3(c)(7) of the Investment Company Act. There is no assurance that such exemptions will
continue to be available to the Fund. Due to the burdens of compliance with the Investment
Company Act, the performance of the Fund’s investment portfolio could be materially
adversely affected, and risks involved in financing portfolio companies could substantially
increase, if the Fund becomes subject to registration under the Investment Company Act.
Neither the Fund nor its counsel can assure investors that, under certain conditions, changed
circumstances, or changes in the law, the Fund may not become subject to the Investment
Company Act or other burdensome regulation. The General Partner is not registered as a
broker/dealer under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) and
with the National Association of Securities Dealers, Inc. (the “NASD”) and is consequently not
subject to the record keeping and specific business practice provisions of the Exchange Act and
the rules of the NASD.
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Tax Risks
Certain tax risks relating to an investment in the Fund are discussed in Section XI “Certain Tax
& ERISA Considerations”, which prospective investors should read carefully. No assurances
can be given that current tax laws, rulings and regulation will not be changed during the life of
the Fund. Prospective Limited Partners should consult their tax advisors for further
information about the tax consequences of purchasing a Limited Partner Interest in the Fund.
Withholding and Other Taxes
The General Partner intends to structure the Fund’s investments in a manner that is intended to
achieve the Fund’s investment objectives and, notwithstanding anything contained herein to the
contrary, there can be no assurance that the structure of any investment will be tax efficient for
any particular investor or that any particular tax result will be achieved. In addition, tax
reporting requirements may be imposed on investors under the laws of the jurisdictions in
which investors are liable to taxation or in which the Fund makes portfolio investments.
Prospective investors should consult their own professional advisors with respect to the tax
consequences to them of an investment in the Fund under the laws of the jurisdiction in which
they are liable to taxation. Furthermore, the Fund’s returns in respect of its investments may be
reduced by withholding or other taxes imposed by jurisdictions in which the Fund’s portfolio
companies are organized.
Confidential Information
The Partnership Agreement will contain confidentiality provisions intended to protect
proprietary and other information relating to the Fund and the Fund’s portfolio companies. To
the extent that such information is publicly disclosed, competitors of the Fund and/or
competitors of its portfolio companies, and others, may benefit from such information, thereby
adversely affecting the Fund, its portfolio companies and the General Partner and the economic
interests of Limited Partners.
Written Agreements
The Fund, the General Partner and the Management Company will be authorized, without the
approval of any Limited Partner, to enter into side letters or similar written agreements with
Limited Partners that have the effect of establishing rights under, or altering or supplementing
the terms of this Memorandum, the Partnership Agreement, such Limited Partner’s
Subscription Agreement or other related agreements. The ability of other Limited Partners to
receive copies of and/or elect to receive the benefit of such side agreements will be limited.
Market volatility
Since 2008, the capital, credit and securities markets have been experiencing unprecedented
levels of volatility and disruption. Ongoing volatility could negatively impact the Fund in a
number of ways. Many of the investments purchased, held and sold on behalf of the Fund may
be complex, and their market values will be highly sensitive to market changes. Overall Fund
returns may be reduced as relatively small changes in the capital, credit or securities markets
may have significant impacts on the profitability of Fund investments. In addition, the U.S.
Congress and regulatory agencies may adopt new financial regulations and tax policies in
response to continued volatility, which could restrict the Fund’s investment options and be
otherwise unfavorable to the Fund.
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Regulatory Changes
On June 22, 2011, to implement provisions of Title IV of the Dodd-Frank Wall Street Reform and
Consumer Protection Act, the U.S. Securities and Exchange Commission (the “SEC”) adopted
final rules implementing new exemptions from the registration requirements of the Investment
Advisers Act of 1940 (the “Advisers Act”), one of which is commonly known as the venture
capital fund exemption. Neither the General Partner nor the Management Company is currently
expected to register as an investment adviser with the SEC in reliance on the venture capital
fund exemption. The General Partner may need to take into consideration certain conditions
regarding the nature of investments that may be made by investment vehicles advised by an
investment adviser relying on the venture capital exemption, which may constrain the Fund’s
investment flexibility or require certain non-qualifying investments to be disposed of earlier
than they might otherwise be. In addition, compliance with the venture capital fund exemption
may subject the Fund to limitations on the Fund’s operations, including limitations on the
Fund’s ability to borrow, provide guarantees and make short-term investments that are more
restrictive than any limitation set forth in the Partnership Agreement.
Reliance on the venture capital exemption also will necessitate reporting certain information to
the SEC about the Management Company, the General Partner and their affiliates and may
result in such entities being subject to SEC examination authority and certain Advisers Act
compliance obligations. If the General Partner and the Management Company are able to rely
on the venture capital exemption, investors in the Fund will not be entitled to the benefits of
certain protections under the Advisers Act. If the General Partner or the Management Company
cannot rely on the venture capital exemption, the General Partner or the Management Company
may need to register as an investment adviser under the Advisers Act. Registration under, and
compliance with, the Advisers Act could be costly and could divert attention of the Fund’s
management team. There also can be no assurance that statutory, regulatory, judicial or
administrative interpretations of existing laws and regulations will not in the future impose
more comprehensive or stringent requirements on the General Partner or the Management
Company.
Cautionary Statements Regarding Forward-Looking Statements. Certain information
contained in this Memorandum constitutes “forward-looking statements,” which can be
identified by the use of forward-looking terminology such as “may,” “will,” “should,” “expect,”
“anticipate,” “project,” “estimate,” “intend,” “continue,” or “believe,” or the negatives thereof
or other variations thereon or comparable terminology. Such forward-looking statements,
including the intended actions and performance objectives for the Fund, involve known and
unknown risks, uncertainties and other important factors that could cause actual results,
performance or achievements of the Fund to differ materially from any future results,
performance or achievements expressed or implied by such forward-looking statements.
Although this information was prepared by the General Partner based on its experience in the
industry and on assumptions of fact and opinion as to future events that the General Partner
believed to be reasonable when made, no representation is made or assurance given that such
statements, views, projections or forecasts are correct or that the objectives of the Fund will be
achieved or that investors will receive a return of their capital. Moreover, neither the Fund nor
the General Partner, nor any of their affiliates, assumes responsibility for the accuracy and
completeness of any forward-looking statements. All forward-looking statements in this
Memorandum speak only as of the date of this Memorandum. The Fund, the General Partner
and their affiliates expressly disclaim any obligation or undertaking to disseminate any updates
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or revisions to any forward-looking statement contained herein to reflect any change in its
expectation with regard thereto or any change in events, conditions or circumstances on which
any such statement is based. Due to various risks and uncertainties, actual events or results or
the actual performance of the Fund may differ materially from those reflected or contemplated
in such forward-looking statements. Limited Partners are cautioned not to place undue reliance
on such statements.
THE FOREGOING LIST OF RISK FACTORS AND CONFLICTS OF INTEREST DOES NOT
PURPORT TO BE A COMPLETE EXPLANATION OF THE RISKS INVOLVED IN THIS
OFFERING. PROSPECTIVE INVESTORS ARE URGED TO READ THIS ENTIRE
MEMORANDUM BEFORE DETERMINING TO INVEST IN THE FUND.
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X. CERTAIN TAX AND ERISA CONSIDERATIONS
IN ACCORDANCE WITH U.S. TREASURY REGULATIONS GOVERNING PRACTICE
BEFORE THE INTERNAL REVENUE SERVICE (CIRCULAR 230), LEGAL COUNSEL TO
THE FUND HEREBY INFORMS INVESTORS THAT (A) THE INFORMATION BELOW
(OR OTHERWISE CONTAINED IN THIS DOCUMENT) IS NOT INTENDED OR
WRITTEN TO BE USED, AND CANNOT BE USED, BY THE INVESTORS FOR THE
PURPOSE OF AVOIDING PENALTIES THAT THE INTERNAL REVENUE SERVICE (THE
“IRS”) MAY ATTEMPT TO IMPOSE ON AN INVESTOR, (B) THE INFORMATION WAS
WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTION
OR MATTERS ADDRESSED BY THE WRITTEN INFORMATION, AND (C) INVESTORS
SHOULD SEEK TAX ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES
FROM AN INDEPENDENT TAX ADVISOR.
CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a brief summary of certain U.S. federal income tax considerations that may be
relevant to an investment in the Fund. This summary does not contain a comprehensive
discussion of all U.S. federal income tax consequences that may be relevant to a Partner in view
of that Partner’s particular circumstances or (unless otherwise indicated) to certain Partners
subject to special treatment under U.S. federal income tax laws — such as regulated investment
companies, personal holding companies, brokers or dealers in securities, banks and certain
other financial institutions, tax-exempt organizations, trusts, and insurance companies — nor
does it address any state, estate, local, foreign, or other tax consequences of an investment in the
Fund, except as otherwise provided herein. This summary is based on the assumptions that (i)
each Partner (and each of its beneficial owners, as necessary under U.S. federal income tax
withholding and backup withholding rules) will provide all appropriate certifications to the
Fund in a timely fashion to minimize withholding (or backup withholding) on each Partner’s
distributive share of the Fund’s gross income and (ii) each Partner will hold its Limited Partner
Interest in the Fund as a capital asset for U.S. federal income tax purposes. Each prospective
investor should also note that, except as otherwise provided herein, this summary does not
address the interaction of U.S. federal tax laws and any income or estate tax treaties between the
U.S. and any other jurisdiction.
No assurance can be given that the IRS will concur with the tax consequences set forth below.
Each prospective investor is advised to consult its own tax counsel as to the specific U.S.
federal income tax consequences of an investment in the Fund and as to applicable foreign,
state, estate, and local taxes.
General Matters
Classification of the Fund - Pursuant to applicable U.S. Treasury Regulations, the Fund will be
treated as a partnership, rather than a corporation, for U.S. federal income tax purposes unless
the Fund affirmatively elects to be treated as a corporation for such purposes. The General
Partner has no intention of making such an election on behalf of the Fund and does not
anticipate any circumstances under which such an election would be made. In certain cases
under Section 7704 of the Internal Revenue Code of 1986, as amended (the “Code”), a
partnership that is classified as a “publicly traded partnership” may be taxed as a corporation
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for U.S. federal income tax purposes. The following discussion is based on the assumption that
the Fund will not be treated as a “publicly traded partnership.”
Treatment of U.S. Partners and Non-U.S. Partners - The discussion below addresses separately
certain U.S. federal income tax matters relevant to U.S. Partners and Non-U.S. Partners. For
purposes of this discussion, the term “U.S. person” generally means any U.S. citizen or resident
individual, any corporation, limited liability company, or partnership organized under U.S. law,
any estate (other than an estate the income of which, from sources outside the U.S. that is not
effectively connected with a trade or business within the U.S., is not includible in its gross
income for U.S. federal income tax purposes), and any trust if a court within the U.S. is able to
exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust. The term “U.S. Partner”
means any partner that is a U.S. person and, unless the context otherwise requires, includes any
U.S. person that holds an equity interest in the Fund through one or more partnerships or other
entities treated as transparent for U.S. federal income tax purposes. The term “Non-U.S.
Partner” means a Partner that is not a U.S. person.
Taxation of Fund Operations Generally - As a partnership, the Fund will not pay U.S. federal
income taxes, but each U.S. Partner will be required to report that Partner’s distributive share
(whether or not distributed) of the Fund’s income, gains, losses, deductions and credits of the
character specified in Section 702 of the Code. It is possible that the U.S. Partners could incur
U.S. federal income tax liabilities without receiving from the Fund sufficient distributions to
defray such tax liabilities. The Fund’s taxable year will be the calendar year, or such other
period as required by the Code. Tax information will be delivered to all Partners on an annual
basis to enable the Partners to complete their tax returns.
Election to Adjust Basis of Fund Assets - Under the principal agreements relating to the Fund
and Section 754 of the Code, the General Partner will have the authority to elect to adjust the
basis of the Fund’s assets (commonly referred to as “Section 754 adjustments”) in connection
with certain distributions made by the Fund to Partners or certain transfers of Limited Partner
Interests in the Fund. Although the General Partner has no present intention of making an
election on behalf of the Fund under Section 754 of the Code, Section 754 adjustments may
nevertheless be mandatory under certain circumstances and could affect the amount of a
Partner’s allocations (for U.S. federal income tax purposes) of gain or loss recognized by the
Fund on a disposition of its assets.
The General Partner also will have the authority under the principal agreements relating to the
Fund to elect to treat the Fund as an “electing investment partnership” and, as a result,
potentially avoid making Section 754 adjustments that otherwise would be mandatory with
respect to certain transfers of Limited Partner Interests in the Fund. Such election, however,
may result in the disallowance (for U.S. federal income tax purposes) of certain losses allocated
by the Fund to transferees of Limited Partner Interests in the Fund. It is possible, however, that
the Fund will not be able to qualify as an electing investment partnership.
The General Partner will have the authority to require any Partner engaging in a transaction
that requires a Section 754 adjustment (for example, a transfer of the Partner’s Limited Partner
Interest) to bear the ongoing administrative and other costs incurred by the Fund or its Partners
in connection with these basis adjustment rules. These costs, which could be significant, may be
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charged to a Partner without regard to whether the General Partner made either of the elections
described above on behalf of the Fund. Furthermore, each Partner will be required to provide
the Fund with any information necessary to allow the Fund to comply with its obligations to
make Section 754 adjustments and/or its obligations as an electing investment partnership.
Tax-Exempt U.S. Partners
Unrelated Business Taxable Income - Under the terms of the principal agreements relating to
the Fund, the General Partner will be required to use reasonable best efforts to conduct the
affairs of the Fund in a manner that does not cause any tax-exempt U.S. Partner to recognize
any “unrelated business taxable income” within the meaning of Section 512 of the Code;
provided, however, that the General Partner may cause the Fund to borrow on a short-term
basis and may guarantee the indebtedness of any portfolio company. The General Partner’s
undertaking will be deemed satisfied with respect to the making, holding or disposing of any
portfolio investment if the tax-exempt U.S. Partners are given the opportunity to (or if all
Limited Partners are otherwise required to) hold their proportionate shares of such portfolio
investment directly or indirectly through an alternative investment vehicle treated as a
corporation for U.S. federal income tax purposes. Notwithstanding this undertaking, it is
possible that the Fund could realize income which would constitute unrelated business taxable
income, and in that event each tax-exempt U.S. Partner would be subject to U.S. federal income
tax on its share of such income and may be required to file a U.S. federal income tax return with
respect to such income.
Taxable U.S. Partners
Limitations on Allowable Deductions - Under Section 67 of the Code, U.S. taxpayers who are
individuals may deduct certain miscellaneous expenses (e.g., investment advisory fees, tax
preparation fees, and unreimbursed employee expenses such as the cost of subscriptions to
professional journals) only to the extent that these deductions exceed, in the aggregate, 2% of
the taxpayer’s adjusted gross income. Further, Section 68 of the Code disallows certain
deductions otherwise allowable to taxpayers who are individuals; the amount disallowed varies
based on the taxpayer’s adjusted gross income. Part or all of the Fund’s expenses allocated to
any U.S. Partner who is an individual (including that Partner’s share of the management fee
payable to the Fund’s Management Company) may be disallowed under these provisions,
although tax-exempt U.S. Partners will generally not be affected. Finally, certain expenses
(including the fees and expenses of placement agents, if any) incurred in connection with the
offer and sale of the Limited Partner Interests are not deductible by any U.S. Partner. If the
Management Company or an affiliate pays the fees or expenses of any placement agent, a
corresponding portion of the Fund’s expenses attributable to payments or accruals of the
management fee is likely to constitute a nondeductible syndication expense.
Surtax on Unearned Income - Section 1411 of the Code generally imposes a 3.8% surtax on the
“net investment income” of certain U.S. Partners who are citizens or resident aliens, and on the
undistributed “net investment income” of certain U.S. estates and trusts. Among other items,
“net investment income” generally would include a U.S. Partner’s allocable share of the Fund’s
net gains and certain other income such as interest and dividends, less deductions allocable to
such income. In addition, “net investment income” may include gain from the sale, exchange or
other taxable disposition of an interest in the Fund, less certain deductions. U.S. Partners
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potentially subject to the surtax should consult their own advisors concerning its potential
applicability to their individual circumstances.
Passive Foreign Investment Companies - A portfolio investment by the Fund in a non-U.S.
corporation that is classified as a “passive foreign investment company” (“PFIC”) will cause
taxable U.S. Partners to be subject to taxation under Sections 1291 through 1298 of the Code. In
general, a non-U.S. corporation will be classified as a PFIC if 75% or more of its gross income
constitutes “passive income” — generally, interest, dividends, royalties, rent and similar
income, and gains on the disposition of assets that generate such income — or 50% or more of
its assets (by value or, in certain situations, by adjusted tax bases) produce passive income or
are held for the production of such income. Under the PFIC rules, gain attributable to a
disposition of PFIC stock, as well as income attributable to certain “excess distributions” with
respect to that PFIC stock, is allocated ratably over the shareholder’s holding period for the
stock. Gain allocated under this rule to (i) the year in which the shareholder disposes of the
PFIC stock and (ii) any year prior to the time the foreign corporation first satisfied the PFIC
income or assets test, as well as income attributable to any excess distribution on PFIC stock
allocated to those years, is subject to tax (as ordinary income) at the U.S. federal income tax
rates applicable to the shareholder for the year in which the disposition occurs. Disposition
gain attributable to years included in the shareholder’s holding period — other than those
described in the preceding clauses (i) and (ii) — and income attributable to excess distributions
allocated to each such other year is subject to tax (as ordinary income) at the maximum U.S.
federal income tax rate applicable to the shareholder for the year in which the income is treated
as realized, and also to an interest-like charge on the shareholder’s “deferred” payment of this
tax liability that accrues generally from the year of deemed realization through the due date of
the shareholder’s U.S. federal income tax return for the year of disposition or distribution
(determined without regard to extensions). A U.S. Partner effectively will be treated as a U.S.
shareholder with respect to its proportionate share of any PFIC stock owned by the Fund. If,
however, that PFIC is also a “controlled foreign corporation” in which the Fund is a “United
States Shareholder” (as defined below), the PFIC rules generally will be superseded by the rules
discussed below dealing with controlled foreign corporations. The PFIC rules generally should
not affect tax-exempt U.S. Partners.
The PFIC rules are highly technical and it is possible that a non-U.S. corporation in which the
Fund makes an investment will be classified as a PFIC. If the Fund invests in the stock of a
portfolio company classified as a PFIC, and that company agrees to provide the Fund and, if
necessary, the IRS with certain financial information, the Fund may elect to treat that company
as a “qualified electing fund” (“QEF”). If the Fund holds stock of a non-U.S. corporation with
respect to which a QEF election has been made for the first taxable year in the Fund’s holding
period for which the non U.S. corporation is a PFIC, each U.S. Partner will be subject to tax
currently on its proportionate share of certain earnings and net capital gain of that non-U.S.
corporation — regardless of whether that corporation actually distributes cash or other property
to the Fund — but generally will not be subject to the tax regime described in the preceding
paragraph with respect to its investment in that corporation. Although the maximum rate of
tax imposed on certain dividends is currently 20%, this rate does not apply to dividends paid or
deemed paid by PFICs. A QEF election generally will not result in current inclusion of the
PFIC’s earnings for any year in which the PFIC has no net ordinary earnings and no net capital
gain. Alternatively, if such PFIC stock is publicly traded, the Fund may be eligible to value the
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stock annually on a “mark-to-market” basis so that the Fund may treat any resulting gain or
loss as ordinary income or loss to avoid the PFIC tax.
As noted above, the PFIC rules (including the rules pertaining to QEF elections) generally
should not affect tax-exempt U.S. Partners.
The Fund cannot predict with any certainty at this time whether any non-U.S. portfolio
company in which the Fund invests may be subject to the PFIC regime, whether a timely QEF
election can or will be made, or the effect or availability of any applicable elections made by the
Fund. The rules applicable to PFICs are complex, and the foregoing summary of U.S. federal
income taxation of U.S. Partners indirectly owning an interest in a PFIC is general in nature. It
is possible that U.S. Partners may be subject to tax currently under the PFIC regime on their
proportionate shares of certain earnings of a non-U.S. corporation in which the Fund holds an
interest and/or may incur nondeductible interest-like charges on tax liability deferred under the
PFIC regime without receiving from the Fund distributions sufficient to satisfy any such
obligations.
In addition to the PFIC rules discussed above, a U.S. person that is a shareholder of a PFIC may
be required to file an annual information report and/or applicable tax forms with the IRS.
Controlled Foreign Corporations - Under Sections 951 through 957 of the Code, special rules
apply to U.S. persons who own, directly or indirectly and applying certain attribution rules,
10% or more of the total combined voting power of all classes of stock of a non-U.S. corporation
(each, a “United States Shareholder”) that is a “controlled foreign corporation” (“CFC”). For
this purpose, the Fund will be treated as a United States Shareholder of any foreign corporation
in which the Fund’s share ownership reaches this 10% threshold. A non-U.S. corporation
generally will be a CFC for a taxable year if United States Shareholders collectively own more
than 50% of the total combined voting power or total value of the corporation’s stock on any
day during such taxable year. United States Shareholders of a CFC generally must include in
their gross income for U.S. federal income tax purposes their pro rata shares of certain earnings
and profits of the CFC. Further, under Section 1248 of the Code, if a U.S. person sells or
exchanges stock of a non-U.S. corporation and that person is or was a United States Shareholder
at any time during the five-year period ending on the date of such sale or exchange during
which that non-U.S. corporation was a CFC, that U.S. person generally will be required to treat
a portion of the gain recognized upon such sale or exchange as a dividend to the extent of the
earnings and profits of the CFC attributable to such stock. Under U.S. federal income tax rules,
the Fund itself is a U.S. person and, if the Fund becomes a United States Shareholder of a CFC,
taxable U.S. Partners (i) will be required to report and pay tax currently on their shares of the
CFC’s earnings and profits attributable to the Fund that are taxable to its United States
Shareholders under the CFC rules, and (ii) will be subject to the Section 1248 recharacterization
rule described above. In addition, if the Fund is a United States Shareholder of a CFC and a
U.S. Partner disposes of its Limited Partner Interest, that Partner generally will recognize
income under Section 751 of the Code equal to its distributive share of the Section 1248 income
that would have been triggered if the Fund had sold its interest in the CFC at fair market value.
The maximum rate of tax imposed on certain dividend income and certain long-term capital
gains attributable to dispositions of securities generally is 20%, so that a recharacterization of
gain under Section 1248 might not increase that U.S. Partner’s U.S. federal income tax liability.
In addition, income of a CFC subject to income tax in a country other than the U.S. at an
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effective rate greater than 90% of the maximum U.S. corporate income tax rate is not taxable to a
United States Shareholder under the CFC rules if the United States Shareholder so elects.
The rules applicable to CFCs are complex, and the foregoing summary of the U.S. federal
income taxation of U.S. Partners indirectly owning an interest in a CFC is general in nature. The
General Partner cannot provide any assurance that the Fund’s portfolio companies will not be
CFCs. The CFC rules, however, generally should not affect tax-exempt U.S. Partners.
U.S. Foreign Tax Credits - The Fund may make investments in entities that are formed and
operating under the laws of countries other than the United States. The countries in which these
entities are organized and operate may impose taxes on the income of, and distributions or
other payments made by, these entities. In addition, the Fund and/or the Partners may be
required to file tax or information returns in such non-U.S. jurisdictions. U.S. Partners may be
entitled, under certain circumstances, to a reduced rate of non-U.S. tax on their shares of such
income or distributions under tax treaties between the United States and the non-U.S.
jurisdictions imposing such tax, or may, in certain circumstances, be entitled under such treaties
to file tax returns in such jurisdictions and claim refunds of any amounts of non-U.S. tax overwithheld.
Subject to applicable limitations on foreign tax credits, a U.S. Partner that is subject to U.S.
federal income taxation generally should be entitled to elect to treat foreign taxes withheld from
such Partner’s share of the Fund’s dividend and interest income as foreign income taxes eligible
for credit against such Partner’s U.S. federal income tax liability. Similarly, each U.S. Partner’s
share of any foreign taxes which may be imposed on capital gains or other income realized by
the Fund generally should be treated as creditable foreign income taxes. Capital gains realized
by the Fund, however, may be considered to be from sources within the U.S., which may
effectively limit the amount of foreign tax credit allowed to the U.S. Partner. Other complex tax
rules may also limit the availability or use of foreign tax credits, depending on each U.S.
Partner’s particular circumstances. Because of these limitations, U.S. Partners may be unable to
claim a credit for the full amount of their proportionate shares of any foreign taxes paid by the
Fund. U.S. Partners that do not elect to treat their shares of foreign taxes as creditable generally
may claim a deduction against U.S. taxable income for such taxes (subject to applicable
limitations on losses and deductions). Foreign tax credits or deductions generally will not
provide any benefit to tax-exempt U.S. Partners unless such Partners’ distributive shares of the
income or gains on which the related foreign income taxes are imposed constitute “unrelated
business taxable income” and certain other conditions are satisfied. However, since the
availability of a credit or deduction depends on the particular circumstances of each U.S.
Partner, Partners are advised to consult their own tax advisors.
Foreign Currency Issues - A U.S. Partner’s distributive share of profits or losses realized by the
Fund on the conversion of U.S. dollars into non-U.S. currency, or of non-U.S. currency into U.S.
dollars, generally will be treated as ordinary income or loss rather than capital gain or loss.
Further, if the Fund acquires, or becomes the obligor under, a debt instrument or enters into
certain other transactions, any of which is denominated in terms of a currency other than the
U.S. dollar, fluctuations in the value of that currency relative to the U.S. dollar generally will
result in foreign currency gain or loss realized by the Fund and will be included in the U.S.
Partners’ distributive shares of Fund profits or losses as U.S.-source ordinary income or loss
rather than capital gain or loss.
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U.S. Reporting by U.S. Partners That Are Owners of Non-U.S. Entities - U.S. tax rules impose
information reporting requirements on U.S. persons that own, either directly or indirectly under
stock attribution rules, more than certain threshold amounts of stock in a foreign corporation;
these persons must disclose, among other things, various transactions between themselves and
those foreign corporations. For purposes of these information reporting requirements, stock
ownership is determined with regard to certain stock attribution rules, and each U.S. Partner is
treated as owning part or all of the stock owned directly or indirectly by the Fund. Similar
reporting requirements apply to United States persons that (i) own, directly or indirectly, more
than certain threshold amounts of certain foreign financial assets including, but not limited to
stocks, securities and partnership interests in non-U.S. entities or (ii) contribute, in their capacity
as Partners, more than a certain threshold amount to a non-U.S. partnership during a 12-month
period. In certain circumstances, these rules may require U.S. Partners to file reports annually.
U.S. Partners generally will be responsible for satisfying these information reporting
requirements.
Non-U.S. Partners
U.S. Trade or Business Issues - Under the terms of the principal agreements relating to the
Fund, the General Partner will be required to use commercially reasonable efforts to conduct
the affairs of the Fund in a manner that limits the Fund’s operations to investing and other
related activities which, in the aggregate, would not cause the Fund to be treated as engaged in
the conduct of a trade or business in the U.S. The General Partner’s undertaking will be
deemed satisfied with respect to the making, holding or disposing of any portfolio investment if
the Non-U.S. Partners are given the opportunity to (or if all Limited Partners are otherwise
required to) hold their proportionate shares of such portfolio investment directly or indirectly
through an alternative investment vehicle treated as a corporation for U.S. federal income tax
purposes. Notwithstanding this undertaking, it is possible that the activities of the Fund and
the contractual arrangements into which it enters could cause the Fund to be treated as engaged
in the conduct of a trade or business in the U.S.
Provided that the Fund is not engaged in the conduct of a U.S. trade or business, the U.S.
federal income tax liability of a Non-U.S. Partner with respect to that Partner’s Limited Partner
Interest generally will be limited to withholding tax on certain gross income from U.S. sources
generated by the Fund as long as the Non-U.S. Partner undertakes no activities in the U.S.
(determined without regard to its investment in the Fund) that would cause that Partner to be
engaged in the conduct of a U.S. trade or business, and, unless otherwise indicated, the
following discussion of the U.S. federal income tax treatment of Non-U.S. Partners is based on
that assumption.
Further, if the Fund withholds and remits the proper amounts to the U.S. government, Non-U.S.
Partners that are individuals or corporations will not be required to file U.S. federal income tax
returns or pay additional U.S. federal income taxes solely as a result of their investment in the
Fund (though Non-U.S. Partners treated as trusts for U.S. federal income tax purposes are
subject to special rules). If the Fund is not engaged in the conduct of a U.S. trade or business,
Non-U.S. Partners’ shares of income and gains from sources other than the U.S. (e.g., interest or
dividends paid by non-U.S. portfolio companies and gains realized on the disposition of
securities of those companies) will not be subject to U.S. federal income tax.
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If it were ultimately established that the Fund is engaged in a U.S. trade or business, the Fund
generally would be required to withhold and remit to the U.S. government a percentage of the
Fund’s net income and gains that are both effectively connected with that trade or business and
allocated to Non-U.S. Partners, and would be liable for interest and penalties with respect to
amounts which were not so withheld. The relevant withholding percentage is the maximum
U.S. federal income tax rate for individuals or corporations, as applicable. In addition, Non-U.S.
Partners generally would be required to file U.S. federal income tax returns and pay tax in
respect of their shares of the Fund’s effectively connected income including capital gains, but
would be allowed a credit against U.S. federal income tax liability for amounts withheld by the
Fund on their behalf. Non-U.S. Partners which are non-U.S. corporations might also be subject
to a “branch profits” tax on certain earnings of the Fund deemed to have been repatriated to
those Partners.
Treatment of Interest and Dividends from U.S. Sources - Certain categories of investment
income from U.S. sources realized by the Fund, such as dividends and interest, generally will be
subject to U.S. income tax withholding, at a 30% rate on the gross amount of that income, when
included in the distributive shares of Non-U.S. Partners. A Non-U.S. Partner whose distributive
share of such income is subject to U.S. withholding tax may be able to claim an exemption or a
reduced rate of withholding under a tax treaty or convention between the U.S. and that
Partner’s country of residence by providing appropriate documentation regarding that
Partner’s residence for tax purposes and its satisfaction of any conditions imposed by the treaty.
A Non-U.S. Partner resident in a jurisdiction with which the U.S. has a tax treaty, however, will
not be entitled to the benefits of that treaty with respect to that Non-U.S. Partner’s distributive
share of the Fund’s income and gains unless the Fund is treated as fiscally transparent under
the law of that non-U.S. jurisdiction and certain other conditions are satisfied. Finally, in order
to claim the benefits of a tax treaty to reduce U.S. withholding tax on U.S.-source interest and
dividends paid by corporations that are not actively traded, a Non-U.S. Partner — and any
direct or indirect equity owner of a Non-U.S. Partner seeking treaty benefits for itself because
the Non-U.S. Partner is considered fiscally transparent in that equity owner’s jurisdiction —
generally will be required to obtain a U.S. taxpayer identification number from the IRS and may
be required to provide that number and certain other documentation to the Fund. Other
exemptions may be available for certain types of interest income.
Treatment of the Fund’s Capital Gains from U.S. Sources - Under current U.S. law, in general,
capital gains attributable to sales by the Fund of the securities of U.S. corporations will not be
subject to U.S. federal income taxation or tax withholding when allocated to a Non-U.S. Partner
unless that Partner is an individual who is present in the U.S. for 183 days or more during the
taxable year in which such gains are realized and certain other conditions are satisfied.
This general rule does not apply to gains attributable to a U.S. trade or business or gains
attributable to dispositions of securities of any “United States real property holding
corporation” (“USRPHC”), defined in Section 897 of the Code as, in general, a company with
50% or more of the fair market value of its business assets consisting of interests in U.S. real
estate and related assets. Capital gains attributable to sales by the Fund of the securities of a
U.S. corporation that is a USRPHC (other than debt securities with no equity component) may
be subject to U.S. income tax, collected initially by withholding, to the extent allocated to any
Non-U.S. Partner. Non-U.S. Partners would also be required to file U.S. federal income tax
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returns, and might be liable for U.S. tax in excess of the amount collected by withholding.
Similarly, Non-U.S. Partners could become subject to U.S. federal income tax and tax return
filing obligations, as a result of transfers of their Limited Partner Interests at a time when the
Fund owned stock of any U.S. corporation that is a USRPHC, although certain exceptions may
apply. Even if a company in which the Fund invests is not a USRPHC at the time of such
investment, such company subsequently may become a USRPHC.
Currency Conversion Issues - Non-U.S. Partners (like other Partners) will be required to make
their capital contributions to the Fund in U.S. dollars, and any cash distributions made by the
Fund will be made in U.S. dollars. Profits or losses realized by Non-U.S. Partners on the
conversion of other currencies into U.S. dollars, or of U.S. dollars into other currencies, will
neither be reflected in the capital accounts of the Partners nor affect the amounts distributable
by the Fund to its Non-U.S. Partners.
Withholding on Payments to Certain Foreign Entities - Sections 1471 through 1474 of the Code
would generally impose a withholding tax of 30% on certain gross amounts of income not
effectively connected with a U.S. trade or business paid to certain foreign entities, unless certain
requirements are satisfied. Amounts subject to withholding tax under these rules generally
include gross U.S.-source dividend and interest income paid on or after July 1, 2014, as well as
gross proceeds from the sale of property that produces U.S.-source dividend or interest income
paid on or after January 1, 2017. To avoid withholding under these rules, Non-U.S. Partners
that are subject to these rules will generally be obligated to comply with certain information
reporting and disclosure requirements, including, in certain cases, entering into an agreement
with the IRS. Non-U.S. Partners are encouraged to consult their own tax advisors regarding the
possible application of Sections 1471 through 1474 of the Code to their investment in the Fund.
Other Tax Matters
Certain State and Local Tax Consequences - State and local taxing jurisdictions may impose
income taxes and estate, inheritance and intangible property taxes on income from, or an
investment in, the Fund. These tax laws may differ substantially from the U.S. federal tax laws.
As a result of participating in the Fund, a Partner may be required to file tax returns with, and
pay taxes to, any state or local jurisdiction in which the Fund does business (or is deemed to do
business from investing a portion of its commitments in operating businesses treated as tax
transparent for U.S. federal income tax purposes). A Partner’s distributive share of the Fund’s
taxable income, gain, loss, deduction and credit is normally included in the income reported to
the state and local jurisdiction(s) in which the Partner is a resident or does business. Investors
should consult their own tax advisors about state and local taxes.
Basis for Description of Tax Consequences - The description of U.S. tax consequences set forth
above is based on the provisions of the principal agreements relating to the Fund that the
General Partner expects will be adopted, existing provisions of the Code, existing and proposed
U.S. Treasury Regulations, existing administrative interpretations and court decisions, and
certain assumptions. Future legislation, U.S. Treasury Regulations, administrative
interpretations or court decisions could significantly change these authorities. Any such change
could have retroactive application and therefore could apply to transactions that have taken
place before such change occurs. In addition, some of the issues discussed above have not been
addressed by administrative authorities or resolved by the courts. Accordingly, no assurance
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can be given that the IRS will agree with the description of the U.S. federal income tax
consequences described above. No rulings have been or will be requested from the IRS.
Furthermore, any changes in the principal agreements relating to the Fund or the operations of
the Fund could affect the tax consequences described above.
Consultation with Tax Advisors - The description of U.S. tax matters set forth above is not
intended as a substitute for careful tax planning. It does not address all of the U.S. federal
income tax consequences to investors in the Fund, and does not address any of the foreign,
state, local, estate or other tax consequences of such investment to any investor, except as
otherwise specifically provided. Each prospective investor in the Fund is solely responsible for
all tax consequences to that person or entity of an investment in the Fund. Each prospective
investor is advised to consult its own tax counsel as to the U.S. federal income tax consequences
attributable to acquiring, holding and disposing of an Limited Partner Interest and as to
applicable foreign, state, local, estate or other taxes. The effect of existing U.S. income tax laws
and treaties, the tax laws of other jurisdictions to which an investor may be subject, and possible
changes in such laws and treaties (including proposed changes which have not yet been
adopted) will vary with the particular circumstances of each investor.
CERTAIN ERISA CONSIDERATIONS
ERISA governs the investment of assets of ERISA Plans that may be investors, directly or
indirectly, in the Fund. ERISA, the regulations under ERISA issued by the United States
Department of Labor (the “DOL”) and opinions and other authority issued by the DOL and the
courts provide guidance that should be considered by fiduciaries of ERISA Plans prior to
investing in the Fund.
The following discussion of certain ERISA considerations is based on statutory authority and
judicial and administrative interpretations as of the date hereof and is designed only to provide
a general understanding of the basic issues. Accordingly, this discussion should not be
considered legal advice and the trustees and other fiduciaries of each ERISA Plan are
encouraged to consult their own legal advisors on these matters.
Fiduciary Duty of Investing Plans
A fiduciary considering investing assets of an Employee Plan (“plan assets”) in the Fund should
consult its legal adviser before making such an investment. Before authorizing an investment in
the Fund, any such fiduciary should, after considering the Employee Plan’s particular
circumstances, be satisfied that the investment of such plan assets in the Fund is appropriate
under the fiduciary standards of ERISA, including standards with respect to prudence,
diversification and compliance with the governing documents of the Employee Plan and its
related trust and the prohibited transaction provisions of ERISA and the Code.
Plan Assets
ERISA and the regulation issued by the DOL at 29 C.F.R. § 2510.3-101, as modified or deemed to
be modified by ERISA (the “Plan Assets Regulation”), define the term “plan assets” as applied
to entities in which a plan invests, directly or indirectly, such as the Fund. The Plan Assets
Regulation provides that when an ERISA Plan acquires an equity interest in an entity, and such
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equity interest is neither a publicly offered security nor a security issued by an investment
company registered under the Investment Company Act, the assets of the ERISA Plan include
not only the equity interest, but also include an undivided interest in the underlying assets of
the entity, unless an exception to this general rule applies.
Exceptions Under the Plan Assets Regulation
The Plan Assets Regulation provides several exceptions to the general rule of plan asset
treatment. Pursuant to one such exception, the assets of certain entities, such as the Fund, will
not be treated as plan assets if the entity is operated as a “venture capital operating company”
within the meaning of the Plan Assets Regulation (“VCOC”). Generally, for an entity to qualify
as a VCOC, at least fifty percent (50%) of its assets (excluding short-term investments made
pending long-term commitments or distribution to investors) valued at cost must be invested in
(a) “operating companies” with respect to which the entity has the direct contractual right to
participate substantially in, or to substantially influence the conduct of, the management of the
operating company and the entity must actually exercise such management rights with respect
to one or more such operating companies in the ordinary course of its business, or (b)
“derivative investments” (as defined in the Plan Assets Regulation) (the “Asset Test”). For the
purposes of qualifying as a VCOC, an “operating company” is defined as an entity that is
primarily engaged, directly or through a majority owned subsidiary or subsidiaries, in the
production or sale of a product or service other than the investment of capital, and includes a
“real estate operating company” as defined in the Plan Assets Regulation (but does not include
another VCOC). Determination as to whether an entity qualifies as a VCOC is made at the time
when the entity makes its first long-term investment (other than short-term investments made
pending long-term commitments) and thereafter during a ninety-day annual valuation period
each year, the first day of which shall begin no later than the anniversary of the entity’s first
long-term investment. In order for an entity to continue to qualify as a VCOC, the entity must
meet the Asset Test on at least one day during each such ninety-day annual valuation period.
Special rules apply to any wind-up of a VCOC when it enters its “distribution period” as
defined in the Plan Assets Regulation.
An additional exception applies when equity participation in the entity by benefit plan
investors is not “significant.” Equity participation in an entity by “benefit plan investors” (as
defined in Section 3(42) of ERISA) is “significant” on any date if, immediately after the most
recent acquisition or disposition of any equity interest in the entity, 25% or more of the value (in
the aggregate) of any class of equity interests in the entity is held by “benefit plan investors.”
For purposes of the 25% test, the term “benefit plan investors” includes ERISA Plans, certain
other retirement plans defined in and subject to Section 4975 of the Code (such as individual
retirement accounts), and entities or accounts deemed to hold “plan assets” due to an
investment in such entity or account by ERISA Plans or such other retirement plans (such as
insurance company general accounts). For the purposes of calculating the 25% threshold under
the Plan Assets Regulation, the value of any equity interest held by a person (other than a
“benefit plan investor”) who has discretionary authority or control with respect to the assets of
the entity or that provides investment advice for a fee (direct or indirect) with respect to such
assets (or an affiliate of such person) is disregarded.
The General Partner will use reasonable best efforts to conduct the affairs and operations of the
Fund in such a manner so that the assets of the Fund will not be treated as “plan assets” of any
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ERISA Plan for purposes of ERISA. In particular, the General Partner will use reasonable best
efforts to either (i) limit investment in the Fund by “benefit plan investors” to a level that would
not be considered “significant” under ERISA, or (ii) operate the Fund as a VCOC, or (iii) operate
the Fund in compliance with any other then-available exception to the general rule of plan asset
treatment. The General Partner has the authority to require a Limited Partner to withdraw from
the Fund (in whole or in part) where the General Partner determines that such withdrawal is
necessary to avoid having the Fund’s assets deemed to be “plan assets” subject to ERISA or
Section 4975 of the Code. Accordingly, the Fund is not expected to be deemed to be holding
“plan assets” subject to ERISA at any time.
Reporting
Benefit plan investors may be required to report certain compensation paid by the Fund (or by
third parties) to the Fund’s service providers as “reportable indirect compensation” on Schedule
C to the Form 5500 Annual Return (the “Form 5500”). To the extent any compensation
arrangements described herein constitute reportable indirect compensation, any such
descriptions are intended to satisfy the disclosure requirements for the alternative reporting
option for “eligible indirect compensation,” as defined for purposes of Schedule C to the Form
5500.
Additional Information
ERISA and its accompanying regulations are complex and, to a great extent, have not yet been
interpreted by the courts or the administrative agencies. This discussion does not purport to
constitute a thorough analysis of ERISA. Each prospective investor subject to ERISA should
consult with its own legal counsel concerning the implications under ERISA of an investment in
the Fund, and to confirm that such an investment will not constitute or result in a non-exempt
prohibited transaction or any other violation of an applicable requirement under ERISA.
“Governmental plans” and certain “church plans”, while not subject to the fiduciary
responsibility and prohibited transaction provisions of ERISA, may nevertheless be subject to
state or other federal laws that are substantially similar to the foregoing provisions of ERISA.
Decision-makers for any such plans should consult with their counsel before making an
investment in the Fund.
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XI. CERTAIN LEGAL & REGULATORY CONSIDERATIONS
Securities Act of 1933
The Limited Partner Interests described herein will not be registered under the Securities Act in
reliance upon the exemptions for transactions not involving a public offering. Each investor
will be required to make certain representations to the Fund, including that such investor is an
“accredited investor” within the meaning of Rule 501(a) under the Securities Act, that it is
acquiring a Limited Partner Interest in the Fund for its own account, for investment purposes
only and not with a view to resale or distribution, that it has received or has had access to all
information it deems relevant to evaluate the merits and risks of an investment in the Fund and
that it has the ability to bear the economic risk of an investment in the Fund. The Limited
Partner Interests described herein will constitute “restricted securities” under the Securities Act
and as such will be subject to certain restrictions on transferability. The Limited Partner
Interests may not be transferred or sold unless the Limited Partner Interests have been
registered under the Securities Act or an exemption from registration is available. It is not
contemplated that registration under the Securities Act or other securities laws will ever be
effected. The Limited Partner Interests are subject to further restrictions on transfer as
described in the Partnership Agreement.
This Memorandum is not a public offering “prospectus” and does not purport to describe or
otherwise address all material considerations relating to an investment in the Fund. Prior to
making an investment, prospective investors and their advisors are invited to ask questions of,
and obtain additional information from, the General Partner concerning the Limited Partner
Interests described herein, the terms and conditions of the offering and any other relevant
matters. Such information will be provided to the extent the General Partner possesses such
information or can acquire it without unreasonable effort or expense.
Any subscription is subject to a determination by counsel to the Fund that the subscription is in
compliance with applicable federal and state laws and regulations.
Investment Company Act of 1940
The Fund will not be registered as an investment company under the Investment Company Act
pursuant to an exemption set forth in Section 3(c)(1) and/or Section 3(c)(7) of the Investment
Company Act. The Fund will obtain appropriate representations and undertakings from all
purchasers of Limited Partner Interests, including restrictions on transfer, to ensure that such
purchasers meet the conditions of the exemption. Section 3(c)(7) of the Investment Company
Act requires that each prospective purchaser be a “qualified purchaser” within the meaning of
Section 2(a)(51) of the Investment Company Act. Information with respect to such requirements
for “qualified purchaser” status will be included in the Fund’s Subscription Agreement. The
General Partner is not registered as a broker-dealer under the Exchange Act, or with the NASD,
and is consequently not subject to certain record keeping and specific business practice
provisions of the Exchange Act and the rules of the NASD.
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Investment Advisers Act of 1940
Neither the Management Company nor the General Partner is currently registered as an
investment adviser under the Advisers Act. By virtue of being exempt from the registration
requirements of the Advisers Act, the Management Company and the General Partner are not
subject to the performance fee restrictions and certain other restrictions contained in the
Advisers Act, and the investors in the Fund will not be afforded the protections provided under
the Advisers Act to clients of advisors that are registered under the Advisers Act. The General
Partner, the Management Company or an affiliate thereof may in the future register as an
investment adviser under the Advisers Act to the extent required under the Advisers Act.
To the maximum extent permitted by applicable law, the General Partner and the Partnership
(together with their respective related persons) hereby disclaim any duties, obligations, or
status as an advisor, finder, agent, broker or dealer on behalf or in respect of any person in
connection with such person’s actual or proposed investment in the Partnership.
Compliance With Anti-Money Laundering Requirements
In response to increased regulatory requirements with respect to the sources of funds used in
investments and other activities, the General Partner may require prospective investors to
provide documentation verifying, among other things, such investor’s (and any of its beneficial
owners’) identities and source of funds used to purchase its Limited Partner Interest in the
Fund. The General Partner may decline to accept a subscription if this information is not
provided or on the basis of such information that is provided.
Each prospective investor and Limited Partner will be required to make representations that
such prospective investor or Limited Partner is not a prohibited country, territory, individual or
entity listed on the U.S. Department of Treasury Office of Foreign Assets Control (“OFAC”)
website and that it is not directly or indirectly affiliated with any country, territory, individual
or entity named on an OFAC list or prohibited by any OFAC sanctions programs. Such
prospective investor or Limited Partner will also represent that amounts contributed by it to the
Fund were not directly or indirectly derived from activities that may contravene U.S. Federal,
state or international laws and regulations, including, without limitation, anti-money
laundering laws and regulations.
Requests for documentation and additional information may be made at any time during which
an investor holds a Limited Partner Interest in the Fund. The General Partner will take such
steps as it determines are necessary to comply with applicable law, regulations, orders,
directives or special measures to implement anti-money laundering laws, which steps may
include the forced sale or withdrawal of an Interest. In addition, the Fund could be required to
disclose information pertaining to prospective investors subscribing for an interest to
governmental, regulatory or other authorities or to financial intermediaries or engage in due
diligence or take other related actions in the future.
Pay-to-Play Laws, Regulations and Policies
In light of recent scandals involving money managers, a number of states and municipal
pension plans have adopted so-called “pay-to-play” laws, regulations or policies which
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prohibit, restrict or require disclosure of payments to (and/or certain contacts with) state
officials by individuals and entities seeking to do business with state entities, including
investments by public retirement funds. The SEC also has recently adopted rules that, among
other things, prohibit an investment adviser from providing advisory services for compensation
with respect to a government plan investor for two years after the adviser or certain of its
executives or employees make a contribution to certain elected officials or candidates. If the
Management Company, the General Partner, their employees or affiliates fail to comply with
such pay-to-play laws, regulations or policies, such non-compliance could have an adverse
effect on the Fund by, for example, providing the basis for the withdrawal of the affected
government plan investor.
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XII. ADDITIONAL INFORMATION
Legal Counsel
Proskauer Rose LLP (“Proskauer Rose”) acts as counsel to the Fund, the General Partner and
the Management Company in connection with the organization of the Fund and the offering of
Limited Partner Interests therein. Proskauer Rose also acts as counsel to the Fund, the General
Partner, the Management Company and their affiliates in connection with investments and
ongoing operations of the Fund and other matters. In connection with the offering of Limited
Partner Interests and subsequent advice to the Fund, the General Partner, the Management
Company and their affiliates, Proskauer Rose will not be representing the Limited Partners of
the Fund. No independent counsel has been retained to represent the Limited Partners of the
Fund. Investors are advised to seek their own counsel in connection with a prospective
investment in the Fund.
Accounting and Reporting
KPMG LLP, independent certified public accountants, will report upon the financial statements
of the Fund for each fiscal year.
Availability of Principal Agreements
Prior to the consummation of the offering, the Fund will provide to each prospective investor
and such investors’ representatives and advisers, the opportunity to ask questions regarding the
terms and conditions of this offering and to obtain any additional information required. Any
questions or requests for information should be directed to Ron Hunt, New Leaf Venture