Happy Friday, Funds Family! 🙌

Today, we’ll learn how to hold your 🛠️ initial closing. Specifically, we’ll focus on:

1. When you’re ready to close ✅ 

2. What documents you need to sign ✅ 

3. What regulatory filings you need to make ✅ 

But first…

Thanks for reading, now we are ready to dive into the article 😃 

The initial closing is a big deal for most GPs. It means you’ve secured a critical mass of soft commitments and are ready to get rolling on the business of the Fund. 🥳 

But what steps do GPs need to take to officially close, before issuing the fund’s first 🛠️ capital call?

GPs should determine how much capital they want committed to the Fund before they hold the initial closing.

Committed Capital vs. Capital Contributions

Committed Capital refers to how much money your investors have promised to contribute to the Fund at some point over the Fund’s life. An investor’s commitment is typically set forth in their Subscription Agreement. 📃 

After you hold the initial closing, you can 🛠️ call each investor's capital (to pay for deals, management fees, and other fund expenses). Once an investor wires money to the Fund, it transforms from “unfunded commitments” ♻️ to “contributed capital” (or “funded commitments”).

Do I need to call capital immediately after my initial closing?

Many GPs wait until they have a deal ready before holding the Fund’s initial closing—and then they call capital immediately. ⚡️ 

But is this required? No. You can wait. You can hold a “dry closing” where you officially hold the initial closing (and—importantly—commit your investors to the Fund) but wait to call capital until you have a deal about to close.

So…when should I hold my initial closing? 🤔 

The best time to hold your initial closing is as soon as you have enough commitments to start executing the Fund’s strategy. 📈 

But there’s a fine line to walk—you want your investors “locked in” and committed to the Fund 🔒️, but you also want to ensure you have enough commitments to make running the fund worth it for you.

In many cases, you’ll have bills to pay at the initial closing. Lawyers, administrators, and other service providers often defer part of their fees until the fund’s initial closing date.

📝 What documents need to be signed at closing?

The most important documents signed at the initial closing are the 🛠️ LPA (Limited Partnership Agreement—or LLC Agreement if your fund is an LLC) and the 🛠️ Subscription Documents.

⚠️ Your “official” closing is when you countersign your first investor’s subscription agreement. (So don’t countersign subdocs until you’re ready to close!). Here’s a breakdown of the key documents.

Subscription Agreement

The subscription agreement is what your investors sign to become officially admitted to the Fund. Usually, the Subscription Agreement contains a limited power of attorney allowing the GP to sign the LPA on the investors’ behalf. The Subscription Agreement contains representations and disclosures about investing in the Fund. Once they sign, they’re committed! ✍️ 

As a GP, you’ll review the Subscription Agreements for each investor to confirm they’re filled out correctly (and that your LP is qualified to invest in the Fund). 🔍️ 

🚨 Remember: Don’t countersign the Subscription Agreement until you’re ready to close.

Many GPs overlook this, but countersigning the Subscription Agreement triggers certain regulatory filing deadlines that you may not be prepared to meet. 📆 

The best practice is to collect Subscription Agreements (signed by LPs) as they come in and hold onto them until you’re ready to close. Then you can sign them all at once and rest easy that you will make your Blue Sky filings on time (more on that in a bit!).

Limited Partnership Agreement

Unlike the Subscription Agreement, the LPs (usually) don’t sign the LPA. Instead, the GP signs the LPA on behalf of the LPs on the initial closing (via a power of attorney granted by the LPs in the Subscription Agreement).

Ancillary Documents

In addition to the Subscription Agreement and the LPA, a handful of other agreements and resolutions “button up” the closing and ensure everything is documented correctly. ✅ 

Common ancillary documents include:

•  Management Services Agreement. This agreement officially “hires” the Management Company to manage the affairs of the Fund.

• Closing Resolutions. These are resolutions of the members of the General Partner authorizing it to create the Fund, hire the Management Company, and admit investors into the Fund.

• Regulation D Bad Actor Questionnaire. This questionnaire ensures the GP is not disqualified by the SEC from selling securities under 506(b) or 506(c).

⚖️ What regulatory filings do you need to make?

Even though most funds are formed under exemptions pursuant to the ⚖️ big three securities laws, you will still need to make at least two filings to give the SEC notice that you’re selling exempted securities.

Most common are the Form D and state-level “Blue Sky” filings.

Form D

A Form D filing lets the SEC know you’re selling exempt securities. It must be filed within 15 days of your initial closing (or else!). The process is a little tricky, so it’s best to get started early. 🕜️ 

Here are the steps:

1. Form ID. Submit your Form ID application to the SEC. This has to be notarized!

2. SEC Codes. Receive “codes” that enable you to file documents in the system as a securities issuer.

3. Form D. Fill out, sign, and submit Form D online.

Blue Sky Filings

In addition to the federal Form D, each state collects information (and fees) regarding securities you sell to investors in that state. Thankfully there is a centralized site called 🔗NASAA where you can make all the required filings and pay your fees at once.

Note: you must make blue sky filings in every state where your LPs are located. 🗺️ 

What about the Advisers Act?

Don’t forget about the ⚖️Investments Advisers Act and similar state-level rules! Some GPs may have to make additional regulatory filings. Here are some additional filings you may need to make:

1. RIAs. Form ADV for registered investment advisers (more than $150M in AUM and without another exemption)

2. ERAs. Part 1A of Form ADV for exempt reporting advisers (between $25M – $150M in AUM or otherwise operating within another exemption)

3. State Law. Any required state-level advisers act filings

💡 Check out our previous articles on complying with the Investment Advisers Act ⚖️here and applicable state law ⚖️ here.

Know-your-customer/Anti-money laundering

Lastly, you’ll want to collect KYC/AML info. Alright…maybe you won’t want to, but you’ll do it anyway.

It’s best practice to collect identifying information on all your investors. This helps ensure that the beneficial owners of any entities that invest in your fund are not on a sanctions list somewhere. Better safe than sorry! 🧘‍♂️ 

The easiest way is to work with a 🛠️ third-party administrator. . Ideally, this administrator will also assist you with investor onboarding, subscription agreements, and capital calls (among other things).

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