Fund Formation To-Do List

Fund Formation To-Do List: Navigating the Essentials

Forming an investment fund is a complex process that requires meticulous planning, compliance with regulatory requirements, and alignment with investor expectations. Below is a simplified checklist that highlights the key steps involved in setting up a fund. This guide is designed to provide fund managers with a roadmap for a successful fund formation process.

1. Forming the GP Entity

• Establish the General Partner (GP) entity, typically structured as a limited liability company (LLC) or partnership.

• Draft and adopt GP organizational documents (e.g., operating agreement or partnership agreement).

• Ensure the GP entity complies with jurisdiction-specific registration and filing requirements.

• Obtain necessary tax identification numbers.

2. Forming the Fund Vehicle

• Choose the appropriate legal structure for the fund (e.g., limited partnership, limited liability company).

• Establish the fund entity in the selected jurisdiction.

• Draft and adopt initial fund organizational documents (e.g., operating agreement or partnership agreement).

• Obtain necessary tax identification numbers.

• Engage local counsel for jurisdiction-specific compliance.

3. Preparing Marketing Deck and the Private Placement Memorandum (PPM)

• Prepare marketing deck, which should include the basic terms and fees of the fund, management bios, fund strategy and track record (if applicable).

• Draft a detailed term sheet that will be incorporated into the PPM. The term sheet should include a detailed description of the governance terms and fees of the fund.

• Draft a detailed PPM outlining the fund’s investment strategy, management company operations, bios of management team, fees, terms and risks.

• Include disclosures in the PPM regarding potential conflicts of interest and regulatory compliance.

• Counsel to review marketing deck and PPM to ensure compliance with securities laws and regulations.

4. Drafting the Amended and Restated (A&R) Partnership Agreement

• Draft an amended and restated organizational document (e.g., operating agreement or partnership agreement) based on the term sheet to distribute to anchor or key investors for their review and comment.

• Incorporate any changes required to accommodate regulatory or tax considerations.

• Ensure alignment with market standards and investor expectations.

5. Drafting the Management Agreement

• Prepare a management agreement outlining the relationship between the fund and the GP or management company, as applicable.

• Define the scope of services provided by the manager, including investment advisory and operational responsibilities.

• Specify fees, assignment and termination provisions.

6. Drafting Form Subscription Agreement

• Draft a subscription agreement for investors to commit capital to the fund.

• Include representations and warranties to ensure compliance with investor qualification standards.

• Address payment schedules and mechanisms for capital contributions.

7. Finalize terms of the Organizational Documents with Investors

• Engage with potential investors to finalize terms of the fund’s organizational document (e.g., partnership agreement or operating agreement).

• Address concerns regarding governance, fees, and reporting.

• Ensure clarity and mutual agreement on key provisions.

8. Preparing Investor Side Letters

• Draft side letters to address specific investor requirements or concessions.

• Common terms include an MFN, fee discounts, transfer provisions, restrictions to distributions in-kind, confidentiality restrictions, use of name provisions, reporting obligations, or co-investment rights.

• Ensure that side letters do not conflict with the fund’s organizational documents that could adversely affect other investors.

9. Filing Form D

• Prepare and file Form D with the Securities and Exchange Commission (SEC) for private fund offerings. Note that the Form D is a public document.

• Comply with applicable state securities filings (i.e., blue sky laws).

• A Form D may be pre-filed prior to fund launch to avoid disclosing certain sensitive information to the public.

10. Finalizing Service Provider Engagements

• Select and hire an auditor to ensure compliance with financial reporting and audit requirements.

• Select and hire an administrator to handle fund accounting, investor reporting, and back-office functions.

• Retain prime brokers for trade execution and financing solutions, if applicable.

• Appoint custodians to safeguard fund assets and comply with regulatory standards.