Lessons learned from starting a fund

[Chris Seveney]

Wanted to share my recent experience regarding a fund we just closed on for the purchase of performing and non performing notes. Love to get people’s feedback as well for those who have also done a fund what lessons they learned and recommendations

1. Plan plan plan. Make sure you and your attorney who is creating the documents take the time to complete everything. Back and forth with my attorney took several months. While there could be boilerplate PPM’s out there you want to make sure you customize it to meet your goals and objectives

2. Do an investment summary and make sure it is professionally done. This is your marketing piece for a fund and it should look good and also be informative with short and sweet information. It shouldn’t be a book

3. Invest in your fund. This was the #1 question that was asked of me, “are you investing in your fund”

4. Keep the terms simple. Having crazy preferred returns with multiple hurdles will only confuse investors. People enjoy things to be easily understood.

5. Dont set your minimum investment amount too low. What is too low is for you to decide and depends also on overall size of fund. For something around $1M I would not go less than $20k.

[Don Konipol]

@Chris Seveney

First, I want to say that all your initial posts are interesting, relevant, and well thought out.

As per this particular post, you hit the nail on the head!

I have successfully started and managed four funds, totaling about $100 million. And the points you mention are relevant to each one, whether a debt or equity fund. Another point I’d add is the expertise and experience of the fund management is of utmost importance to investors, as well as what pops up in a google search of the sponsor.

For some reason, people don’t do the same kind of due diligence with a joint venture or two person partnership as they do with a fund investment.

Also, we found minimum investment sizes of either $50,000 or $100,000 to work for us.

My first two funds were started well before Reg D 506 c which allows general solicitation and advertising. The two funds we run now are 506 c funds, and I find the trade off of verification of accredited status of investors rather than just having investors state their accredited to be very easy and preferable. No worries about existing relationships, firewalls, 90 day waiting periods, or web site access. Also, Reg D eliminates the difficulty of trying to do an intrastate offering on line.

For the latest funds, We paid $10,000 to our securities attorney for the PPM, Operating Agreement, Subscription Agreement, Reg D filing, first 10 state notification filings, ongoing compliance monitoring for 12 months, and general advice regarding our compliance options. He charged us $8500 for the second one, which was different as it was an equity fund, not a debt fund as the first was.

Basically, a private fund offering can fall into 4 different camps, all of which use an exemption from registration

1. Exemption for intrastate offering, need to be offered only to investors in one state and comply with that states securities laws

2. General exemption for private offering, no “safe harbor”, no “affirmative defense” if lawsuit from investors

3. Reg D 506 b - sophisticated and or accredited investors, investors self accredit, no general solicitation or advertising

4. Reg D 506 c - accredited investors only, sponsor must get prove of accreditation, general solicitation and advertising allowed

While there are a few other type offerings, these seem to be the most common