Are you filled with entrepreneurial aspirations and eager to invest in a lucrative venture without relying on external parties or public offerings? If so, the formation of a private fund may be the ideal path for you.
A private fund serves as an investment vehicle, enabling you to pool capital from multiple investors to generate returns in the form of dividends, interest payments, or capital gains. While establishing a private fund can present its fair share of complexities and demands considerable time, the potential rewards can be truly remarkable.
Determine The Type of Fund You Want to Form
The first step in forming a private fund is determining the type of fund you want to form. Private funds come in many varieties, and each one has its own set of advantages and disadvantages. For example, hedge funds have historically been the most popular type of private fund but require a minimum investment that can be too large for some investors.
Private equity funds focus on company investments and are subject to specific securities regulations, whereas real estate funds target investments in physical properties. Finally, venture capital funds are focused on investing in start-ups and early-stage businesses in exchange for ownership stakes.
It’s important to consider which type of fund works best for your strategy and objectives. Do your research to better understand how each type of fund works and what their respective returns and risks tend to be.
When you have a clear understanding of the purpose behind the fund you want to form, you’ll be better prepared to move on to the next steps involved with fund formation.
Develop An Investment Strategy
Having an investment strategy is the backbone of your private fund, as it will help guide your investing decisions. The first step is to define your investments—will you go for stocks, bonds, private companies, etc.? Another important component is assessing each investment’s risk tolerance and expected returns.
Understanding the risk levels of each investment will help you determine what investments are best suited for your fund. Generally, there are four main risk profiles: conservative, moderate, aggressive, and opportunistic. Each risk profile has its benefits and drawbacks that must be weighed against each other when deciding.
Finally, you should also define your expected returns. This will give you a clear understanding of how much money you anticipate gaining from each investment. Remember that these are expectations – not guarantees – so it’s wise to be conservative when setting expectations for returns.
Create A Legal Structure
Once you have your team in place, the next step is to determine the legal structure of your fund. This decision will depend on a few factors, including the type of investments you plan to make and any desired tax benefits. The most common legal structures for a private fund are a limited partnership, a limited liability company (LLC), or a corporation.
Limited Partnership
Limited partnerships (LP) are often used when a single individual or entity takes on the bulk of the risk associated with the fund operations. This structure allows the general partner to take advantage of certain tax benefits while limiting liability and managing administrative costs.
Limited Liability Company (LLC)
A limited liability company (LLC) is ideal if two or more individuals or entities are involved in running the business. An LLC provides flexibility in management and control with protection against personal losses for the company’s members. Also, LLCs can provide financial advantages for tax purposes, depending on how your business is structured.
Corporation
A corporation is typically used when there are many investors involved in managing a fund, and there’s a need for formal representation of investment decisions. This structure isn’t as flexible as an LP or an LLC because it requires more paperwork and operating rules that need to be followed but can provide additional tax benefits for shareholders.
Draft Legal Documents
Once the fund has been established, the next step is to draft all your legal documents. This is where the rubber meets the road—all of your work until now will be for nothing if your legal documents are not in order.
Here’s a quick overview of what you’ll need to draft to form your private fund:
- Private Placement Memorandum (PPM): This document describes the fund and disclosure information, including potential risks, fees, and distributions.
- Limited Partnership Agreement (LPA): The LPA outlines the rights and responsibilities of the investors and specifies how day-to-day operations are managed.
- Subscription Agreement: The subscription agreement sets out key terms such as minimum investment amounts, investor qualification requirements, and capital commitment deadlines.
- Operating Agreement: Finally, the operating agreement defines specific rules for managing the fund and allows investors to define their relationship with one another.
Once all these documents are in place, with all parties signing off on them, you can start raising funds for your private fund!
Hire Service Providers
If you’re serious about forming private funds, you need to invite some qualified professionals on board. Even if the process is complex, these experts will make it easier. Who should you be looking out for?
Attorney
You must consult with a lawyer who’s well-versed in securities and investment law and who can create the legal documents that will govern the fund’s activities. This includes preparing or reviewing the fund’s private placement memorandum, subscription agreement, and operating agreement.
Accountant
You’ll also need an accountant who can handle all financial aspects of your fund’s formation and operation. The accountant will be responsible for filing all necessary tax documents (such as those required by the IRS) and creating financial statements for investors.
Administrator
Hiring an experienced third-party administrator to handle investor relations, such as onboarding investors, preparing quarterly financial reports, and distributing K‐1 tax forms, is advisable.
Custodian
A custodian—like a bank—will safeguard cash investments held by the fund and provide investors with a safe place to store their assets. For larger funds, investors may require that a qualified custodian handle their assets according to established industry practices.
Contact My Ria Lawyer, We Will Help You with Establishing, Registering, And Managing Private Funds
If you’re ready to take the next step in forming your private fund, then it’s time to contact My Ria Lawyer. Our experienced professionals will work with you every step, from establishing and registering your private fund to managing its operations.
We understand that starting up a private fund is a big undertaking, and we are here to provide you with the support and guidance needed to ensure that it is done correctly and efficiently. Whether you need assistance with filing documents with the SEC or other regulatory agencies, creating a compliance program, or handling the financial accounting and reporting for the fund, we can help.
Whether you are just beginning to explore forming a private fund or are ready to take the plunge, contact My Ria Lawyer today!
Author Bio
Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.
Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.
