Launching An Investment Fund: Legal Steps To Success

Starting an investment fund is a complex and challenging process that requires careful planning and execution. Here are the key steps to legally establishing an investment fund:

1. Define your investment strategy: Clearly define your investment strategy and ensure it is replicable, scalable, and understandable to potential investors. Common strategies include long/short equity positions, merger arbitrage, investing in distressed companies, and algorithm-driven quantitative approaches.

2. Choose a business structure: Decide on the legal structure of your fund, such as a limited partnership, limited liability company (LLC), or corporation. Each structure has its own advantages and disadvantages in terms of liability protection, taxation, and operational flexibility.

3. Register your fund: Comply with regulatory requirements by registering your fund with the relevant authorities, such as the Securities and Exchange Commission (SEC) and state regulatory bodies. This may include filing articles of incorporation, obtaining an employer identification number (EIN), and registering as an investment advisor.

4. Create an operating document: Establish rules and guidelines for running your investment fund, including decision-making processes, ownership percentages, profit and loss allocation, and management responsibilities.

5. Obtain required licenses: Ensure you and your employees have the necessary licenses to provide investment advice and manage investments. This may involve passing written exams administered by financial regulatory authorities.

6. Develop a marketing strategy: Identify your target clients and create a branding and marketing strategy to reach them effectively. Build a website, craft a consistent brand image, and comply with advertising regulations to promote your investment fund to potential investors.

7. Raise capital: Convincing others to invest in your fund is one of the toughest steps. Prepare to invest your own capital and showcase your investment track record, strategy, and a competent team to attract institutional and accredited investors.

Define your business strategy

Before starting an investment fund, it is crucial to outline a clear and well-defined business strategy. This involves extensive research into the desired market or sector, such as energy development or early-stage biotech companies. Investors will want to understand the fund's goals and investment strategy. Consider whether the fund will have a geographic focus, industry specialisation, or a specific strategy for emerging markets.

It is also essential to determine the purpose of each investment. For example, is the primary goal to raise capital for mergers and acquisitions, or to enable existing owners to sell their stakes in the company? Articulating a clear and scalable investment strategy that can adapt to different market conditions is key to attracting investors. Common hedge fund strategies include long/short equity positions, merger arbitrage, investing in distressed companies, and algorithm-driven quantitative approaches.

In addition to the investment strategy, it is crucial to establish a business plan that outlines cash flow expectations, timelines, and marketing strategies to target future investors. This should be accompanied by an executive summary that ties together all the key elements of the business plan.

Furthermore, it is important to assemble a competent team of service providers, including a broker offering prime brokerage services, an auditor, and an administrator to handle day-to-day tasks. Building a strong team will help ensure the smooth operation of the fund and inspire confidence in potential investors.

Finally, it is worth considering the use of a professional marketing team to sell the fund to outside investors. They can help craft a compelling narrative, explain the investment process, and highlight the fund's successes to potential investors.

Choose a business structure

The business structure you choose for your investment fund will depend on your jurisdiction and the type of fund you are starting. In the US, investment funds can be structured as corporations, partnerships, or limited liability companies (LLCs).

Corporations are owned by shareholders and run by officers appointed by a board of directors. Corporations shield owners from personal responsibility for business obligations such as debts or lawsuits. To form a corporation, you will need to file articles of incorporation with the state and pay a filing fee.

Partnerships are owned by the partners, who jointly run the business. Partners are personally responsible for the partnership's obligations. Partnerships do not have to file paperwork with the state, but you may be able to create a limited partnership where only the general partner is personally liable for the company's obligations.

Limited liability companies (LLCs) are a hybrid of corporations and partnerships. They shield owners (called members) from personal responsibility for business obligations. You will need your jurisdiction's permission to form an LLC.

Hedge funds typically require the formation of two business entities: one for the fund itself, usually structured as a limited partnership (LP) or limited liability company (LLC), and one for the fund's investment manager, which can be structured as any business type that meets the needs of the investment manager.

When choosing a business structure, consider consulting a lawyer experienced in investment funds to ensure you select the best structure for your fund.

Hire a lawyer

Hiring a lawyer is an important step in the process of starting an investment fund. A lawyer will be able to guide you through the complex legal requirements and ensure that you are in compliance with all applicable laws and regulations. Here are some key points to consider when hiring a lawyer to help you start your investment fund:

• Experience and Specialisation: Look for a lawyer who has experience in the specific area of investment fund formation and compliance. They should be well-versed in the relevant laws and regulations, such as the Securities Act and the Investment Company Act. Additionally, seek a lawyer who has experience in the investment industry and understands the unique challenges and requirements of investment funds.
• Industry Knowledge: Choose a lawyer who is familiar with your particular industry. Different industries have different legal requirements and regulations. For example, the healthcare and manufacturing industries have more stringent rules than others. By selecting a lawyer with industry-specific knowledge, you can ensure that all legal obligations are met.
• Compliance and Regulatory Expertise: The lawyer should be well-versed in compliance requirements and be able to guide you through the process of registering with relevant regulatory bodies, such as the Securities and Exchange Commission (SEC). They should also advise you on consumer protection provisions and ensure your fund complies with applicable laws.
• Cost and Billing: Understand the lawyer's fee structure and billing rates beforehand. Some lawyers charge a flat fee for specific projects, while others charge an hourly rate. Ask for an estimate of the total cost and be aware of any additional expenses that may arise. Discuss the payment methods they accept and whether they require a retainer or advance payment.
• Communication and Availability: Ensure that the lawyer is easily reachable and responsive to your needs. Clarify their preferred methods of communication (phone, email, etc.) and establish expectations for response times. It is also essential to inform them about your day-to-day business responsibilities to avoid interruptions during critical business hours.
• Conflicts of Interest: Before retaining a lawyer, ask about any potential conflicts of interest. Inquire if they have represented any competitors, former business partners, or individuals with whom you have a dispute. This information will help you decide if you feel comfortable sharing confidential information with the lawyer.
• Team and Delegation: Understand the lawyer's team structure and how work will be delegated. If they work with junior partners, associates, or paralegals, clarify their roles and how it may impact the overall cost and timeline of the legal services provided.
• Timeline and Efficiency: Discuss the expected timeline for completing the legal work required to establish your investment fund. Ensure that the lawyer can work within your timeframe and address any time-sensitive matters promptly.
• Reputation and References: Research the lawyer's reputation and seek references or testimonials from previous clients. A good reputation and positive feedback from past clients can give you confidence in their abilities and work ethic.
• Size of the Law Firm: Consider whether you prefer a solo practitioner, a small firm, or a large firm. Solo practitioners or small firms may offer more personalised services, while larger firms may have more resources and specialisations. Choose the option that aligns with your budget and the level of attention you desire.

Remember, hiring a lawyer for your investment fund is an important investment. A qualified and experienced lawyer will not only help you navigate the complex legal landscape but also provide valuable insights and guidance throughout the process of establishing your investment fund.

Create an operating document

Creating an operating document is a crucial step in legally starting an investment fund. This document will outline the rules and procedures for running your investment company and will be stored at your principal place of business. The specific content of your operating document will depend on the structure of your company.

If you form a corporation, you will need to draft bylaws. Your bylaws should explain:

• How individuals can be appointed as officers or board members.
• How shareholder or board of director meetings can be called.

If you form a partnership, you will need a partnership agreement. Your agreement should cover:

• Ownership percentage and how profits and losses are allocated.
• Who can bind the partnership.
• What will happen if a partner dies.

If you form a limited liability company (LLC), you will need an operating agreement. This document will be similar to a partnership agreement and should include:

• Identification of the owners and their percentage of ownership.
• Division of profits and losses.

Additionally, you may want to include other information in your operating document, such as:

• A mission statement.
• A compliance manual.
• An ethical code of conduct.
• A manual for supervisory procedures.
• An advisor portfolio management agreement.

Register with the government

Registering with the government is a crucial step in the process of legally starting an investment fund. The specific requirements and procedures may vary depending on your country and the type of investment fund you are establishing. Here is a detailed guide on registering with the government, specifically tailored for starting an investment fund:

• Identify the Relevant Government Agencies: Different government agencies may be involved in the registration process, depending on your jurisdiction. In the United States, for example, you will need to register with both your state government and the federal government. Identify the specific agencies responsible for regulating investment funds, such as the Securities and Exchange Commission (SEC) in the US.
• Consult with Legal Professionals: The registration process can be complex, so it is highly recommended to consult with legal professionals who have expertise in this area. They can guide you through the specific requirements and help ensure that you comply with all applicable laws and regulations.
• Complete the Necessary Paperwork: The registration process will typically involve submitting various documents and forms to the relevant government agencies. This may include articles of incorporation, registration forms, and other legal documents. Work closely with your legal team to prepare and submit these documents accurately and on time.
• Obtain Required Licenses: Investment advisors and fund managers often need to obtain specific licenses to operate. For example, in the US, investment advisors may need to obtain a Series 65 license by passing a written exam on securities laws and ethics. Make sure you are aware of any licensing requirements in your jurisdiction and take the necessary steps to obtain them.
• Register with the Securities Regulator: In many countries, investment funds are regulated by a securities regulator, such as the SEC in the US. You will typically need to register your investment fund with this regulator and provide detailed information about your fund, its structure, and its investment strategies.
• Comply with Consumer Protection Provisions: Depending on your jurisdiction, there may be specific consumer protection laws and regulations that you need to comply with. For example, in the US, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 imposes registration and reporting requirements on investment fund managers. Ensure that you understand and adhere to all applicable consumer protection provisions.
• Register for Taxation: Investment funds are subject to taxation, and you will need to register with the relevant tax authorities. In the US, for instance, you will need to obtain a Federal Employer Identification Number (FEIN) from the Internal Revenue Service (IRS) for tax purposes.
• Stay Informed about Regulatory Changes: The regulatory landscape for investment funds can be dynamic, with new rules and regulations being introduced from time to time. Stay informed about any changes in the laws and regulations affecting investment funds to ensure ongoing compliance. Subscribe to updates from the relevant government agencies and consult with your legal team regularly.
• Seek Guidance when Needed: Starting an investment fund can be a complex process, and it is important to recognise when you need additional guidance. Consult with legal professionals, industry associations, and other experts who can provide you with specific advice tailored to your jurisdiction and the type of investment fund you are establishing.

Frequently asked questions