Fund Formation for Texas Fund Managers
Forming a private fund means creating the fund entity, a separate management entity for the sponsor, and the documents that govern investors: an operating or partnership agreement, a private placement memorandum (PPM), and a subscription agreement. Most funds raise money under a Regulation D exemption and rely on an Investment Company Act exemption such as Section 3(c)(1) or 3(c)(7). A partner attorney handles the structure, the documents, and the filings.
What is fund formation?
Fund formation is the legal work of setting up a pooled investment vehicle: a fund that collects money from several investors and invests it under a stated strategy. The sponsor (the person or company running the fund) is called the general partner or manager. The investors are limited partners or members. Fund formation covers choosing the entity type, drafting the governing documents, structuring the fees and profit split, and meeting the securities-law requirements for raising the money.
It applies to real estate funds, private equity funds, venture funds, search funds, and single-asset vehicles often called special purpose vehicles (SPVs) or syndications.
How is a private fund structured?
Most private funds use three layers:
- The fund entity. A limited partnership or LLC that holds investor money and makes the investments. Investors own interests in this entity.
- The general partner or manager entity. A separate LLC that controls the fund and signs for it. It keeps the sponsor's personal assets apart from fund liabilities.
- The management company. An optional third entity that employs staff and collects the management fee.
Real estate funds often add a property-level LLC for each acquisition. A common economic structure is a management fee, a preferred return to investors (a minimum return paid before the sponsor shares in profits), and a carried interest or promote (the sponsor's share of profits above that hurdle). The percentages are negotiated deal by deal and set out in the governing agreement.
Which exemptions keep a fund from registering?
Two federal laws matter. The Securities Act of 1933 requires an offering to be registered or exempt, and most private funds use Regulation D, Rule 506. The Investment Company Act of 1940 regulates pooled funds, and private funds usually avoid it with one of two exclusions:
| Exclusion | Who can invest | Key limit |
|---|---|---|
| Section 3(c)(1) | Typically accredited investors | No more than 100 beneficial owners; no public offering |
| Section 3(c)(7) | Qualified purchasers only (generally individuals with at least $5 million in investments) | No fixed investor cap, but other securities-law thresholds still apply |
Some real estate funds that hold property directly are not investment companies at all, depending on what they own. That is a structuring question for your attorney, not something to assume.
Does the fund manager have to register as an adviser?
Not always. Under the Investment Advisers Act, an adviser that manages only private funds and has less than $150 million in assets under management in the United States can generally operate as an exempt reporting adviser, which files a shortened Form ADV with the SEC instead of fully registering. Venture capital fund advisers have a separate exemption. States run their own adviser rules, so Texas and any state where investors live can add requirements. Your attorney confirms which path fits your size and strategy.
What documents does a fund need?
- Operating agreement or limited partnership agreement. Governs control, capital calls, distributions, fees, transfers, and exit.
- Private placement memorandum (PPM). Describes the strategy, the sponsor, fees, conflicts, and risk factors. Not strictly required by statute for an offering to accredited investors only, but anti-fraud liability makes it standard practice.
- Subscription agreement and investor questionnaire. Where each investor commits capital and confirms their status.
- Management or advisory agreement. Sets the manager's duties and compensation.
- Bad actor questionnaires. Rule 506(d) disqualifies offerings if certain covered persons have disqualifying histories.
- Form D and state notice filings. See the steps below.
Texas or Delaware?
Delaware is common for funds with out-of-state investors because its partnership and LLC law is well developed and investors and lenders know it. A Texas entity is often simpler and cheaper for a fund that invests mainly in Texas, because a Delaware entity doing business in Texas may also need to register as a foreign entity here. The right answer depends on your investors, your assets, and your lenders, so decide it with your attorney before forming anything.
How does fund formation work, step by step?
- Define the fund. Strategy, target size, minimum investment, investor type, fee model.
- Choose the structure and exemptions. Entity types, state of formation, Reg D path, Investment Company Act exclusion.
- Form the entities. File with the Secretary of State, obtain EINs, open the bank account.
- Draft the documents. Governing agreement, PPM, subscription documents, manager agreement.
- Run compliance checks. Bad actor questionnaires and an adviser-registration analysis.
- Open the offering. Accept subscriptions, then file Form D within 15 days after the first sale and make any state notice filings.
Common fund formation mistakes
- Advertising a 506(b) offering to the public, which breaks the exemption.
- Paying an unregistered finder a commission for bringing in investors, which can create broker-dealer problems.
- Missing Form D or a state notice filing deadline.
- Mixing sponsor and fund money in one account.
- Leaving risk factors and conflicts out of the PPM.
- Starting to raise money before the structure and exemption are chosen.
Free consultation with a partner attorney. No cost, no obligation.
Book Free ConsultationFrequently asked questions
What is the difference between a fund and a syndication?
A syndication usually pools investor money to buy one specified asset, such as a single apartment building. A fund pools money to make several investments under a stated strategy, sometimes before the assets are chosen. Both usually involve selling securities, so both need to fit a securities-law exemption.
Do I need a PPM to raise money for a fund?
A PPM is not strictly required by statute for an offering sold only to accredited investors. It is standard practice anyway, because anti-fraud rules apply to every offering and a thorough PPM with risk factors is the sponsor's main protection if a deal goes badly.
How much does it cost to form a fund?
Cost depends on fund size, the number of entities, and how customized the terms are. A partner attorney quotes the scope and fee after a free consultation with Anchor Legacy Planning.
Can I start raising money before the fund is formed?
It is risky. Raising money before you have chosen a structure and a securities exemption can break the exemption, for example by creating a general solicitation. Plan the exemption first, then start investor conversations.
What is a general partner?
The general partner, or manager in an LLC, runs the fund, makes investment decisions, and signs for it. It is usually a separate LLC so that the sponsor's personal assets are kept apart from fund liabilities.
Do I have to file anything after my first investor closes?
Yes. A Regulation D offering requires a Form D filed with the SEC within 15 days after the first sale, and most states, including Texas, require a notice filing for offerings sold to their residents.
Should I form my fund in Texas or Delaware?
Delaware is common when investors are out of state because its law is well developed. Texas is often simpler for a fund that invests mainly in Texas. Your attorney will weigh your investors, your assets, and your lenders.