WHAT LICENSES DO YOU NEED FOR YOUR FUND?

Hey guys, welcome back. So in this episode, we're going to talk about what licenses do I need to start a fund and a secret, I'm going to teach you a way that you can start a fund without any licenses. Sound good? Simple structure again, we have our general partner, we have our limited partnership or fund and you have limited partners or investors that come into the fund and invest money into the fund. This is the basic structure of how funds works that I talked about in a previous episode. And this is all under Reg D 506 type of fund that we're going to talk about today. So Bridger, what licenses do I need to actually do this? Now a lot of funds want to charge a management fee, and I'll put that right over here. I'm going to draw this out. To charge a management fee, you need to have what's called a registered investment advisor along with your general partner. So what happens when distributions happen or a waterfall happens? The limited partnership, the fund makes money. The management fee will go to the registered investment advisor. Let's call it 2%, like a 2 and 20 fund. And then the performance fee will come to the general partner. And that can be, we don't know what that is, right? That's based on performance. So usually what funds will do is say, once we hit 8%, first 8% goes to the investor. Anything above that, we're going to do an 80/20 split. 80% of returns go to the investor, 20% come to the general partner as a performance fee or carried interest. So this is where licenses come into this whole thing. If you are going to set up a registered investment advisor and charge a 2% management fee or a half a percent or a 1% management fee, which means essentially if you do nothing this year with their money, you still get 2%. You could be on the beach in the Bahamas drinking piña coladas and still make 2% on their money. To do that, the SEC comes in and says, we want you to be licensed, to have a registered investment advisor. And typically to do this, you need to have what's called a Series 65. The Series 65 license will let you— you can set up a registered investment advisor and your client, you are advising the fund as your client and getting a 2% or a half percent management fee as an advisement fee. Also, to charge a management fee, you have to have qualified investors that invest in your fund. Bridger, what's a qualified investor? There are 3 tiers of investors. There's accredited investor, a qualified client, and a qualified purchaser. Accredited investor has a net worth of about $1 million, and there's a few other details. Qualified client, about $2 million net worth. Qualified purchaser, a $5 million net worth. Now, we have other videos on the different types of investors, but to charge a management fee, you need at least a qualified client to charge a management fee. So I'm gonna put a qualified investor. And this is where the SEC gets very involved in what's going on because they don't like the fact that you are making money without doing any work. So Bridger, how can I start a fund without all these licenses, a registered investment advisor, Series 65? Well, I'll tell you, this is how I set up my and currently run my fund actually right now. I said, hey, I'm not gonna have a registered investment advisor and I'm not gonna charge a management fee. I'm only going to charge carried interest or a performance fee. What that means is when I pitch an investor, I say I don't make any money unless you get at least an 8% return and then I start making money only if I perform, if the fund does well. If the fund doesn't do well, I make $0 in the fund. If we make a 7% return this year, I make $0. The SEC looks at that and says if you have the confidence to not charge a management fee and just do performance fees, We do not care if you have a Series 65 because you're not having a registered investment advisor and you can have accredited investors which makes it easier to go out and raise money. So with my first fund, I said I'm gonna do a 0% management fee, I am only doing performance on carried interest and investors love this, right? They ate it up like holy crap, this kid is so confident, he's not going to charge a management fee. Yes, I would be interested and I only make money on off of performance fee or carried interest. Now, in the near future, I'm looking to set up a registered investment advisor. We're on our 3rd fund and so we want to start charging a management fee but a lot of people like my dad, when he started out his first funds, they did the same thing. They did a 0% management fee because they could go to investors and it was a very compelling pitch. When you pitch an investor and say I'm not going to make any money unless you make a certain pref, preferred rate of return, That's a compelling pitch and that's why I recommend most people starting out in funds don't charge management fees. Don't go through setting up a registered investment advisor, 65. It's just a lot of work to get going. Now, if you've already done funds in the past, you know how this works, you have a 65, great. Go ahead, charge a management fee, good luck. If you're a scrappy entrepreneur like us and you've got to get things done, I would recommend doing a 0% management fee. Just doing the GP, limited partnership, have money come in, get them a good return, build a track record. Put your name out there. No, you're not gonna be worth $100 million after your first fund. That's not the point. Your first fund and second fund and third fund are to build on each other over time where you can build a track record, build a name for yourself, and then one day, yes, charge a management fee, build up $100, $200, $500, a billion-dollar fund, and go from there. But if you're young, if you're scrappy, if you're just starting out, this is how I did it, and this is a good way, I think, to get started in the fund world.