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Step One: Choosing Your Investment Fund’s Legal Structure
You wouldn’t build a house without first having an architect draw the blueprints, correct? In a way, creating your investment fund is similar. You need a legal expert who understands all of your options and can assist you with deciding which type of legal structure best fits your plans.
This is hyper-important. The legal structure you choose determines what you can and can’t do within the fund’s regulatory constraints.
The structure of investment funds varies based on their specific objectives, the needs of their target investors, and regulatory obligations. Below are the most common fund structures.
Limited Partnership (LP)
Private equity, venture capital, and hedge funds predominantly utilize this structure. General partners (GPs) manage the investment decisions and day-to-day operations, while Limited Partners (LPs) supply capital without involvement in daily operations. The Limited Partnership Agreement (LPA) serves as the governing document that defines terms related to topics such as
- Capital calls
- Management fees
- Investment model
- Profit distribution
- Liability allocation
- Fund duration.
Limited Liability Company (LLC)
Fund structures typically implement Limited Liability Companies (LLCs) for General Partner or Management Company entities. LLCs allow members to gain limited liability while providing management flexibility and tax advantages.
Documentation
Essential documents for operating funds include the Limited Partnership Agreement (LPA), offering memorandum, subscription agreements, and the Limited Liability Company operating agreement.
Open-End Investment Companies (Mutual Funds)
The Investment Company Act (1940) governs Open-End Investment Companies (Mutual Funds). This structure permits investors to purchase or redeem shares based on the net asset value (NAV). Entities must obtain SEC registration and provide disclosures through prospectuses and regular reporting.
Closed-End Funds
Closed-end funds function like mutual funds yet operate with a predetermined number of shares available for trading on stock exchanges. They must adhere to the same regulatory standards as mutual funds but can issue senior securities according to specific rules.
Unit Trusts
This contractual arrangement establishes a system where a trustee manages assets for investor benefit. A trust deed must define the trustee and management company's rights and responsibilities.
Common Contractual Funds (CCFs)
A Common contractual fund permits investors to share ownership of assets without requiring the formation of a separate legal entity. It is ideal for tax-neutral setups.
Step Two: Maintaining Your Fund’s Regulatory Compliance
Winging it isn’t an option when managing your investment fund. As the General Partner / Fund Manager, you are the first person to be looked to for noncompliance issues. The SEC and various state laws are serious matters, and the regulatory fines and disciplinary measures are painful, to say the least.
Federal Regulations
The Securities Act of 1933 and the Securities Exchange Act of 1934 were further refined with the enactment of the Investment Company Act of 1940. The level of regulatory compliance required depends on the number of investors and the total amount of funds being managed (AUM).
State Regulations
Blue Sky Laws mandate state filing processes to protect investors against fraudulent activities.
Tax Considerations
Funds design their structures to maintain tax neutrality so that tax obligations occur exclusively at the investor or investment level.
Jurisdictional Choice
Investors decide on Delaware (for LPs/LLCs) or tax-neutral jurisdictions like the Cayman Islands because they align with their preferences and operational needs.
Step Three: Investment Fund’s Reporting Requirements
Once you have selected the correct legal structure and completed the required filings, you step into the role of the fund manager. This is a serious responsibility that involves overseeing the organization and timely compliance filings for both federal and state forms. Below are the most common forms filed annually.
Form D
The SEC mandates that companies or funds offering securities under Regulation D exemptions file Form D. The document delivers essential information about the offering, including executive officers' size, date, and details. The filing requirement for Form D applies within 15 days after the first securities transaction, and this document serves as common practice for private investments directed at accredited investors. The filing process maintains both transparency and adherence to federal securities regulations.
Form ADV
Form ADV serves as a registration document for investment advisers, outlining their business operations and details about assets under management, fee schedules, and records of any disciplinary actions. It has two main parts:
The first part of the document contains details about identification information and ownership structure, as well as affiliations and disciplinary actions. The second section of Form ADV contains detailed descriptions of advisory services offered by firms, fee structures, potential conflicts of interest, and information about employee backgrounds. Investment advisers must file an updated Form ADV annually to stay transparent with their clients and regulatory bodies.
Exempt Reporting Advisers
Exempt Reporting Advisers manage private or venture capital funds without complete SEC registration requirements. ERAs must submit Form ADV Part 1A and comply with anti-fraud rules from the Investment Advisers Act (1940). These advisers face limited reporting obligations but remain responsible for upholding fiduciary responsibilities to their clients.
Blue Sky Filings
Blue Sky Filings represent mandatory state registrations under Blue Sky Laws to safeguard investors against fraudulent activities. Before selling securities in any state, issuers must reveal their financial information and the specifics of their offering terms. State-specific regulatory compliance requires these filings, which provide additional oversight beyond federal securities laws.
General Checklist to Setting Up Your Fund
NOTE: This is not an exhaustive checklist; instead, it is meant to be a good launch point listing some of the core activities you will be dealing with.
- Choose the proper legal structure, as this is the foundation upon which you will build your success. Do not assume that you know which legal structure to use. Confirm with legal counsel that the fund structure complements the investment strategy and the types of investors.
- Select your fund’s best jurisdictional domicile by assessing:
- Regulatory environment
- Tax considerations
- Investor preferences
- Operational costs
Registering with the SEC and State Regulators
Legal and regulatory consultation with legal counsel to ensure compliance with applicable laws Your fund must register with regulatory bodies and obtain necessary approvals while meeting the requirements of the Securities Act, the Investment Company Act, and the Investment Advisers Act.
Which steps must be followed to register an investment fund with the SEC and state regulators?
SEC
Identify if your fund structure and goals enable exemptions to registration requirements under the Investment Company Act (1940). The most often used is section 3(c)(1): A fund can bypass SEC registration requirements by having 100 or fewer investors who aren’t “knowledgeable employees” and avoiding public offerings.
The registration limit for offshore funds includes only their U.S.-based owners. Section 3(c)(7): The Investment Company Act provides an exemption when all fund investors meet the "qualified purchasers" criteria, defined as individuals holding investments over $5 million and institutions with assets exceeding $25 million.
The SEC registration process demands the submission of Form N-8A for registration notification and a registration statement such as Form N-1A for mutual funds or Form N-2 for closed-end funds. The registration statement must contain details about investment policies, risk factors, fees, and management information. Use the SEC’s EDGAR system to file all forms electronically.
Look-Through Rule (be aware). The SEC will include underlying investors when a company holds more than 10% of the fund or when the fund tries to circumvent the investor limit of 100.
Investment Adviser Registration SEC-Registered Advisers:
Required for firms managing $100M+ AUM. Complete the disclosure brochure by filling out Form ADV Parts 1A and 2. Submit SEC payment fees and adhere to Advisers Act requirements.
Exempt Reporting Adviser (ERA): Private fund advisers who do not need full SEC registration must register as Exempt Reporting Advisers and file Form ADV Part 1A annually.
STATES
Blue Sky Filings are not a requirement in every state. Your legal counsel will identify which states require your fund to be registered and any state-specific investor protection regulations.
For example, SEC-registered funds operating in Texas must complete a “notice filing” despite their federal registration status, and state-registered advisers must register when they serve clients in Louisiana.
State adviser registration may be required for fund advisers who manage assets totaling less than $100 million unless they qualify for an exemption.
- Submit Form ADV Part 1A through the Investment Adviser Registration Depository (IARD).
- Investment Adviser Representatives (IARs) must submit Form U4, pass the Series 65 exam, or hold CFP/CFA credentials.
State-Registered Advisers:
Register in the adviser’s home state for firms with less than $100M AUM. Any state with five or more clients requires filing a notice unless an exemption applies (for example, Texas notice filings).
Key Filings for Exempt Offerings Form D:
For private placements under Regulation D, Form D should be filed with both the SEC and state authorities. It includes details about fund strategy, key personnel, and investor information.
Record keeping:
The fund must keep accurate records of trade transactions, client interactions, and compliance guidelines. Audits: State regulators can perform audits to check adherence to custody regulations and fiduciary responsibilities.
Jurisdictional Considerations Domicile Choice:
Offshore funds select jurisdictions like the Cayman Islands to keep non-U.S. investors outside SEC registration requirements.
As you can see, starting a fund is not as simple as doing an off-the-shelf, fill-in-the-blanks project. Rather, seeking the advice of a fund formation attorney, marketing consultants, and accounting experts is essential to your success.
OK, back to the checklist.
- Create your investment strategy by outlining the fund's objectives and target assets while designing the investment approach, risk management strategy (based on market conditions), investor needs, and professional expertise. Make sure your explanation is clear and concise for investors. NOTE: Do not avoid disclosing how your found will deal with flat or negative markets. Sophisticated investors do not view investments through rose-colored glasses. They will appreciate an honest risk management discussion, and you will avoid future investor confusion.
- Be ready to assemble the team. Initially, it might just be yourself, but soon, your team will grow to include portfolio managers, risk management analysts, and essential support staff members. TIP: Hiring team members with experience that you do not possess allows you to borrow their credibility benefiting the fund. Here is a link to an article talking about starting a new fund and how to overcome the challenge of credibility: [link]
- Operational and administration processes. Set up back-office systems for operational risk and management solutions and integrate them in compliance reporting and accounting practices.
- Select and engage key service providers. The necessary service providers for selection include a fund administrator custodian, an optional prime broker auditor, and legal counsel.
- Develop a marketing plan and establish investor communication protocols. Your marketing plan will be centered around your pitch deck. A costly assumption is to create a presentation assuming the prospective investor understands the information. A confused mind says NO, so your pitch deck must be clear and concise and address the primary questions most investors raise. Missing the mark with a presentation has been the death knell for many a fund, so double down hard on this project.
- Your risk management and compliance framework should establish procedures and policies to meet compliance requirements. Do not be naive and assume everyone on the team is hardworking and honest. Create internal controls to block fraud and prevent operational mistakes.
- Run an internal audit during launch preparation to confirm that all legal documentation is in order, that your offering materials are complete and ready in printable and online formats, and that you have reviewed established bank accounts and trading platforms. Running a soft launch to test your processes and systems may also be advisable.
A complete checklist enables fund managers to cover essential components of fund structuring, including legal requirements and operational arrangements. From day one, expert legal advice is vital for fund owners who must understand regulatory requirements and industry best practices because launching a fund.
What Makes Fund Launch’s Formula Unique?
First of all, who are we?
Fund Launch is the #1 provider helping fund managers, investors, and entrepreneurs build, launch, and scale their funds without needing a fancy Ivy League degree or working on Wall Street for 20+ years.
To maximize value for our members, we assembled our ‘hero team’ of fund managers to ensure we provide them with A-Players who are actively managing and scaling successful funds across multiple industries.
We provide our clients with a custom-tailored approach to getting their funds launched in the easiest, quickest, and most cost-effective way possible. Our members’ results speak for themselves.
Here is how Fund Launch can save you a ton of money!
Legal Fees (gulp)
The fees charged by investment law attorneys can be sky high—as much as $50,000 and more are quite common. Fund Launch avoids excessive legal fees by nailing down the fund structure FIRST. Then, our attorney-created fund structuring docs save our members tons of money.
Do you know the difference between:
Accepting investor money before your fund is registered?
Or…
Obtaining soft commitments from investors where no money is accepted before your fund is registered?
About 5-10 years!
Here is a much better approach to test your fund’s investor response, which keeps you out of the grey bar hotel.
Fund Launch will help you design the perfect pitch deck and create your presentation script so you can approach investors before your fund is set up. You can secure soft funding commitments from them, clarifying that you will NOT ACCEPT A SINGLE PENNY until all legal filings are finished.
Investors will appreciate that you are a by-the-book, honest individual, inspiring more confidence when the time comes to move forward. After you have enough money in soft commitments, you can have the confidence to move forward and get your legal documents filed.
Here is a tremendous Fund Launch member benefit: The money you spend on filing documents is reimbursable by the fund. Once you become a member, we invest in your success and want to give you every possible reason to work with us for years to come.
When was the last time any company really had your back?
How Fund Launch Membership Can Help You Launch a Fund?
If wasting time thinking instead of doing frustrates you, then you need to dig into our exclusive BLACK CARD PROGRAM. This is an exclusive fund incubator program that provides high-level mentorship and resources for aspiring fund managers aiming to scale their funds.
Members have reportedly launched 300+ funds in the past 3 years. How? We guide every fund owner through our tried and tested 4-phase Fund Launch Incubator - designed to help you craft a fund strategy that stands out.
BLACK CARD
Asset class-specific tracks for Real Estate, Venture Capital, Private Equity, Debt, & Hedge Funds.
- 4-Phase Curriculum
- Meet 1-1 with various advisors
- Dedicated account manager
- Office hours 6 days/week
- Fund Academy course, 200+ videos
- Regular group coaching sessions
- Fund/Syndication Legal Work
- Works for: Funds & Syndications
- Access to exclusive resources and events
Check out what one of our BLACK CARD MEMBERS has to say in this video (scroll down towards the bottom of the page): https://www.fundlaunch.com/about
Summary of Main Points
How to Set Up Legal Docs For Your Fund outlines the essential steps and considerations for establishing and maintaining an investment fund, emphasizing the critical nature of selecting the correct legal structure, such as a Limited Partnership (LP) or Limited Liability Company (LLC).
It details federal and state regulatory compliance, including mandatory filings such as Form D and Form ADV, and highlights ongoing reporting responsibilities.
The article also features information about Fund Launch, a consultancy service that assists individuals in navigating the complexities of fund creation. It aims to reduce legal fees and guide managers through fundraising and operational setup, offering various membership programs like the Black Card Program for comprehensive support.
