Raising a fund can be challenging for a first-time fund sponsor. New fund sponsors need to obtain the right team to help navigate the regulatory complexity involved in raising a fund, to assist with fund structuring, and to attract investors.
At Doida Crow Legal, we work with new fund sponsors to structure and establish funds to raise capital. We regularly assist sponsors with fund formation, investor negotiations, and other responsibilities that contribute to the success of a new fund. This post outlines the different types of funds that we work with and the main issues that fund sponsors should consider when forming a fund.
Private Investment Fund Types
A private fund is an investment entity formed by an investment manager, known as the fund sponsor, that raises capital from investors to make investments in private companies or joint ventures under a specified investment strategy. Our firm can assist with the formation of the following private fund types:
- Real Estate Funds: Funds formed to invest in real estate projects or debt secured by real estate.
- Venture Capital Funds: Funds formed to invest in startup companies.
- Growth Funds: Funds formed to invest in later stage, pre-IPO companies.
- Buyout Funds: Funds formed to purchase a controlling interest in companies to flip in a later sale.
- Hedge funds: Funds formed to invest in a variety of assets and markets to maximize a return regardless of market conditions.
Forming Your Team
An effective launch of a fund typically starts with the fund sponsor assembling a great team of experts. The key players on a fund formation team include:
- Attorney. An attorney with fund formation experience is necessary to help determine the correct structure, form the entities involved, and draft the fund documents that comply with the law.
- CPA. Private funds need a CPA to prepare tax returns, manage audits, and work with legal counsel on other tax-related issues.
- Fund Administrator. An administrator can be used to assist the fund sponsor with back office support (e.g. accounting, bookkeeping, and transfer agent services).
At a minimum, every private fund will need the following documents:
- Limited Partnership Agreement (or Limited Liability Company Agreement). Historically, the most common entity for a private fund is a limited partnership organized in Delaware, with the fund sponsor (which is typically formed as an LLC) acting as the general partner and the investors as the limited partners. However, funds can also be formed as LLCs. This agreement will govern the relationship between the general and limited partners and includes, among others, terms for the management of the fund, restrictions on transfer, admission of additional limited partners, voting rights, fees paid by the fund, and the economics of distributions to the partners.
- Private Placement Memorandum (PPM). The PPM is a disclosure document that provides information to prospective investors regarding the identity of the principals that operate the fund sponsor, the terms of the offering, the fund’s investment strategy and business plan, fees, distributions, and the risks of investing in the fund.
- Subscription Agreement. Prospective investors that choose to invest in the fund will sign a subscription agreement. By signing the subscription agreement, the investors are agreeing to make an investment in the fund, acknowledging that they understand the risks of the offering, and making representations that they satisfy the investor suitability requirements to invest in the fund.
Private funds must navigate several different bodies of law that govern private funds. In general, every private fund will need to comply with or satisfy an exemption from, the following:
- Investment Adviser Registration – depending on certain factors, the fund sponsor may need to register as an investment adviser at either the state or federal level.
- Securities Compliance – securities laws (federal and state) will govern the type of investors that can invest in the fund, the information you must provide to investors, and how you can market the offering.
Starting a fund? Let us help.
At Doida Crow Legal, we are here to assist you with your fund formation. Using our legal experience and unique industry insights, we can help you get your new fund started on the right foot. Planning ahead is critical to a successful launch of a private fund. To schedule a no-obligation consultation, call us now at 720.306.1001 or email email@example.com.