A private fund gathers together the money that investors have to put into a single investment plan. The sponsor is the individual or group responsible for setting it up. Before requesting anyone to invest, the sponsor must determine who is eligible to join, how the fund is to raise money and who is to have control over it.

According to U.S. law, the establishment of a private fund requires separate legal examinations of the fund itself, the fundraising activity, and the manager. The Securities and Exchange Commission (SEC) outlines this distinction in its private fund guide. Setting up a limited liability company (LLC) or a partnership represents only the first step; it does not grant the business the right to offer investments or to manage other people’s money.

Who is going to own and manage the fund?

Begin by dividing up the different roles. The fund collects the money from investors and is responsible for holding the investments. The general partner, or the managing member in the case of an LLC, has control of the fund in accordance with their governing agreement. The investment manager makes the investment decisions based on the authority granted to it. These roles can be assigned to separate entities.

While a limited partnership and an LLC are usual options, one of them is not suitable for every type of fund. The legal structure chosen should take into account the investments proposed, the rights of the investors, the tax treatment and the laws of the jurisdiction in which the entity is formed.

The founders should also have a separate agreement which should set out who owns the management business, who is authorised to sign on its behalf, how the fees and profits are to be divided, and what happens if one of the founders leaves. These issues must be settled before making any commitments to investors. It is true that liability protection is not absolute: the use of a company does not justify fraudulent or other illegal behaviour.

The kind of terms adopted by a hedge fund, a venture capital fund or a real estate fund should be based on the way in which that specific fund is going to operate, not on copying the documents of another fund.

How will the fund be considered a private fund?

Private funds usually base their exclusion from the definition of an investment company under the Investment Company Act on one of two grounds. The names of these exclusions are technical in nature, but the essential difference lies in who is allowed to invest.

A typical fund falling within Section 3(c)(1) usually has 100 beneficial owners at most. It is not always straightforward to determine the number by simply counting the signed subscription agreements. In cases where another company or investment vehicle has made an investment, the rules might require examining through to its owners. There are particular rules which permit certain smaller venture capital funds to have a greater number of investors.

A fund which is covered by Section 3(c)(7) usually only accepts qualified purchasers. These investors have to satisfy a separate eligibility criterion, this criterion being based on their substantial investment holdings. For instance, an individual generally qualifies if they own at least $5 million in investments, the amount being calculated in accordance with the applicable rules.

Both exclusions restrict public offerings. An appropriately carried out Rule 506(c) offering, as discussed below, may still be eligible even if it allows public advertising. In the case of real estate structures a different analysis will be required depending on whether they own property, loans or securities. The legal basis of the fund should be determined before finalising the investor list; however, this does not take the place of the individual fundraising and manager-registration reviews.

Who is eligible to invest and can advertisements be run?

The sale of ownership interests in the fund constitutes a securities offering; there are two common exemptions from the requirement to register that offering with the SEC, namely Rule 506(b) and Rule 506(c).

Rule 506(b) bans general solicitation, which involves making wide-reaching efforts to locate investors. There would be a problem if the offering terms were posted on a publicly accessible website or on social media. The rule permits accredited investors and also allows a limited degree of participation by non-accredited investors who are able to evaluate the investment, either on their own or with the help of a qualified representative. Extra disclosures must be made for non-accredited investors. The fund’s own restrictions remain in force.

Under Rule 506(c) public advertising is permitted, but all purchasers must be accredited and the fund must take reasonable steps to verify that fact. One should not assume that a ticked box on a questionnaire is always sufficient.

An accredited investor must meet certain criteria relating to income, wealth or some other qualifying condition. A qualified purchaser has to satisfy a different set of criteria which applies to investors in that type of fund. It is possible for someone to be an accredited investor without at the same time being a qualified purchaser, and therefore meeting the offering rules might still be insufficient for entry into a 3(c)(7) fund.

It is necessary to select the offering route prior to distributing fundraising materials, since a website disclaimer will not cancel an improper offer that has already been made.

Returns and track records should also be subject to legal review. Fundraising statements must not be such as to mislead investors. Furthermore, those managers who are registered or who are required to register with the SEC must also comply with the investment adviser marketing rule, including the rule’s requirements regarding the presentation of performance results.

Shall the manager register?

The position of the manager in relation to that of the fund is separate. Whether or not SEC registration, state registration or an exemption is required will depend on the company’s business, the assets it manages and its location. The fact that it is a small organisation does not in itself resolve the issue.

A U.S.-based manager which is advising only qualifying private funds may avoid the requirement to register with the SEC when managing less than $150 million in assets of private funds under the private fund adviser exemption. This is a general limit for the manager and not an individual allowance for each fund. The figure takes into account uncalled capital commitments, that is, the amounts which investors have agreed to contribute but have not yet paid.

There is an exemption applicable to managers who advise only qualifying venture capital funds. The rules look at things like the investments held, borrowing and the right to withdraw money. Just calling a fund a venture capital fund is not sufficient.

Those managers who make use of these exemptions usually end up acting as exempt reporting advisers. They are still required to submit certain information to the SEC and have to verify the state requirements. The analysis we have prepared on the Investment Company Act and the Advisers Act covers these separate issues concerning funds and managers.

A fee calculated on the basis of investment profits might also involve qualified-client checks, according to the manager and the fund in question. This represents a third type of investor check, different from that of an accredited investor or a qualified purchaser. Make sure you carry out this check before committing to a fee arrangement.

What ought the fund documents to say?

Each document has a different purpose. The partnership or LLC agreement establishes the fund’s binding rules. The private placement memorandum, usually referred to as a PPM, outlines the offering, the risks, the fees and the conflicts. The subscription agreement sets down the investor’s agreement to invest, while the questionnaire gathers the information needed to verify eligibility.

The documents must give clear answers to normal questions, for example, how much money has the investor committed? When can the manager ask for payment? What occurs if the investor fails to make payment? A request for the agreed-upon payment is usually referred to as a capital call.

You should be given a full explanation of each layer of compensation. The method to be used for calculating the management fees, the expenses that the fund covers and the way in which the profits from investments are shared should all be stated. In the case where the sponsor receives a portion of the profits, a term commonly referred to as carried interest, the documents must make clear when it is earned and when it is paid. It is important to consider the valuation rules since the value assigned to the investments can influence the fees and payments made to investors.

Equal attention should be given to withdrawal and transfer rights. It should be stated whether an investor can leave the fund early, sell their interest, or only get their money when the fund sells its investments. The fund’s duration, its right to extend and any authority to delay withdrawals should be specified. Also consider the possibility of removing the manager, the cases of key personnel leaving, changes to the agreement, and the limits of the liability protection.

It is not essential for every all-accredited Rule 506 offering to have a document known as a PPM. Accurate and non-misleading disclosures are still necessary. When examining the presentation, the emails and the legal documents together, remember that a risk explanation contained in one document does not adequately overcome a conflicting promise found elsewhere.

How will conflicts and special investor terms be handled?

Let us consider the case where the sponsor owns a property which it wishes to sell to its new fund. It gains an advantage from the sale at the same time as it is deciding whether the fund should purchase. This situation represents a conflict of interest.

Conflicts can also arise when a manager divides investment opportunities between two funds or charges them for shared expenses. The SEC’s fiduciary interpretation explains the need to address conflicts through elimination or full and fair disclosure that allows informed consent. Disclosure does not remove the manager’s duty to act in the fund’s best interests. A vague statement that conflicts might arise is not enough to explain a known arrangement.

Certain investors request changes by means of a side letter, which is a separate agreement dealing with things like reduced fees, additional information, or the right to withdraw. Before agreeing to it, make sure that the principal fund agreement permits the terms and note any necessary disclosure or consent.

You should also look at previous promises since if one investor is given a better fee this could activate another investor’s contractual right to receive similar treatment. The documents have to be consistent with each other, especially in the case where investors join at different times.

Can you pay someone to bring in investors?

The person in contact will agree to introduce investors provided that they receive a certain percentage of the funds raised. However, before making agreement, you should check if that individual needs to have broker-dealer registration.

The guidance provided by the SEC regarding broker-dealers states that transaction-related compensation is a significant factor. It is also necessary to take into account the individual’s activities, such as seeking out investors, talking over the terms and assisting with the completion of investments. Just calling the payment a consulting fee does not settle the matter. Furthermore, a fixed fee does not automatically exempt it from registration.

Before the introductions start, you should look over the person’s registration or available exemption, the proposed activities, and the written agreement. Employees and founders of a fund are not automatically entitled to receive sales commissions. In cases where an adviser pays for investor referrals, its marketing rule obligations may also need to be examined. The rules applicable to broker-dealers and advisers are separate safeguards.

Do certain investors or assets change the rules?

When considering investments from a retirement plan, one should take into account the rules concerning ERISA plan assets. ERISA is a federal law designed to safeguard the retirement benefits provided in the workplace. There are situations in which the fund’s underlying assets are regarded as plan assets, which in turn imposes extra duties and restrictions on the manager. Therefore, it is necessary to check the type and extent of the plan’s investment as well as any applicable exception before admitting new investments.

Foreign investors might create U.S. tax withholding obligations for the fund. Even tax-exempt investors can be subject to tax on some kinds of income. If interests are offered outside of the United States, then the relevant local fundraising laws must be checked. These issues should be identified when selecting the structure, not after an investor has already committed.

The need for a separate registration of a commodity pool operator or for an exemption to be considered in the case of planned futures, swaps or similar financial contracts is possible. However, an exemption under securities law does not deal with that issue.

When it comes to real estate funds, you should consider the actual assets and the way ownership is structured. The legal issues involved in directly owning buildings are different from those associated with investing in mortgage loans or in shares of property companies, and the rules cannot be determined simply by the fund’s name.

What needs to be in place before the first investment?

Before accepting a commitment, you should verify the investor’s eligibility, carry out the necessary documentation and determine who has the authority to admit the investor. You must also comply with applicable sanctions and should perform the relevant sanctions screening. With regard to Rule 506, attention should be paid to the bad-actor disqualification rules: where a fund or certain persons covered by the rules have relevant convictions, regulatory orders or other disqualifying events, reliance on the exemption may be prevented unless an exception or waiver is available.

You should decide where the assets of the fund are to be kept and who is allowed to access them. You must also check the relevant custody and audit requirements since these vary depending on the manager’s regulatory status and the type of arrangements employed; not all private funds have the same audit requirements. The contractual commitments made to investors are important as well.

Filings may be made after the first sale has taken place. For a Rule 506 offering, Form D is usually required to be filed within 15 days of the first investor becoming irrevocably committed to make the investment. This commitment could occur before the money has been received. It should be understood that Form D is a notice of the offering and not a sign of SEC approval. Additionally, notices may have to be filed with the various states and the appropriate fees paid.

Set the filing calendar before the closing and assign each filing a responsible party; at the first closing the fund will officially take its first investors, and any questions regarding authority, eligibility and investor rights should already have been settled.

If you plan on setting up a private fund, the Ishimbayev Law Firm can assist the sponsors by examining the fund’s structure, the eligibility of investors, the offering documents, and the registration of the manager. You should get in touch with our team before you approach investors or accept commitments so that the legal arrangements match the fund you actually intend to manage.

This article provides general information about U.S. private fund formation as of October 2026. It is not legal or tax advice.