🟥 11 Investment Fund-Raising Red Flags

🎉 Happy Friday, funds family!

Today, we’re going to list the most common “whoopsies” foot faults by emerging investment fund managers.

Below is a downloadable PDF, but here are 11 classic mistakes:

1️⃣ Countersign sub docs

This is your initial closing. It starts a 15-day clock for your Form D and state securities filings. Also let your lawyer know if any investors increase their investment amount.

2️⃣ Admit a non-US investor

You may need to withhold taxes, use an offshore structure, comply with foreign marketing rules, and screen for sanctions.

3️⃣ Admit a tax-exempt investor

Leverage and some investments can create taxable income for them (UBTI), which may require a blocker.

4️⃣ Admit retirement money

If retirement money, including IRAs, reaches 25% of the fund, you may become an ERISA fiduciary (which you would rather avoid).

5️⃣ Accept an investor who may not qualify

One unqualified investor can jeopardize the fund's legal exemption. Confirm whether your fund is limited to accredited investors, qualified clients, and/or qualified purchasers. The requirements vary per fund – ask your lawyer.

6️⃣ Get close to your investor cap

Funds relying on the Investment Company Act’s 3(c)(1) exemption max out at 100 beneficial owners, and some entity investors (including some funds-of-funds) count as more than one. If you want more than 100 slots, talk to your lawyer about parallel funds.

7️⃣ Sign a side letter

Special terms for one investor may have to be offered and/or disclosed to others. Check to see whether you have any existing most favored nations (MFN) provisions.

8️⃣ Talk about your fund publicly

Social posts, podcasts, and press can count as advertising your offering, which some exemptions (like 506(b)) prohibit. If you want to speak publicly, talk to your lawyer about 506(c).

9️⃣ Pay someone for investor intros

Paying finders can raise broker-dealer issues, and a bad actor in the chain can void your exemption. Transaction-based fees to unregistered persons risks unregistered broker-dealer activity, rescission exposure (you have to give the money back), and future Rule 506(d) “bad actor” disqualification from using Regulation D.

🔟 Do a deal outside your usual strategy

One non-venture deal (like a secondaries SPV) can blow your venture capital adviser exemption for every fund you manage. Real estate managers moving into debt or preferred equity can trigger additional regulatory requirements too.

#️⃣ Cross $150M in regulatory AUM

The private fund adviser exemption disappears above $150M of RAUM. You then have to register as an RIA, which includes Form ADV Parts 1 and 2, the Custody Rule, the Marketing Rule, a Chief Compliance Officer, annual reviews, and surprise audits. Note that this doesn’t apply to certain fund types – ask your lawyer.

Thanks for reading, everyone!

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This may be considered attorney advertising.