Launching a new management company and fund can be quite expensive both initially and on an ongoing basis. Many of the costs are obvious: law firm professional fees, legal costs such as entity formation, hiring auditors and administrators, leasing office space, stationery and branding, to name just a few.
The costs are less obvious on the regulatory side and it is important to factor in the following to avoid being surprised, especially as the launch date approaches (faster than one might think!):
- Investment Adviser registration: ranging from $40 for the smallest of SEC registrants to $500 for some state registrants. SEC registrants may have to notice file in their home state, or states where they have clients. State fees vary, ranging from $50 to $500.
- Investment Adviser Representative registration: some SEC and most state registrants will be required to register certain of their employees as Investment Adviser Representatives in one or more states. Filing fees range from $0 to $285 per representative, depending on the state. These and the adviser registration fees will be in addition to a law firm or consulting firm’s professional fees to handle the registration. Moreover, representative registration often requires that the registrant pass one or more securities licensing exams, usually the Series 65, which currently costs $135. Prep courses and materials will be an additional cost.
- Disbursement Procedures for state registrants: Some states, such as California, may require certain of its registered advisers to retain an independent third party that processes and approves deductions of fees and expenses from client accounts. Depending on the state’s requirements and service provider, there may be a charge per issuance of a letter or other document approving the fee(s) or cost(s).
- Auditors. The SEC and some states require private funds to undergo an annual audit (or surprise exam, though given the choice, most fund managers opt for the audit), so saving money by not hiring an auditor may not be an option. California’s Exempt Reporting Adviser status also requires an audit for 3(c)(1) funds.
- Initial and Ongoing Compliance-related costs: Depending on a manager’s jurisdiction (SEC or a particular state), it may be required to establish a code of ethics, policies and procedures manual, appoint a chief compliance officer, or be subject to other requirements short of a full compliance program. Even if not required, a manager may establish any or all of these as a matter of best practices. NB: most states that register investment advisers have recordkeeping requirements, which are similar to the SEC’s. Costs should be discussed with the applicable service providers and may include:
- Professional fees for drafting documents (code of ethics, policies and procedures, disaster recovery plan and the like);
- Archiving for emails and other electronic communications (this should be set up early on to make sure that required books and records are complete);
- Any other IT infrastructure to support books and records maintenance (similarly, should be set up early on);
- Class action monitoring and processing (most likely post-startup); and
- Proxy voting service (most likely post-startup).
- SEC Form D and State Blue Sky filings: Private funds typically file Form D with the SEC at launch to claim one or more exemptions from registering its interests as securities under the Federal securities laws. The SEC filing is free of charge. However, nearly all of the US states and territories have a corresponding law that permits these “Federal Covered Securities” to be offered in their state as long as a copy of the Form D is transmitted to the state within a certain timeframe. Most states require a filing fee and some require additional documentation. These filing fees add up quickly because they are made when the first investor from each state comes into the fund. Fees range from $0 to $1,500, excluding professional fees (such as law firms and compliance consultants) to prepare them.
Funds not relying on Regulation D may still be subject to other state laws governing private offerings, some of which require filings (usually with fees, varying significantly within and among the states) and others do not. Legal counsel can advise on the applicability of these laws; expense-conscious managers may wish to ask about the approximate costs of researching and monitoring compliance with these laws as they are more variable than the Regulation D/Federal Covered Securities system.
Under either Regulation D or other state laws, some states require renewals on an annual or other periodic basis (such as two years in Alaska for Form D or four years in New York for state Form 99), so managers should plan for ongoing fees as well.