Investment Fund Legal Documents

DOCUMENTS AND FILINGS NEEDED TO FORM A FUND

Capital Fund Law Group

John S. Lore, Esq. | Managing Partner

To effectively start an investment fund, the sponsor must safely navigate the complex
regulatory structures that govern the fund’s operations. Unintentionally deviating from
regulatory disclosure requirements can result in serious consequences for the issuer and
its directors, officers, and managers. Experienced legal counsel plays a vital role in
guiding managers through their various responsibilities and can help managers avoid
devastating mistakes as they launch a new fund.

This white paper lays out some of the key documents and filings that legal counsel will
prepare for either an open-ended fund (hedge fund) or closed-ended fund (private equity/
real estate fund). When properly prepared, the offering documents and regulatory filings
set forth the framework to enable the fund to:

• properly structure the fund in a tax efficient way;

• meet the appropriate statutory requirements and exemptions;

• set market-appropriate investment terms;

• make the proper securities disclosures to avoid potential liability; and

• raise and deploy capital in compliance with regulatory structures.

HEDGE FUND STRUCTURAL CONSIDERATIONS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

WHAT DOCUMENTS
Fund Structural Considerations
MUST BE PREPARED?

There are four categories of documents that The structure for an investment fund is
the investment fund attorney will prepare dependent on a number of tax, regulatory,
to launch a fund: and financial considerations. Fund structure
(i) formation documents; (ii) offering is driven in large part by the fund’s strategy
documents; (iii) internal documents; and and the type of investments that the fund
(iv) certain regulatory filings. will pursue. The fund structure should be
based on careful and thorough analysis
with the assistance of an
experienced fund attorney. Among the
Formation documents are the documents decisions that should be made in structuring
filed with the appropriate government the fund include whether to:
authority to establish the existence of the
entities, including the fund, the general
partner and investment management
company. These include certificates and • structure the fund as a closed-end or
articles. The formation documents are open-end fund;
among the most basic of the fund
documents. • rely on Section 3(c)(1) or 3(c)(7) as
an exemption from the Investment
Because of the simplicity of filing Company Act--real estate funds typically
formation documents, some clients make rely on Section 3(c)(5)(C); and
the mistake of forming entities before
consulting with legal counsel. Formation • establish an offshore fund or a
documents should be filed only after domestic only fund.
thoroughly considering the appropriate
legal structure of the fund. These issues and others have bearing on
what entities should be formed, how many
entities are needed, and in what jurisdiction
the formation documents should be filed.
For a more detailed discussion of structural
issues, please refer to the following white
papers: For hedge funds: Hedge Fund
Structural Considerations. For real
estate funds: Forming a Real Estate
Fund--Strategy, Structure and Investment
Terms.

Call 212.203.4300 for a free consultation

HEDGE FUND STRUCTURAL CONSIDERATIONS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

(ii) The Offering Documents

The offering documents are the documents Similar to a prospectus in a public

that are provided to a prospective investor offering, a PPM provides potential
prior to the investor making an investment in investors with specific information about
the fund. These documents include: the terms of the fund, the structure of
the investment, background of the
(i) a fund disclosure document in the form managers and other disclosure issues.
of a private placement memorandum; The private placement memorandum
contains risk factors that an investor
(ii) the governing documents of the fund, should consider prior to making an
in the form of a limited partnership investment in the fund. A thoroughly
agreement or operating agreement prepared private placement memorandum
(depending on whether the fund is formed as should protect a fund sponsor from investor
a limited partnership or LLC; and claims of lack of disclosure. For examples
of the contents and level of thoroughness that
(iii) investment purchase documents, in the a private placement memorandum should
form of a subscription agreement, which have, refer to our PPM sample excerpts.
includes an investor questionnaire to
determine investor qualification.
Limited Partnership Agreement
"A thoroughly prepared
The limited partnership agreement (or in the
private placement case of an LLC-based fund, an operating
memorandum should agreement) is the legal governing document
of the fund. The limited partnership
protect a fund sponsor from agreement outlines the terms of the fund and
investor claims of lack of the rights of an investor and fund manager.
In contrast with the private placement
disclosure." memorandum, which is written in plain
Private Placement Memorandum English (accessible to non-legally trained
readers), the fund’s limited partnership
A private placement memorandum (PPM) is agreement is a lengthy and complex legal
a securities disclosure document that provides document. Among the terms of the limited
investors with material information about the partnership agreement are:
fund to enable an investor to make an
informed investment decision.

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HEDGE FUND STRUCTURAL CONSIDERATIONS KEY DECISIONS WHEN SETTING UP A DOMESTIC OR OFFSHORE FUND

• the powers and activities of the general Subscription Agreement/Investor

partner; Questionnaire
A subscription agreement provides investors
• fees and expenses, including with a description of the steps necessary to
management, performance or other purchase limited partnership interests (or for
potential fees as well as legal startup an LLC-based fund, membership interests)
costs, brokerage, administration, and in a fund and provides fund managers
audit expenses; with eligibility information about the
• allocations and distributions of profits to investor. This is the investor’s contract with
all partners, including how profits are the fund, which specifies the subscription
calculated and the timing of distributions; amount and outlines the terms under
which the investment is being made.
• withdrawal provisions, including For fund managers, this document
minimum and maximum withdrawal requires investors to attest that they meet
certain eligibility standards, such as
amounts, lock-up periods, gates, and
being an “accredited investor” or
distribution dates; and
“qualified client,” as required by SEC
regulations and state law.
• a designation of power of attorney, which (iii) The Internal Documents
authorizes the fund manager to act on the
limited partner’s behalf for such purposes Some fund documents, vital to the fund’s
as voting the fund’s securities, buying and operations, are neither filed with the
selling fund securities, admissions of new government nor provided to investors, but
limited partners, and amendments to fund kept on file with the fund. These internal
formation documents and other documents agreements set forth the rights and
necessary for continued fund activity. responsibilities among the individuals
sponsoring the fund and between the fund
and investment manager. These include the
To become a limited partner of a fund, an operating agreements of the general partner
investor must sign a countersignature page and management company, as well as the
to the limited partnership agreement, in investment management agreement.
which he or she agrees to be bound by its
terms.

Call 212.203.4300 for a free consultation

INVESTMENT FUND LEGAL DOCUMENTS PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND

Operating Agreements Since the fund manager and the fund are
controlled by the same individuals, the
The fund manager and general partner investment management agreement is
operating agreements are the legal typically signed by the same individuals
governing documents that provide for the on both sides.
rights of the founders of the fund. These
documents specify how ownership of the (iv) The Regulatory Filings
fund is divided among the principals of the
fund, how voting is decided, how the Regulatory filings are documents that need
company will wind up upon dissolution to be filed with the federal and state
and other important internal provisions. jurisdictions (in addition to formation
The management company and general documents) that are needed to satisfy certain
partner operating agreements and their securities law structures, registration
contents are generally not disclosed to exemptions and rules applicable to the
investors. investment instruments traded.

Investment Management Agreement Among these filings are:

The investment management agreement is • The SEC and state Form D filings (which are
an agreement between the fund and the required whenever there is a US investor);
investment management company (often
the same entity as the general partner). It • Investment advisor registration (depending
defines the services that a fund manager on the state in which the fund managers are
will provide. It also delegates to the fund located, the amount of assets under
manager authority over the fund’s assets, management and the type of investment); and
and gives the fund manager the broad
discretionary authority to manage such
• Registration with the Commodities Futures
investor funds and securities in a
Trading Commission (CFTC) (applicable to
manner that the fund manager
certain hedge funds that invest in commodities,
believes is consistent with the
investment strategy of the fund. futures, swaps, currencies and similar
instruments).

John S. Lore, Esq. is the managing partner of Capital Fund Law Group, a boutique law
firm providing expertise focused on the alternative investment industry. Call
212.203.4300 or email us to schedule a consultation to discuss your fund.

Call 212.203.4300 for a free consultation