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10 Reasons Why You Should NEVER DIY a Private Investment Fund

Attention fund managers, this one’s for you.

I can’t tell you how many fund managers give our firm a call, and I’m consulting with them, and they’re telling me investors are suing them because of an old PPM template they used or that they’re facing an SEC or state Securities Commission investigation because of their lack of disclosures in their PPM.

It happens almost on a daily basis—and let’s be real with what’s going on in today’s world—SEC’s really taking a close look at private funds. So this is why I felt it was absolutely necessary to do this video and give you ten reasons why you should not DIY your private fund.

#1 You’re Not a Lawyer and Can’t Write the Legal Disclosures

Listen, your PPM or private placement memorandum has a bunch of legal jargon in it. It covers Securities Law, tax law, and potentially other areas of law depending on the underlying assets. You are not a lawyer, you are not a tax lawyer, and you don’t know all of the changes that have happened in the last ten years that would allow you to have the expertise to write all of these legal disclosures in a PPM.

And no, using the template from your last firm from six years ago is not going to cut it. It’s out of date. There is significant legal information that goes into a PPM, and that information needs to be provided by an attorney.

#2 There Are Many Compliance Obligations You May Not Know

The second reason why you shouldn’t DIY your private funds is compliance. Yes, that little dirty word that shouldn’t really be dirty in our industry. There are so many compliance obligations when it comes to running your fund. There are obligations at the state and federal levels in terms of different disclosures and filings that you have to make, and if you fail to make these filings and disclosures, you could face some serious fines, so don’t do it. Get an attorney.

#3 Documents Should Disclose Risks, Fees, Etc. To Protect Investors

Your PPM and associated documents include a lot of investor protection language and information. That’s right—these fund documents should disclose investment amounts, allocation of fees and expenses, withdrawal rights, redemption rights, and more. If you are using an old template or have a non-attorney draft this information, you may not be disclosing that information appropriately. And again, not disclosing that information to investors so that they know what they’re investing in can lead to more fines for you—so get a lawyer.

#4 Certain Disclosures About Risks Are Required

The fourth reason why you should not DIY your private fund is because you are required to make certain disclosures. That’s right—your PPM is going to disclose certain risks associated with your investment strategy, the underlying assets, management, tax, and more. Failing to have this information puts you at risk and could cause investor lawsuits or regulatory actions, leading to fines, suspensions, discouragement, and more. So don’t do it yourself; get a lawyer.

#5 Documents Need to Be Customized to Your Specific Fund

The fifth reason why you should not DIY your private fund is that you need customization. I can’t tell you how much it annoys me to see a PPM, and the information and the disclosures don’t really have much to do with the actual fund. And it’s because the fund manager got a template from a friend who got it from another friend who had a lawyer drafted 15 years ago.

These documents have to be customized to your fund. They have to be customized based on your investment strategy, the risks, the underlying fees and expenses, and the disclosures. You need these documents to be highly customized to what it is you’re doing. Again, if they’re not, you could fail to include information that is required for you to disclose to potential investors, which can lead to investor lawsuits, regulatory action fines, discouragement, and more. So stop DIY’ing. Do that on your macrame pants, not on your fund, so get a lawyer.

#6 DIY Exposes You to Liability

The sixth reason why you shouldn’t DIY your private fund, and I’ve mentioned it a few times now, is the exposure of liability for fund managers. Yes, don’t think that just because you don’t have to register as an RIA or you do not have to disclose as much information about your fund to state and federal regulators, you’re somehow shielded from liability. No, when you DIY your private fund documents, you’re opening yourself up to more exposure.

And now, when the regulators are taking an even closer interest and looking at fund managers, fund performance, and fund disclosures, this is not the time to DIY your fund documents. You could face regulatory action, investor lawsuits, fines, and discouragement. The cost to you in the back end of not doing it right is going to be a lot more than the cost of hiring competent legal counsel to draft these documents for you.

#7 Drafting Documents is Very Time-consuming

The seventh reason why you should not DIY your private fund is because it’s time-consuming. You have better things to do, like set up a bank account, find who’s going to be your fund administrator, or figure out if you need to get your financial documents audited. And oh, by the way who the hell is doing your financial documents to begin with?

There are so many other things that you, as a fund manager, are responsible for doing. Don’t DIY the fund documents. Leave that to competent counsel to do it so they can make sure it’s customized and it’s got all the appropriate disclosures and information that you are required to provide investors, and let them get into the time suck that is preparing PPMs.

I can tell you it takes a long time because I have personally drafted hundreds of PPMs, and it takes time. It doesn’t matter how simple you think the fund is; it still requires competent counsel to review the documents and ensure laws haven’t changed and new guidance hasn’t been issued that affects the disclosures and information in the PPM.

#8 Laws Change, and Documents May Need Revisions

The eighth reason not to DIY your private fund is that you may actually need to make certain revisions and amendments over time. Laws change. Have you looked at the last ten years in the Securities industry? A lot has changed and a lot is changing for the private fund sector and will continue to change in the future as regulators take a closer look at what’s happening with private funds.

You may be required to make certain revisions and amendments to your documents, and again, this is not something you want to DIY. You want competent counsel who:

  • knows what those revisions and amendments are
  • is able to prepare necessary revisions and amendments, and
  • has the expertise to be able to tell you what the hell the revisions and amendments mean

So that is not the time to DIY your private fund; make sure you’re hiring competent counsel — contact us.

#9 Investors Expect Professionally Drafted Documents

The ninth reason why you don’t want to DIY your fund is because you are taking money from rich folks. Let’s be real—accredited investors have at least two hundred thousand dollars in annual income and at least a million net worth. Qualified investors have at least one million in income and three million in net worth. Do you think these people want to see a fund document that looks hodgy podgy? No!

You are going to get the kind of investors you want when you present them with professionally drafted documents and when you have access to legal counsel who could potentially answer questions related to those legal documents.

I’ve seen some of these PPMsS—they have six different fonts, three different sizes, and things aren’t consistently formatted. I hate it when things are not fully justified. It looks messy, and I can tell you a lot of investors are going to look at this and say, “Who the hell prepared this? Bugs Bunny?!”

They don’t want to see documents like that. You help bring in better quality investors into your fund when you can present your investors with professionally prepared documents. So don’t set yourself up with a bunch of sketchy investors who’ll probably sue you later anyway. Make sure you’re getting the right kind of investors in your fund by getting professionally prepared documents—so go get a lawyer!

#10 Hiring a Lawyer is More Cost-effective

The 10th and final reason why you shouldn’t DIY your private fund is because it’s actually going to be more cost-effective for you to hire counsel. That’s right—I said it. I know there are providers out there who’ll do it for $5,000 – $7,000. They’ll do it on the cheap. It’s not worth it.

You need competent counsel who’s going to prepare the:

  • Fund documents
  • Subscription documents
  • Investor qualification letter
  • Blue sky filings
  • Form D filings

You need competent counsel who’s going to make sure that the shit you need to get done to keep the SEC out of your ass is going to get done. And it’s more cost-effective to pay competent counsel now than to pay hundreds of thousands of dollars in fines and discouragement in investor lawsuits. I promise you one investor lawsuit will cost you multiple six figures. Imagine having ten of them! Don’t be dumb about this. This is one area you don’t want to mess up.

Get it Right The First Time — Contact My RIA Lawyer.

So, I’ve just given you ten reasons why you should not DIY your fund documents, and I’ve also told you at least ten times now to go get a lawyer.

Listen, I know it is scary, and you want to make it as simple as possible, but when it comes to investor money and private funds, you do not want to mess around. You do not want to face investor lawsuits or face regulatory investigations and actions.

So, if you’re ready for that competent counsel to lead you and your team and make sure that you have qualified documentation written appropriately by lawyers, then give us a call or contact us online. I look forward to speaking with you.

Author Bio

Leila Shaver is the Founder of My RIA Lawyer, a law firm that provides compliance and legal consulting for financial institutions. With extensive experience as a securities attorney and compliance expert, she has served as Chief Compliance Officer and General Counsel to RIAs, BDs, and TAMPs with billions in assets under management.

Leila understands the challenges RIAs face and is committed to helping RIAs streamline their processes, mitigate risks, and ensure compliance with regulatory requirements. She received her Juris Doctor from Atlanta’s John Marshall Law School and is a West Georgia Young Lawyers’ Association member. Leila has received numerous accolades for her work, including the Carroll County Bar Association’s Outstanding Young Lawyer Award in 2017.

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