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Hey everybody, I hope you all had a fantastic Fourth of July! Personally, the Fourth is one of my favorite holidays—there's nothing like celebrating with some patriotic spirit, BBQs, and an epic fireworks show. It always reminds me of The Sandlot and those classic summer vibes.
Today, I want to dive into something a bit more technical but crucial for anyone starting a fund: the two main options for legally structuring your fund and the key documents you’ll need. My brother John, an experienced securities attorney, shared this insight with me, and I’m excited to pass it along to all you Rebels out there.
Let’s get into it!
Traditional Fund Structure
In a traditional fund setup, you’ll establish a General Partner (GP) and a Limited Partnership (LP). Here’s how it breaks down:
- General Partner (GP): The GP is typically the fund manager—you. As the GP, you make all the money and investing decisions.
- Limited Partners (LPs): These are your investors. They provide the capital and join your LP, which is governed by the GP.
In this setup, the GP and LP are considered two separate entities. The GP manages the fund, while the LP provides the investment capital.
Non-Traditional Fund Structure
If you opt for a non-traditional route, you’ll set up an LLC that functions similarly to an LP, but with some key differences:
- LLC Structure: You create an LLC where investors join as members.
- Manager Role: You’ll be aggregated to the LLC as the manager.
- Class A and Class B Members: Within the LLC, you can define two types of membership classes:
- Class A Members: Typically your investors, who have limited say in the fund’s operations.
- Class B Members: This would be you, the manager, with rights similar to a GP, overseeing and managing the fund.
The main distinction between this and the traditional setup is that the LLC is seen as one entity, whereas the traditional setup involves two separate bodies (GP and LP).
Two Core Documents
Both structures require specific documentation, though with slight variations:
1. Private Placement Memorandum (PPM)
- Purpose: The PPM is essential for both structures. It’s essentially a comprehensive brochure detailing everything about the fund—what it will do, its goals, and how it plans to achieve them.
- Content: The PPM also includes disclaimers outlining all the possible ways an investor could lose their money, even those with nearly 0% chance of happening.
- Length and Cost: A PPM can range from 30 to 150 pages, depending on the complexity of the fund. Pricing can vary, but typically, you’re looking at costs between $7k and $30k.
2. Legal Agreements
- Traditional Setup: Uses a Limited Partnership Agreement (LPA). This document puts the PPM into a more formal legal structure, detailing finer points like distribution schedules and investor rights.
- Non-Traditional Setup: Uses an LLC Operating Agreement (OA), which serves the same purpose as the LPA but tailored to the LLC structure.
Subscription Documents (Sub Docs)
Regardless of the structure you choose, both setups require subscription documents:
- Purpose: These documents serve as a questionnaire to verify the type of investor you’re dealing with—primarily to ensure they’re accredited investors or qualified clients, as often required by the PPM.
- Function: The sub docs also ask potential investors how much they are willing to commit to the fund, acting as a filter and protection for you as the fund manager.
Conclusion
While the traditional and non-traditional fund structures differ in setup, their functions are quite similar. The LLC route tends to be quicker and might be a good fit for smaller funds, while the traditional setup remains the dominant choice for many fund managers.
Before you decide, I encourage you to do your research and weigh the pros and cons of each structure. Understanding these options will bring you one step closer to launching your own successful fund.
Hope this was helpful!
Want to get direct guidance for your fund? Schedule a time with my Fund Advisors!
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
