A manager may require a potential investor to sign a confidentiality agreement prior to making any investment.
Managers do this for two important reasons:
First, they’re subject to private placement rules associated with the sale of hedge fund interests. They want to ensure compliance with those rules.
Second, they don’t want sensitive information about their operations or investment program to be leaked.
The typical agreement that an investor will be asked to sign may be short, perhaps seven or eight pages.
These contracts are typical “off the-shelf” agreements that a manager will look to use with many prospective investors.
As an investor, it’s tempting to sign these agreements as is.
However, it’s important to recognize that these agreements are contracts that can bind a potential investors to significant restrictions even if they ultimately decide not to move forward with an investment.
So here are 10 issues to consider in connection with pre-investment hedge fund confidentiality agreements:
- The definition of confidential information is overly broad.
- The agreement is open-ended with no termination date.
- Contract terms conflict with the confidentiality provisions in fund documents.
- Limitations are present on an investor’s ability to share information with advisors.
- Exceptions to confidential information are too limited.
- Manager exculpation clauses on information provide don’t account for anti-fraud concerns.
- Contract terms interfere with an investor’s ability to respond to legal matters unencumbered.
- Onerous choice of law provisions are present.
- Onerous ongoing expense requirements are present.
- Agreements lack basic contractual clauses (for example, clauses related to the validity of amendments).
Investors are in the business of making investments — not running confidentiality agreement programs that go beyond legitimate manager concerns.
So beware.