Looking into Starting a Fund

[Joseph King]

Has anyone out there created a fund for Notes that could give some advice?

[Chris Seveney]

@Joseph King

This is worthy of setting up a call to discuss this. When I was reading this I was like, damn this guys brain works like mine

I went through this with my attorney and CPA and selling partials in a fund creates two distinct concerns:

1. Tax implications - my CPA felt that this was considered obtaining leverage, and any investors who were using a self directed IRA would be subject to tax implications.

2. If selling partials to a non-accredited investor really walks a fine line of that investor investing in the fund as you still have common ownership interest. A way around that would be to create a joint venture agreement with the fund and the investor but then the investor would have to be on the recorded assignment (all according to my attorney) - BUT my CPA still believed you would still be subject to tax implications.

Some more comments below:

Hi Chris, so I am thinking of creating a fund where we purchase performing notes and partial off some to bring capital back into the fund to purchase more. I am thinking we go after passive accredited investors and the fund to start off is 10 million over 5 years. We would offer the fund investor a 10% yield, we offer the Partial investor a 10-14% yield.

(1) not sure how you could offer the partial investor a greater yield, why would someone invest in the fund if the partial investor was getting more in return?

I am curious about the following:

* What do I charge for managing the fund? (1.5-3% are standard)
* Are there servicers specifically for fund management? Yes, but they are not cheap. Around $1500+ per month
* Do the assets in a fund have to be purchased in a specific region or can it be nationwide? How does this work with taxes? (They can be purchased anywhere). For tax purposes each investor receives a K-1 and the state the LLC was incorporated in (fund is an LLC in my case) pays a pass through tax in that state.

* Do you have to be licensed in anything to start a fund? NO
* Do you have to raise the full 10 million before acquiring assets into the fund? NO. You have a floor and a ceiling. 
* How long does it take to set up the fund? Truly depends on you and how quickly you can get info back and forth to your attorney. I would say on average 1-3 months.
* What type of fund should I set this up and how much do they cost to get going? See comments above.
* What restrictions and/or regulations will I be faced with through SEC - See comments above
* Is there a number of non-accredited investors you can bring into the fund? I have always heard the number 35. - If you do a 506b you cannot advertise for the fund, you must have a pre-existing relationship with them, and you can have up to 35. If you do 506c all must be accredited but you can advertise the fund.
* How it would work legally if we are paying off fund investors from part of the revenue from the partials? As noted above this is where it gets hairy. Why not just buy performing loans and pay the investors from the interest on the performing loans?
* How do you structure the flow of money to keep the Partial investors on track as well as the Fund investors? will these require two separate CPA's or is there some type of service out there that aids asset managers? if so who? See above

I have many more questions but I think I will stop here because it already seems like a lot.

Happy to discuss further.