Investment Management Contracts: When To Sign The Deal

Investment management agreements (IMAs) are legal documents that give investment managers the authority to manage capital on behalf of investors. They detail the terms and conditions under which a client will invest in a shared vehicle while agreeing to pay investment management service fees and direct expenses. An IMA contains other standard provisions, including monitoring fees, the scope of activities, and managerial indemnification.

The agreement is made between the investment manager and the client, who appoints the manager as their investment manager. The manager is then authorised to supervise and direct the investment and reinvestment of the assets in the client's account, subject to certain limitations. The manager, as the client's agent and attorney-in-fact, can buy, sell, exchange, convert and otherwise invest or trade in stocks, bonds, options, units and other securities.

The investment management agreement should also specify the type and frequency of written or verbal reports, which are typically issued quarterly and include general market conditions, account activity, current holdings, and performance.

The investment manager's fees are typically specified in an appendix and are usually expressed as a percentage of account assets, payable quarterly in advance or on invoice receipt.

Investment contract structure

An investment contract is a legal agreement between an investor and a company, where the investor provides capital with the expectation of receiving a return. These contracts are regulated by the Securities Act of 1933 and must contain certain elements as outlined by the Howey Test to be considered valid. Here are some key aspects of the structure of an investment contract:

• Parties Involved: The contract should clearly identify the parties involved, including the investor(s) and the company. It should also specify the roles and titles of each party, such as company founders, shareholders, and investment managers.
• Investment Structure: The contract should define the type of investment, such as stock, debt, or convertible debt. It should also specify the amount and form of the investment (e.g. cash, assets, etc.) and the timing of the investment (lump sum or over time).
• Purpose of the Investment: The agreement should outline the goals of the investment, including any conditions or milestones that need to be achieved. It should also specify whether the investor is seeking ownership or stake in the company or is simply providing a loan.
• Rights and Obligations: The contract should detail the rights and obligations of both parties, including any restrictions on the investor's rights, such as limits on ownership, shares, or other roles in the company. It should also address the investor's expectations of profit and how it will be calculated.
• Terms and Conditions: The contract should outline the terms and conditions of the investment, including the investment timeline, duration, and termination clauses. It should also specify any pre-conditions to funding and commitments made by the company in return for the investment.
• Representations and Warranties: The contract should include representations and warranties, which are assurances made by the company regarding the accuracy and truthfulness of their statements. This protects investors in case of willful or negligent misrepresentations.
• Reporting and Control: The contract should specify who will handle financial reporting and at what frequency (e.g. quarterly, annually). It should also address the level of control and decision-making authority granted to the investor, especially in relation to significant financial decisions.
• Dispute Resolution: The contract should include a strategy for resolving disputes and consequences for violating the contract. This may include financial penalties or legal action.
• Signatures: Both parties must sign the contract to indicate their understanding and agreement to the terms.

It is important to note that investment contracts can vary depending on the specific type of investment and the parties involved. Seeking legal advice from a financial lawyer is recommended to ensure the contract is structured appropriately and complies with all relevant laws and regulations.

Investment length

The length of an investment contract is not a random date agreed upon by both parties. Instead, it is the length of time it will take for the investor to reach their agreed-upon return on investment (ROI). This is also referred to as the term of the contract.

The contract should also outline how the agreement will end and what will happen if the parties want to terminate the contract early.

For example, an investment management agreement may continue in effect for two years from the date of execution, and from year to year thereafter so long as such continuance is specifically approved at least annually. It may be terminated at any time by vote of the Board of Trustees or by vote of a majority of the outstanding voting securities of the Fund.

An investment contract may also be terminated by either party upon thirty days' written notice to the other party.

Investment purpose

Investment contracts are legal agreements between an investor and a company, protecting the investor's financial interests and outlining how the company will provide a return on their investment. These contracts are covered by federal securities laws, such as the Securities Act of 1933 in the US, which safeguard investors from fraud.

When to Acquire an Investment Management Contract

An investment management contract is acquired when an investor is proposing to inject new capital into a business. This could be a new investor or an existing one offering further funding. The contract sets out the key terms of the investment, including the amount, any conditions, and what is offered in return.

Key Terms

• Identity of the Parties: The contract should identify all parties, including the company, the investor(s), and any shareholders.
• Investment Structure: Outline the type of investment, such as equity investment or debt investment.
• Purpose of the Investment: The investor's purpose is usually to make a profit, while the company aims to raise capital.
• Amount of Investment: Define the amount of money or other assets being invested, as well as any milestones that must be reached.
• Form of the Investment: How the investment will be received, such as a lump sum or over time.
• Return on Investment (ROI): Address the expected ROI and how it will be calculated.
• Rights of the Parties: Outline the rights of all parties, especially if the investor will become a new shareholder.
• Management and Control: Detail how the company will be managed, including the role of executives and the board.
• Confidentiality: Include confidentiality provisions to protect sensitive commercial information.
• Exit Strategy: Outline an exit strategy in case of an unresolvable dispute or if the investor wishes to stop investing or transfer their shares.

Other Considerations

• Warranties: The company may provide warranties or assurances about its statements and performance.
• Due Diligence: Before investing, investors should conduct due diligence on the company and understand the terms and conditions of the contract.
• Legal Advice: Consult a financial advisor or lawyer to ensure the investment aligns with your financial goals and to avoid potential pitfalls.
• Notarisation: While not required, having the contract notarised can be beneficial if there is a future dispute.

Types of Investment Agreements

The type of investment agreement will depend on the nature of the funding. Here are some common types:

• Share Purchase Agreement: Investors purchase shares in exchange for their investment.
• Convertible Loan Note: The investor provides a loan that may convert into shares later.
• Simple Agreement for Future Equity (SAFE): The investor gains the right to subscribe for shares in the future.

Investment amount

The investment amount is a critical aspect of an investment contract. It involves the investor transferring money or other assets to the issuer in exchange for a financial reward. The amount of investment can vary depending on the nature of the project and the specific requirements of both parties. For instance, in equity investments, the investor contributes capital to the venture and gains ownership in the business, while in debt investments, the investor lends money to the venture and receives repayments with interest without acquiring ownership.

When determining the investment amount, it is essential to consider the investment's purpose, risks, goals, and prospective rewards. It is also crucial to ensure that the investment aligns with the investor's overall financial strategy. Consulting with a financial advisor or professional can help investors make informed decisions about the investment amount.

In the case of investment management agreements (IMAs), the investment amount also includes the fees and expenses associated with the investment manager's services. These fees are typically specified in an appendix and expressed as a percentage of account assets, payable quarterly in advance or upon receipt of the invoice. Along with the investment manager's fees, clients are responsible for brokerage commissions, custodial fees, and other service providers' fees.

It is worth noting that investment contracts can be complex legal documents, and it is always recommended to seek professional legal advice before signing any agreement.

Investment Management Agreements (IMAs)

IMAs are legal documents that authorise investment managers to manage capital on behalf of investors. They outline the terms and conditions under which the client will invest in a shared vehicle while agreeing to pay investment management service fees and direct expenses. IMAs also include other standard provisions, such as monitoring fees, the scope of activities, and managerial indemnification.

The investment amount specified in an IMA will depend on the specific arrangement between the investment manager and the client. The manager's fees are typically calculated as a percentage of the account assets, and clients may also be responsible for additional expenses.

Factors Influencing Investment Amount

When determining the investment amount, several factors come into play:

• Structure of the Investment: The structure of the investment includes identifying the parties involved, the nature of the investment, its purpose, the rights of the parties, and any restrictions or obligations.
• Length of the Investment: The length of the investment is determined by the time it takes for the investor to achieve their desired return on investment (ROI). It also outlines the terms of termination and early exit strategies.
• Purpose of the Investment: The purpose of the investment should be clear, with the investor's goal typically being profit and the company's goal being capital raising.
• Form of the Investment: The form of investment refers to how the investment will be received, such as a lump sum or periodic cash payments or the exchange of tangible assets.
• Return on Investment (ROI): ROI is a crucial consideration, and the contract should address how it will be calculated. Common formulas include ROI = Net Income / Cost of Investment and ROI = Investment Gain / Investment Base.
• Rights of the Parties: Defining the rights of the parties involved, especially if the investor becomes a shareholder, is essential to ensure a transparent and mutually beneficial relationship.

Investment form

An investment contract is a legally binding agreement between an investor and a company, where the investor will invest cash or something of value in exchange for a financial reward. These contracts are covered by federal securities laws, such as the United States' Securities Act of 1933, which safeguard investors from fraud and guarantee that companies provide accurate and thorough information on their financial performance and prospects.

To be considered a valid investment contract, the contract must contain the elements laid out by the Howey Test, which include:

• An investment of money
• In a common enterprise
• A reasonable expectation of profit
• Derived from the efforts of others

Structure of the Investment

The structure of the investment should define the parties involved, the nature of the investment, its purpose, the rights of the parties, the ROI for the investing party, and any restrictions or obligations of the parties.

Length of the Investment

The length of the investment refers to the time it will take for the investor to reach their agreed-upon ROI. This section of the contract should also outline how the agreement will end and any conditions for early termination.

Purpose of the Investment

The purpose of the investment should be clear in the contract. Typically, the investor's goal is to make a profit, while the company aims to raise capital. As the investor will become a new shareholder, the terms and conditions of the agreement must be explicit.

Amount of Investment

The contract should define how much the investor will provide, whether it be cash, assets, or something else of value. It should also detail what the company is offering in return, such as equity shares, and any milestones that need to be achieved by certain dates.

Form of the Investment

This refers to how the investment will be received. It could be in the form of cash, either as a lump sum or over time, or it could be an exchange for tangible assets.

Return on Investment (ROI)

The contract should address the expected ROI and any conditions that may impact it. It should also outline how the ROI will be calculated, using a popular formula such as ROI = Net Income / Cost of Investment or ROI = Investment Gain / Investment Base.

Rights of the Parties

It is critical to define the rights of the parties involved, especially as the investor will become a shareholder. Any rights to be included or excluded when the agreement is activated must be outlined upfront.

Warranties and Representations

Representations and warranties are assurances that the company gives to the investor regarding specific circumstances. For example, the company may assure the investor of their financial records, adherence to regulations, and intellectual property ownership.

Restrictions

The contract should include any restrictions or confidentiality clauses that safeguard the interests of both parties and ensure compliance with the contract's conditions.

Reporting

An investment contract should specify the type and frequency of written or verbal reports. Typically, reports are issued quarterly and cover general market conditions, account activity, current holdings, and performance.

Investment Principles

The contract should specify the investment principles used for managing the account, which should be discussed collectively and transparently between the parties.

Expenses and Fees

The investment manager's fees are typically specified in an appendix to the contract and are expressed as a percentage of account assets, payable quarterly. Along with the investment manager's fees, the contract should outline any other expenses, such as brokerage commissions and custodial fees, and which party is responsible for them.

Term and Termination

The contract should state the time period during which it remains valid and any conditions that will result in its termination.

Signatures

Finally, the investment contract must be signed by authorised individuals from both parties, as well as witnesses, to make it legally binding. Each party should retain an original copy of the signed agreement.

Frequently asked questions