Have investors but don’t have a deal? This structure is useful for people who know investors but either don’t have deals or want to invest in others’ deals. Here’s a checklist for a “Fund of Funds.”
Sponsor Sets up Their Own Fund:
- Uses U.S. or offshore legal entity (Cayman Islands or BVI – based on tax advice from a separate CPA or tax attorney with international experience)
- Qualifies for Regulation D, Rule 506(c) exemption for U.S. investors and Regulation S exemption for non-U.S. investors
- Limits fund to <100 investors or becomes subject to “registered investment company” regulations
- Sponsor does anti-money-laundering and bad-actor checks
- Sponsor reviews Subscription Agreements to make sure everyone meets the suitability requirements for the offering
- If your fund will invest in Rule 506(c) offerings, all of your investors must be accredited investors:
- >$1MM net worth, or
- >$200k/year income for an individual or $300k/year income for married couple or spousal equivalents
- The Fund Manager earns from its fund:
- Flat fee, but not based on the amount of money raised
- Plus a share of the Fund’s earnings (ex. 20%)
Sponsor Hires Securities Attorney to:
- Form their U.S. legal entities and/or coordinates with offshore counsel for offshore legal entities, if needed
- Draft Private Placement Memorandum (required if you have non-accredited investors; recommended if you will more than 3-4 Accredited investors or if you are advertising)
- Draft Operating Agreement for the investor entity and for the Manager entity (if needed), and
- Draft Subscription Agreement (includes investment risks if no PPM)
- File notices with SEC and state securities agencies
- Provide education to the Manager about their exemption so they comply with securities laws