A question that clients often ask us when preparing to start their private
equity fund [ Link to private equity fund article] is what licenses the
principals need to manage or market the fund.
The answer depends on several factors, which are discussed below.
- Investment adviser registration: If the private equity fund that you will
be managing has $150 million or more in assets, then the investment adviser
of the fund must register with the SEC as an investment adviser. In addition,
the individuals actually managing the fund’s investments must register
as investment adviser representatives in the state in which the investment
adviser is located.
If the private equity fund’s assets will be less than $150 million,
then no SEC registration is necessary. Rather, the investment adviser
firm will be subject to state law. As a result, whether you will have
to register as an investment adviser will depend on the law of the state
in which the investment adviser is located. Note that this factor is determined
where you are
physically located, not the state in which the investment adviser firm is incorporated.
For investment advisers managing private equity funds with less than $150
million under management, it is often possible to find an exemption from
registration. This will be determined by the laws of the state in which
you are located and the nature of the investors in your fund.
- Broker-dealer registration: In most cases, start-up advisers market their
funds through their principals. As long as the principals are not paid
a commission for bringing investors into the fund, then no registration
as a broker is required. A management fee or carried interest is not considered
a commission for these purposes.
Some fund sponsors may want to form an in-house marketing department to
market their funds and conduct outreach to potential investors. This must
be done carefully in order to prevent the in-house marketing employees
from being considered unregistered brokers.
In addition, special issues can arise if you form more than one fund (for
instance, with different strategies), and more than one fund is raising
capital at the same time.
Be aware that raising capital through third party firms that are not registered
as broker-dealers can cause significant legal problems, especially if
they are paid by commission. For this reason, it is important to consult
with an attorney before entering into an arrangement with a third party
firm that is not registered as a broker-dealer.
If you are ready to start your private equity fund, contact Whitley LLP
Attorneys at Law today. We can help you navigate the complex legal issues
involved and help your fund get off to a successful start.