Any company registered under the 1940 Act that has not previously had an effective registration statement under the 1933 Act must include in its initial registration statement audited financial statements as of a date within 90 days prior to the date of filing. However, as a result of ASC 720-15, the seed capital statement of assets and liabilities must be accompanied by a statement of operations unless the sponsor has unconditionally agreed to assume all organizational costs.

The staff of the SEC has advised that filings of new registration statements after June 30, 1998 are expected to include both a statement of assets and liabilities that reflects at least $100,000 of net worth (in accordance with Section 14 (a) of the Investment Company Act of 1940) and a statement of operations that reflects the expensing of organization and start-up costs and related notes. However, if the fund is not required to pay the organization costs, no statement of operations and no liability on the fund’s "seed capital" balance sheet would be required.

Further, should the fund have an "excess expense" arrangement, its impact should be reflected on the financial statements. Under an excess expense arrangement, a manager agrees to assume expenses in excess of a specified cap, subject to the right to recover those amounts in subsequent periods if a) the management agreement (or other underlying agreement) is still in effect and b) the fund’s expense ratio falls below the cap. So long as the arrangement exposes the manager to realistic risk of non-recovery of the expenses assumed, the potential recovery of the expenses from the fund within a defined period is treated as a contingency and not a liability. See ARM 9652.17.

Situation One: The Fund will reimburse organization expenses ($25) which have been paid by the Fund’s sponsor.

Notes to Financial Statements:

Description of the Fund and other standard disclosures.

Description of organization costs incurred and expensed by the Fund.

Situation Two: The Fund has agreed to reimburse organization expenses ($25) which have been paid by the Fund’s sponsor in accordance with an "excess expense" agreement between the Fund and the sponsor.

Notes to Financial Statements:

Description of the Fund and standard disclosures.

Description of organization costs incurred, "excess expense" agreement, and amount of expenses assumed by the sponsor subject to future recovery.

* Receivable (for reimbursement to Fund under excess expense plan) and payable for reimbursement of organization costs by the Fund of $25 might be netted if conditions of ASC 210-20 are met. However, the grossing up makes the circumstances clear and we suggest this approach be followed.

Situation Three: The Fund is not required to reimburse organization expenses ($25) which have been paid by the sponsor.

Notes to Financial Statements:

Description of the Fund and standard disclosures.

Description of organization costs and their amounts which are assumed by the Fund’s sponsor and which the fund will not be required to reimburse.

Theoretically, in accordance with SAB Topic 5.T(SEC 4940), such a situation could lead to the conclusion the sponsor has contributed additional capital. However, this approach traditionally has not been followed and the Staff of the SEC Division of Investment Management has accepted the above presentation.

Section 14 of the 1940 Act requires that a registrant making a public offering of shares have a net worth of at least $100,000. Accordingly, a new investment company is usually incorporated by its sponsor with "seed capital" of that amount. Sometimes, sponsors desire to start a fund with more than $100,000. The SEC, in a "generic comment letter" to chief financial officers of SEC registered funds, has reminded registrants that at the time of seeding there can be no intention to redeem capital, and redemptions are on a facts and circumstances basis. Contributions in excess of $100,000 should be made separately from the required seed capital in order to avoid questions regarding future redemptions.

New portfolios of existing registrants (i.e., in a series fund) do not need to be seeded as long as there is at least $100,000 in another portfolio. However, the Chief Accountant of the SEC's Division of Investment Management expressed the view in a "generic comment letter" from November 1, 1994 to chief financial officers of SEC registered funds that new series of preexisting registrants should have an audited balance sheet if they have been "seeded" in advance of initial effectiveness with even a single share. Fund management should be advised to contact legal counsel if they wish to delay the issuance of "seed" shares until after effectiveness to avoid this requirement, in order to ensure positions taken do not conflict with requirements for approval of certain contracts by the "initial shareholder" of the fund.