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
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for a free consultation
WHAT DOCUMENTS
MUST BE PREPARED?
There are four categories of documents that
the investment fund attorney will prepare
to launch a fund:
(i) formation documents; (ii) offering
documents; (iii) internal documents; and
(iv) certain regulatory filings.
Formation documents are the documents
filed with the appropriate government
authority to establish the existence of the
entities, including the fund, the general
partner and investment management
company. These include certificates and
articles. The formation documents are
among the most basic of the fund
documents.
Because of the simplicity of filing
formation documents, some clients make
the mistake of forming entities before
consulting with legal counsel. Formation
documents should be filed only after
thoroughly considering the appropriate
legal structure of the fund.
Fund Structural Considerations
The structure for an investment fund is
dependent on a number of tax, regulatory,
and financial considerations. Fund structure
is driven in large part by the fund’s strategy
and the type of investments that the fund
will pursue. The fund structure should be
based on careful and thorough analysis
with the assistance of an
experienced fund attorney. Among the
decisions that should be made in structuring
the fund include whether to:
• structure the fund as a closed-end or
open-end fund;
• rely on Section 3(c)(1) or 3(c)(7) as
an exemption from the Investment
Company Act--real estate funds typically
rely on Section 3(c)(5)(C); and
• establish an offshore fund or a
domestic only 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.
HEDGE FUND STRUCTURAL CONSIDERATIONS
PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND
Call 212.203.4300 for a free consultation
(ii) The Offering Documents
The offering documents are the documents
that are provided to a prospective investor
prior to the investor making an investment in
the fund. These documents include:
(i) a fund disclosure document in the form
of a private placement memorandum;
(ii) the governing documents of the fund,
in the form of a limited partnership
agreement or operating agreement
(depending on whether the fund is formed as
a limited partnership or LLC; and
(iii) investment purchase documents, in the
form of a subscription agreement, which
includes an investor questionnaire to
determine investor qualification.
"A thoroughly prepared
private placement
memorandum should
protect a fund sponsor from
investor claims of lack of
disclosure."
Private Placement Memorandum
A private placement memorandum (PPM) is
a securities disclosure document that provides
investors with material information about the
fund to enable an investor to make an
Similar to a prospectus in a public
offering, a PPM provides potential
investors with specific information about
the terms of the fund, the structure of
the investment, background of the
managers and other disclosure issues.
The private placement memorandum
contains risk factors that an investor
should consider prior to making an
investment in the fund. A thoroughly
prepared private placement memorandum
should protect a fund sponsor from investor
claims of lack of disclosure. For examples
of the contents and level of thoroughness that
a private placement memorandum should
have, refer to our PPM sample excerpts.
Limited Partnership Agreement
The limited partnership agreement (or in the
case of an LLC-based fund, an operating
agreement) is the legal governing document
of the fund. The limited partnership
agreement outlines the terms of the fund and
the rights of an investor and fund manager.
In contrast with the private placement
memorandum, which is written in plain
English (accessible to non-legally trained
readers), the fund’s limited partnership
agreement is a lengthy and complex legal
document. Among the terms of the limited
partnership agreement are:
HEDGE FUND STRUCTURAL CONSIDERATIONS
KEY DECISIONS WHEN SETTING UP A DOMESTIC OR OFFSHORE FUND
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for a free consultation
• the powers and activities of the general
partner;
• fees and expenses, including
management, performance or other
potential fees as well as legal startup
costs, brokerage, administration, and
audit expenses;
To become a limited partner of a fund, an
investor must sign a countersignature page
to the limited partnership agreement, in
which he or she agrees to be bound by its
terms.
Subscription Agreement/Investor
Questionnaire
A subscription agreement provides investors
with a description of the steps necessary to
purchase limited partnership interests (or for
an LLC-based fund, membership interests)
in a fund and provides fund managers
with eligibility information about the
investor. This is the investor’s contract with
the fund, which specifies the subscription
amount and outlines the terms under
which the investment is being made.
For fund managers, this document
requires investors to attest that they meet
certain eligibility standards, such as
being an “accredited investor” or
“qualified client,” as required by SEC
regulations and state law.
(iii) The Internal Documents
Some fund documents, vital to the fund’s
operations, are neither filed with the
government nor provided to investors, but
kept on file with the fund. These internal
agreements set forth the rights and
responsibilities among the individuals
sponsoring the fund and between the fund
and investment manager. These include the
operating agreements of the general partner
and management company, as well as the
• allocations and distributions of profits to
all partners, including how profits are
calculated and the timing of distributions;
• withdrawal provisions, including
minimum and maximum withdrawal
amounts, lock-up periods, gates, and
distribution dates; and
• a designation of power of attorney, which
authorizes the fund manager to act on the
limited partner’s behalf for such purposes
as voting the fund’s securities, buying and
selling fund securities, admissions of new
limited partners, and amendments to fund
formation documents and other documents
necessary for continued fund activity.
INVESTMENT FUND LEGAL DOCUMENTS
PRINCIPAL DOCUMENTS AND FILINGS NEEDED TO LAUNCH A FUND
Call 212.203.4300 for a free consultation
Operating Agreements
The fund manager and general partner
operating agreements are the legal
governing documents that provide for the
rights of the founders of the fund. These
documents specify how ownership of the
fund is divided among the principals of the
fund, how voting is decided, how the
company will wind up upon dissolution
and other important internal provisions.
The management company and general
partner operating agreements and their
contents are generally not disclosed to
investors.
Investment Management Agreement
The investment management agreement is
an agreement between the fund and the
investment management company (often
the same entity as the general partner). It
defines the services that a fund manager
will provide. It also delegates to the fund
manager authority over the fund’s assets,
and gives the fund manager the broad
discretionary authority to manage such
investor funds and securities in a
manner that the fund manager
believes is consistent with the
investment strategy of the fund.
Since the fund manager and the fund are
controlled by the same individuals, the
investment management agreement is
typically signed by the same individuals
on both sides.
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.
(iv) The Regulatory Filings
Regulatory filings are documents that need
to be filed with the federal and state
jurisdictions (in addition to formation
documents) that are needed to satisfy certain
securities law structures, registration
exemptions and rules applicable to the
investment instruments traded.
Among these filings are:
• The SEC and state Form D filings (which are
required whenever there is a US investor);
• Investment advisor registration (depending
on the state in which the fund managers are
located, the amount of assets under
management and the type of investment); and
• Registration with the Commodities Futures
Trading Commission (CFTC) (applicable to
certain hedge funds that invest in commodities,
futures, swaps, currencies and similar
instruments).
