Whether you need to obtain licenses or registration depends on a number of factors, including the role you/your firm will play in management of the fund, the state in which the fund (and/or the management firm) operates, and the type and total value of assets under management. Given the complexity of overlapping state and federal regulations, this is a particular area in which experienced legal counsel is important. For example, the Series 65 exam may be required, along with formal registration as an Investment Adviser with the SEC or a state agency. However, for funds that will trade in futures contracts including foreign exchange futures, the Series 3 or Series 34 exam may be required, along with registration as a Commodity Pool Operator or Commodity Trading Advisor with the Commodity Futures Trading Commission (CFTC).

The number of allowed investors is contingent on how the fund seeks to be classified under the U.S. securities laws. Specifically, whether the fund intends to conduct a 506(b) or 506(c) offering and further whether the fund seeks to utilize the 3(c)(1) or 3(c)(7) exemption. Under these provisions private funds generally will take advantage of a safe harbor within the Securities Act of 1933 and avoid being defined and governed by the SEC as “investment companies” under the Investment Company Act of 1940 if they limit the number of investors to a particular number and a specific "accredited" or "qualified purchaser" standard. Dependent upon the forgoing such funds generally may include either 100, 499 or 1,999 investors. In certain circumstances private funds may also include within the 100 investor type of fund up to 35 “non-accredited investors.”  We consult at the outset of fund formation to determine how a fund will be structured, the types of investors you are likely to attract and, therefore, how the fund should be classified.

Private investment funds technically are not structured as corporations, but rather as limited partnerships (LPs) or limited liability companies (LLCs). (In a few states — Delaware and Florida among them — the fund can also register as a limited liability limited partnership (LLLP).) The reason being: these entities can be taxed as partnerships to avoid the double taxation (of individual investors and of the corporation itself) associated with traditional corporate forms. Separate entities may be required for related domestic and offshore funds, as well as for the associated management company. We offer fund-specific advice with regard to which entity structure(s) and state(s) of registration are optimum for tax and regulatory purposes.

Offshore funds are established if a fund will include investors located outside the U.S. or certain tax-exempt U.S. investors. The benefits include not just minimization of income taxable in the U.S., but also avoidance by investors of certain U.S. SEC and IRS disclosures. There are a range of options for location and structure of an offshore fund depending on the fund’s goals. With regard to structure, the fund may be a stand-alone fund, may be directly related to a domestic fund (side-by-side or parallel structure), or may feed into a master fund with or without an associated domestic fund (master-feeder or mini-master structure). We work with managers of new and existing funds to establish the benefits and preferred structures of offshore investment vehicles, whether as stand-alone funds or as funds integrated into a multi-fund strategy.

The short answer is: less time than you might think. Of course timing depends on a host of factors, such as how management will be handled and the complexity of the fund structure (including whether just domestic, or also offshore, entities are planned). But, it is possible for domestic funds exempt from SEC registration to be legally formed, and begin operating, in as little as one month.

Traditionally, hedge funds charge fees to investors based on a “2 and 20” formula: an annualized 2% management fee which is paid monthly or quarterly based on assets under management and a 20% annual performance or incentive reallocation based on net fund profits. Similarly managers of private equity funds generally charge an annualized 2% management fee based on committed capital and receive a 20% carried interest as incentive compensation. Recently in some circumstances, particularly for new fund managers, fees may be negotiated somewhat in order to induce seed investors at the time of fund formation. We also have experience in several alternative fee arrangements including, but not limited to, incentive hurdles & triggers, clawbacks and modified highwater marks. We work with new funds to determine the most advantageous fee structure, taking into account management goals as well as the competitive market for investors.

Private investment funds generally can accept money from benefit plan investors such as 401(k) plans, IRAs, and other retirement or pension plans. The hitch lies in whether the relative interests in the fund held by such plans trigger ERISA regulations. If ERISA is triggered, the fund manager becomes subject to additional restrictions and responsibilities as an ERISA fiduciary and/or the IRS prohibited transaction rules. To avoid ERISA requirements, the aggregate interests in a fund held by benefit plan investors must be limited to 24% or less. Benefit plan investors can still be valuable fund contributors; we simply recommend initiating appropriate strategies and monitoring from fund inception either to avoid, or to prepare for, ERISA compliant operations.