Hey Guys, I’m starting to think about starting some kind of investment side business, and therefore for modesty reasons won’t call it a fund or even a firm, but rather a “vehicle”, since I wouldn’t have people working for me nor an office. To make it short, I am wondering if such a thing is possible and if yes, how the hell can a thing like that be setup. So is it even possible in most legislations to effectively invest other people’s money as a side business, without the whole regulatory, prospectus and etc. hassle ? I am talking about very small capital and nothing publicly traded or that has directly to do with financial markets. So maybe some kind of limited partnership ? Has anyone any kind of experience with this type of stuff ?
What will you be investing in? What country/state/province are you in?
^^ In alternative energy projects in Europe. I would be investing directly in the project SPV, either in shares or in shareholder loans (or some other kinds of subordinated debt) or both.
Yes it’s possible. To be legit, you have to register yourself as an RIA (Registered Inv Advisor) with the state where you live. The whole process is fairly cheap; it takes about $5,000 to set up (including getting a lawyer for the registration). Then there are on-going compliance requirements with the state. You have a lot of flexibility but can only charge AUM fees (no commission) and do consulting work if you like. I suggest you look into it.
Not sure an RIA is the right sort of arrangement for what the OP has in mind. Viceroy, I’m not an expert but I do know something about this sort of thing (including having set up an RIA) and might be able to be of some help; feel free to shoot me an e-mail if you want.
This looks hokey but actually is useful in at least setting out many of the relevant issues/steps and pointing you in the right direction: http://www.fwallstreet.com/article/170-how-to-start-your-own-hedge-fund I think that in fact depending on how many investors you have you may indeed need an RIA as that site points out, although the vehicle you have in mind would probably be an L.P.
http://leighdrogen.com/the-hedge-fund-structure-is-dead/ Might find this interesting.
Captain Windjammer Wrote: ------------------------------------------------------- > Not sure an RIA is the right sort of arrangement > for what the OP has in mind. > > Viceroy, I’m not an expert but I do know something > about this sort of thing (including having set up > an RIA) and might be able to be of some help; feel > free to shoot me an e-mail if you want. Hey Captain’, sorry for late answer and txs for input. Ok, so my thing would be based in Germany. I am currently looking into a structure called GmbH & Co. KG. It’s similar to an LP, but the general partner is itself some kind of LLC, meaning that the unlimited liability ends in the LLC on top which I would own 100%. (eventually more layers of LLCs are added to segregate liability even more, but I am faaaaaaar from that point). I think european law is much more complex with regards to making a fund than what you described, but I am going to see if the “fund” legal status can be avoided and how. Afterall, let’s pretend I asked a couple of friends for money, make an LP and have them as limited partners in the statutes, what is so complicated there ? Anyways it’s not so simple, this legal structure thing is complicated for a noob like me
Oh and I am also thinking about the possibility of registering my structure abroad, meaning in much simpler legislations. But then again, for a mini vehicle like what I have in mind, it may not make sense at all… Anyways…
^^ Or Luxemburg. The only problem is, for the size of what I want to do, it might be a bit overkill. + I don’t know who the limited partners (investors) will/would be, but I think that they will be mostly based in Germany. Germans tend to prefer companies registered in Germany. Anyways, I made a little bit more research, and it seems the closed-end fund structure described above has minimal legal constraints. Your prospectus just needs to be approved by the BaFin (local regulatory authority) which apparently just runs a checklist to see if the required documentation is there.
Best of luck, and let us know how it goes, I hope to be doing something similar down the road.
Made some further research and it seems pretty doable so far in the above structure. In fact, it appears that such companies aren’t even subject to a “fund” status and that general business / contract law applies, i.e. you are just setting up a normal LP with limited partners who are bringing in equity. It all seems too simple to be true. BTW, I read that it’s the oldest most simple type of investment company structure, and applies typically to real estate investments as well as VC and PE…
Vinceroy, it’s not as easy as it sounds. Yes, setting up a GmbH & Co KG is not that difficult. Grasping the implications for your and every Limited Partner’s tax return is a much different issue. GmbH & Co KG are mostly used for tax purposes, that’s about the whole reason for their existence. Also, there are things like officer’s liability and liability for under-capitalization, apart from all the BaFin requirements. Please do talk - at least shortly - to a lawyer about your preferred structure and the purposes you want to accomplish with it. Otherwise it might very well work out for you, it might just as well go very wrong and you’re on the hook personally. I’m a German lawyer-in-training (Rechtsreferendar), so of course I err on the side of caution on these matters, so take it for what it’s worth. But there’s a reason there are lawyers doing nothing else than setting up new investment funds all day - and they are primarily tax law specialists. The company law part is not the difficult one. Cheers
^^^ dsp, thanks alot for input!!! I am currently so far away from starting the thing that talking to a lawyer isn’t a concern. I am just really brainstorming a bit and trying to sketch what it would look like, what issues exist, what is possible and not. Of course I would get legal & tax advice before I do anything concrete. So, I am not sure about this, but I think that the whole Prospectus authorisation thing and Prospectus liability applies for KGs with more than 20 LPs, so that for small structures it is even simplified. By the way, do you know if the Prospectus liability has to apply to the *person* filing the prospectus, or if it applies to the limited liability (GmbH General partner) company if it files the prospectus as a manager ? I also heard that unless there is a clause limiting the powers of the LPs, that they can potentially take some control on the KG’s management if they put their votes together. So this is something to watch out for in the KG’s statutes. Something that I am worried about is the LP’s Nachschusspflicht (is this what you meant with liability for under-capitalization?). This is a risk that equity investors have to bear in project finance, and hence my initial idea to have a business model based on investing in subordinated debt. In any case that would be a total deal breaker, as it wouldn’t be acceptable for LPs to have a risk which isn’t limited to their investment. But my feeling is that this has more to do with the structure of the deals I would be investing in.
Viceroy - It’s by far easier to first think about what you actually want to accomplish on the business side (where to invest - geographically as well as in which market, in which structure, equity or debt etc.) before thinking about the legalese. Legal structures serve business purposes, not the other way round, so do make up your mind in the right order. In general, you would be wise to choose a legal entity from an established jurisdiction with well-known case law and statues. No use in using a LLC from Turkmenistan just to save a few bucks when you can become personally liable due to some obscure Turkmenistan law for the delivery of 100 goats to their president. Choose your jurisdiction wisely. The specific legal entity can always be modified to fit your purposes and your personal tax planning. Cheers from Germany