Discover the legal essentials to raise capital for a private equity or hedge fund while avoiding SEC pitfalls and regulatory missteps.
Starting an investment fund—whether it’s a private equity fund, hedge fund, or venture capital vehicle—is an exciting step, but also one that triggers complex securities laws. Pooling capital from multiple investors and managing it across deals qualifies as a securities offering. That means you must comply with federal and state regulations to avoid costly mistakes.
This guide walks you through how to legally raise money for an investment fund, covering everything from entity setup to avoiding registration under the Investment Company Act of 1940.
Choose The Right Structure: LPs, LLCs, And Manager Entities
Investment funds are most commonly organized as Limited Partnerships (LPs), where the fund is the LP and the fund manager acts as the General Partner (GP). Some managers opt for an LLC structure, but LPs provide clearer distinctions in roles, liability, and tax treatment.
Fund Structure Checklist:
- Form a Delaware LP or state-specific entity
- Create a separate management LLC for the GP
- Ensure tax-efficient pass-through treatment for all parties
- Set up a banking and accounting system aligned with fund operations
A securities attorney can help ensure the structure meets your business, legal, and tax needs.
Prepare The Offering Documents: PPM, LPA, And Subscription Agreements
Your legal offering documents tell investors what they’re getting into—and protect you from liability.
Core Documents Include:
- Private Placement Memorandum (PPM): Discloses strategy, risks, fees, conflicts of interest
- Limited Partnership Agreement (LPA): Outlines capital commitments, management rights, distributions
- Subscription Agreement: The investor’s formal commitment to the fund
Your PPM should include:
- Investment objectives and strategy
- Use of proceeds
- Management structure and fees
- Risk factors and conflicts of interest
- Subscription procedures
- Legal disclaimers and disclosures
A properly drafted PPM helps protect you from investor lawsuits and proves to regulators that your offering was made in good faith.
All documents must align. Any discrepancies can raise red flags with investors or regulators.
Use A Securities Exemption: Reg D, Rule 506(b) or 506(c)
Your fund must avoid public registration with the SEC, so you’ll rely on a Regulation D exemption.
Rule 506(b):
- No advertising or public promotion
- Can include up to 35 sophisticated (non-accredited) investors
Rule 506(c):
- Permits public promotion (email, webinars, websites)
- All investors must be accredited and verified (via third party or documentation)
Most private equity and hedge funds use Rule 506(b) to quietly raise capital from known contacts, but if you need broader exposure, 506(c) might be the better fit.
Avoid Investment Company Act Registration: Stay Under 100 Investors
One of the most critical compliance steps is ensuring your fund does not trigger registration under the Investment Company Act of 1940 (ICA). Registration is costly, burdensome, and usually unnecessary for private funds.
To stay exempt under Section 3(c)(1) of the ICA, your fund must:
- Have fewer than 100 beneficial owners, and
- Not make a public offering of its securities
Another exemption, Section 3(c)(7), allows for unlimited accredited investors who are “qualified purchasers,” but adds complexity.
Stick to the 3(c)(1) exemption unless your investor base demands otherwise. And track beneficial ownership carefully to avoid accidental noncompliance.
File Form D And Blue Sky Notices
Once you accept your first investment, you must file Form D with the SEC within 15 days. This is your formal notice that you’re using a Reg D exemption.
You may also need to file “Blue Sky” notices with each state where you have investors. A securities attorney can help you track deadlines and filing fees.
Pro Tip: You can and usually should file the Form D before you start raising capital. Work with a securities lawyer to ensure you file the correct forms on a timely basis federally and in each applicable state.
Onboard Investors Legally And Systematically
A polished onboarding process gives investors confidence and keeps you legally protected.
Key Steps Include:
- Delivering all offering documents
- Verifying investor accreditation (if 506(c))
- Collecting signed subscription agreements
- Retaining records for compliance and audits
Many fund managers use investor portals or fund administration platforms to manage this efficiently and securely.
Stay Compliant Post-Funding
Raising capital is just the beginning. Post-close, you have ongoing legal duties:
- Deliver K-1s annually for tax purposes
- Communicate fund performance and updates regularly
- Avoid style drift (stick to your stated strategy)
- Update offering documents if any material terms change
Failing to meet post-funding obligations is a common pitfall that erodes investor trust and invites regulatory scrutiny.
Book A Free Strategy Call To Get Your Legal Docs In Place
Raising capital for an investment fund requires strategic legal planning from day one. Our legal team specializes in helping fund managers launch with confidence and stay compliant throughout the lifecycle.
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