Fund Formation Lawyer
Used to pool money from multiple parties for investment, entities known as “private funds” are not required to be registered or regulated at the federal level because they do not publicly offer their own securities.
However, private funds and those that manage them still face a range of compliance challenges and financial pressures. Fund formation lawyers are the ones who specialize in navigating this labyrinth of legal and financial matters. In particular, fund managers will turn to fund formation lawyers to help structure a fund and develop its compliance programs. An effective fund formation lawyer is able to provide a framework follow-up advice that speaks to the fund’s priorities.
What Is Fund Formation?
Fund formation typically refers to private funds that are created by parties looking to pool capital and acquire securities or a share of ownership in private companies. Private fund managers will research, acquire, and calibrate investments based on an investment strategy that is meant to provide an optimal return on investment.
Types of Fund Formation
Although they are all focused on providing a return to investors, private funds can vary significantly when it comes to how they acquire money and make investments. The three general types of private funds include hedge, private equity, and venture capital funds.
Hedge funds are normally formed to invest in liquid assets, like stocks and other publicly traded securities. These funds often use standard investment practices such as short selling. While these funds normally call for upfront contributions from investors, they also typically provide flexibility when it comes to withdrawing capital.
Private Equity Funds
Private equity funds are typically formed to invest in illiquid, private assets — such as growing and established enterprises. Some private equity funds are focused on taking a controlling interest in a public company and taking it private. These funds source capital through commitments from investors, and investors have limited flexibility when it comes to withdrawing capital.
Venture Capital Funds
Like private equity funds, venture capital funds are formed to invest in illiquid private assets. However, venture capital funds are more focused on investing in startups and private companies in the early stages of growth. Venture capital funds often take a minority interest in several different early-stage companies to create an investment portfolio. These funds source capital through commitments from investors, and investors have limited flexibility when it comes to withdrawing from the fund.
A Lawyers’ Role in Fund Formation
Private funds and their associated management entities all require legal formation. Private funds are frequently formed as limited partnerships, with a general partner managing the fund and investors who are considered limited partners. In some situations, a private fund will be formed as a limited liability company or corporation. The structure of a fund is dictated by the desired relationship between the general partner and fund investors with respect to risk and liability.
Fund formation lawyers are normally responsible for drawing up documents that structure the fund and describe relationships among those associated with the fund. For example, fund formation lawyers could draw up a limited partnership agreement to establish a venture capital fund that is structured as a limited partnership. For private equity and venture capital funds, fund formation lawyers could outline how the general partner calls for capital commitments.
More general documentation would cover how any profits are to be divided, management fees, and the ability of limited partners to withdraw capital. Fund formation lawyers need to review the structure of the fund, confirm compliance with federal regulations, and draft the distribution waterfall in the partnership agreements before any offering is made.
When it comes to seeking capital commitments from potential investors, the standard approach is to put together a subscription document package for which fund formation lawyers are typically responsible. This package normally includes:
- An organizational agreement. This document describes the legal structure of the fund, including the rights and responsibilities of both the general partner and limited partners.
- A private placement memorandum. This outlines the general terms of the fund, and it may include information on the investment focus, the fund’s founders, and the fund’s performance to date.
- A subscription agreement. Used in private equity and venture capital funds, this document outlines capital commitments and closing conditions.
- An investor questionnaire. This document is used to gather compliance-related information about a potential investor.
Most investors expect this fundamental documentation in a subscription package. They also expect to see proof of compliance with all major regulations before considering an investment in the fund.
In addition to investors, a private fund may also often have an investment advisor that must be a separate legal entity. An investment advisor typically has its own set of partners, and this entity is required to register with either the SEC or an appropriate state regulator to fulfill certain reporting requirements.
In addition to handling the formation of a fund and its various relationships with different entities, fund formation lawyers and related attorneys specializing in corporate law also handle a number of other fund-related responsibilities. Every fund and management entity is unique.
Because of this, fund formation lawyers are needed to craft documentation specific to each situation. After documentation is complete, these attorneys are retained to guide their clients with forward-thinking legal strategies. Some common duties of fund formation lawyers include:
- Crafting an investment strategy for various types of specialized funds, such as buyout funds and growth equity funds
- Advising on the creation and operation of investment funds, particularly with respect to governance arrangements, compliance, succession planning, admission of new partners, and separations
- Advising on the purchase and sale of fund stakes
- Representing sellers and buyers in secondary transactions related to a fund’s portfolio
- Counseling on various public capital alternatives
- Representing institutional investors
With Our Team, Fund Formation Law is Just the Beginning
At Fridman Law Firm, we have a wealth of experience in corporate law and fund formation law. But we also help businesses go far beyond their initial stages with services related to general counsel, mergers and acquisitions, and intellectual property. Send us an email or call our office in New York City at 212-262-9823 to arrange for a consultation.