A fund of funds is an investment vehicle that allows a syndicator to pool funds from a group of investors into a single company that invests in other companies. In order to pool other people’s money, you need two things:
- A company that can accept the investors’ funds, which is usually going to be a limited liability company or limited partnership
- A business plan that attaches to your offering documents and explains to investors how their funds will be invested
As long as the investments your company makes meet the criteria that you have laid out in your business plan, then you can make the investment on behalf of your company.
As the manager of a fund of funds, you will open a bank account for your company. Your investors will deposit their funds into this account. Your company will invest as a single investor in these investment opportunities. You will be responsible for maintaining the bank account for your company and making distributions to your investors whenever your company earns a return from these other investments.
You have to be careful about making investment decisions for other people, as those kinds of decisions may require that you have someone on your team with a registered investment advisor (RIA) license. Without it — and even with the license in some cases — you could be taking on liability for the performance of those investments.
One way to limit your liability is to ensure that you’re not making decisions solely on how your investors’ funds are spent. You can take a vote from your investors before making investment decisions, or you could allow the investors within your fund to make their own decisions as to whether they will invest in specific investments that your company is contemplating, giving them the chance to abstain if they don’t like the investment.
You also need to be aware that you are actually engaging in your own securities offering when you are offering investment opportunities to other people. This means you may have to prepare your own private placement memorandum, subscription agreement, and do securities notice filings in order to be exempt from having to register your company as a public offering.
