How to Establish a Fund: Key Steps and Requirements

Establishing a fund involves a series of deliberate steps, moving from conceptualization to legal structuring and ongoing operations. This process requires careful consideration of investment goals, regulatory requirements, and the practicalities of managing a financial entity. Understanding these fundamental aspects is paramount for anyone looking to launch a successful fund.

Defining the Fund’s Investment Focus

Establishing a fund begins with clearly defining its investment purpose and identity. This guides all subsequent decisions, from legal structure to investor outreach. A well-articulated investment focus ensures alignment across the fund’s design and future operations.

Formulating a precise investment strategy involves identifying specific asset classes the fund will target, such as public equities, private equity, venture capital, real estate, debt, or commodities. The strategy also encompasses the investment approach, emphasizing long-term growth, consistent income, or specialized techniques. This clarity helps define the fund’s unique market position.

Identifying the target investor base is another crucial step, influencing the fund’s design and regulatory pathway. Funds may seek capital from accredited investors, institutional investors, family offices, or a combination. Each investor type comes with distinct regulatory considerations and expectations for reporting and communication. This shapes marketing efforts and required disclosures.

Defining the investment horizon and liquidity terms clarifies how long capital will be committed and how easily investors can access their funds. Some funds are structured for long-term capital appreciation, requiring investors to commit capital for several years, while others offer more frequent liquidity. This impacts the assets the fund can pursue and investor profiles.

The fund’s objectives articulate its goals beyond financial returns, such as capital appreciation, wealth preservation, or social/environmental impacts. These objectives guide investment decisions and communicate the fund’s mission to prospective investors. They also serve as benchmarks for evaluating performance and impact.

Understanding Legal Structures and Regulatory Obligations

Selecting the appropriate legal structure is key for any fund, impacting liability, taxation, and governance. Understanding regulatory obligations is important for compliance and avoiding legal issues. This involves reviewing federal and state securities laws before formal filings.

Common fund structures include Limited Partnerships (LPs), Limited Liability Companies (LLCs), Corporations, and Business Trusts. LPs are frequently used for private equity and venture capital funds. A general partner (GP) manages the fund with unlimited liability, while limited partners (LPs) contribute capital with liability limited to their investment. LPs typically benefit from pass-through taxation.

However, the general partner’s unlimited liability often necessitates forming a separate entity, like an LLC, to serve as GP.

Limited Liability Companies (LLCs) offer liability protection to all members, similar to a corporation, but can elect to be taxed as a partnership, corporation, or disregarded entity. This flexibility makes them a popular choice for various fund types, allowing customization in governance and capital structure.

Corporations provide strong liability protection for shareholders but are subject to corporate income tax, with profits potentially taxed again at the shareholder level. Business Trusts, less common for traditional investment funds, offer pass-through taxation and liability protection, often used for REITs or other asset-holding vehicles. The choice among these structures hinges on the fund’s investment strategy, desired tax treatment, and liability considerations.

Federal regulatory frameworks impact fund operations. The Investment Advisers Act of 1940 governs firms providing investment advice for compensation, requiring registration as an Investment Adviser (IA) with the Securities and Exchange Commission (SEC) if the firm manages assets above $100 million in AUM. Firms below this threshold generally register with state authorities.

The Investment Company Act of 1940 regulates investment companies, such as mutual funds, which offer securities to the public. Most private funds structure themselves to avoid registration under this Act, often relying on exemptions for funds with fewer than 100 investors or primarily qualified purchasers.

Exemptions from SEC registration as an Investment Adviser are available for certain private fund advisers. The private fund adviser exemption applies to advisers who solely advise private funds and have less than $150 million in AUM in the United States. Advisers relying on this exemption become “exempt reporting advisers” (ERAs) and must still file certain information with the SEC via Form ADV, with fewer disclosure requirements.

De minimis exemptions exist at the state level, allowing advisers with fewer than a specified number of clients (e.g., five) in a state to operate without state registration, provided they have no office in that state and do not hold themselves out to the public as investment advisers.

Form ADV is the key document for SEC and state investment adviser registration and reporting. It is divided into several parts, each with specific information.

Part 1A collects basic firm details, including legal name, principal office address, business operations, client types, AUM, and information about management personnel. It also requires disclosure of disciplinary history.
Part 1B contains additional questions for state-registered advisers.
Part 2A, the firm brochure, provides narrative disclosures about the adviser’s services, fees, conflicts of interest, and disciplinary information, delivered to clients.
Part 2B, the brochure supplement, provides information about individuals providing investment advice.
Part 3, Form CRS, is a relationship summary required for SEC-registered advisers serving retail investors.

To complete Form ADV, a prospective fund manager must understand their fund’s structure, investment strategy, and client base. Information regarding the firm’s legal entity, business activities, and fee structure will populate Part 1A. Details about individuals managing the fund and providing advice, including their educational backgrounds and professional experience, are necessary for Part 2B. The firm’s investment approach and potential conflicts of interest, such as performance-based fees or proprietary product sales, are important for the narrative disclosures in Part 2A.

State-level securities laws, or “Blue Sky Laws,” impose additional requirements on fund offerings and adviser registration within each state. While federal laws often preempt state registration for certain offerings, states retain authority over fraud prevention and may require notice filings and fees for securities offered within their borders. Funds offering securities across multiple states must comply with each jurisdiction’s specific regulations. State-specific requirements can be found on individual state securities divisions’ websites.

Official forms, like Form ADV, are filed electronically through the Investment Adviser Registration Depository (IARD) system, managed by the SEC and FINRA. It serves as a central repository for adviser registration and disclosure. State-specific notice filings under Blue Sky Laws may also be submitted through the IARD system or directly with the relevant state securities authority.

Executing Fund Formation and Operations

Once initial decisions regarding legal structure and regulatory understanding are in place, fund formation and operational infrastructure establishment begins. This phase involves drafting legal documents, setting up financial systems, and engaging service providers. It culminates in regulatory filings and ongoing compliance measures.

The creation of fund documentation is key to formalizing the fund’s existence and its relationship with investors. Key legal documents include the Private Placement Memorandum (PPM), the Limited Partnership Agreement (LPA) or Operating Agreement, and the Subscription Agreement. The PPM, or Offering Memorandum, serves as a comprehensive disclosure document provided to prospective investors. It outlines the investment opportunity, associated risks, terms, use of proceeds, and financial projections, effectively replacing disclosures required in public offerings.

The Limited Partnership Agreement (LPA) or Operating Agreement (for LLCs) is the governing document defining the rights and obligations of all parties. For LPs, this includes the general partner and limited partners, detailing provisions for capital contributions, profit and loss allocation, management responsibilities, fees and expenses (e.g., typical management fees of 1.5% to 2% of committed capital and carried interest of 20% of profits), and procedures for dissolution or investor exit.

The Subscription Agreement is the legally binding contract through which an investor commits to investing in the fund, detailing their capital commitment and confirming eligibility. These documents are drafted and reviewed by legal counsel to ensure they align with the fund’s strategy and comply with securities laws.

Establishing the fund’s operational infrastructure involves several steps. Obtaining an Employer Identification Number (EIN) from the IRS is necessary for the fund and its management company as their federal tax identification. Following EIN acquisition, opening dedicated bank accounts for the fund and its management entity is essential for segregating assets and facilitating financial transactions. This separation is important for accounting, tax, and compliance.

Key service providers are important for efficient operation.

Fund administrators manage accounting records, calculate Net Asset Values (NAVs), handle capital calls and distributions, and prepare financial statements and investor reports.
Custodians, typically banks or trust companies, hold and safeguard the fund’s securities and other assets, ensuring their security and facilitating transaction settlements.
Independent auditors provide an annual audit of the fund’s financial statements, providing an objective assessment.
Engaging experienced legal counsel and tax advisors is important for ongoing compliance, complex transactions, and tax obligations.

Implementing internal compliance policies and procedures is an ongoing process. These policies, mandated by regulations like Rule 206(4)-7 of the Investment Advisers Act, prevent violations of federal securities laws.

They typically include a code of ethics.
Anti-money laundering (AML) protocols.
Cybersecurity measures.
Trading policies.
These policies ensure the firm operates with integrity, protects client assets, and adheres to regulatory standards.

Regulatory filings and post-formation compliance involve submitting Form ADV. This is done electronically through the IARD system, requiring account creation and funding for fees. The process involves navigating the online portal, inputting information, and submitting.

After submission, the SEC or state regulators review the application, which can take weeks or months. Regulators may issue deficiency letters requesting additional information. Once approved, the firm receives confirmation of its registration.

Beyond initial registration, ongoing compliance requirements include annual updating amendments to Form ADV, typically due within 90 days of the firm’s fiscal year-end. Firms must also maintain accurate and current books and records, as specified by Rule 204-2. Adherence to marketing rules, annual compliance program reviews, and periodic personnel training are part of continuing obligations to ensure compliance.