You Don't Need a License to Raise a Fund of Funds. Except You Probably Do.

There are plenty of virtual or live events where someone is teaching a room full of people that a fund of funds is the easy way to raise capital. It might cost tens of thousands of dollars for their coaching program. Their claim, it's so easy, you just raise capital, you don't have to do anything else. I want to tell you what that sentence is leaving out. My name is Kim Lisa Taylor. I'm the founder of Syndication Attorneys. I've worked with close to 500 syndicators on Reg D offerings, and I hear this exact pitch described back to me nearly every week. Fund of funds isn't illegal. It isn't even unusual. Plenty of our clients run one properly. What's dangerous is the version being taught in some of these rooms. Raise the money, hand it to other people's deals, collect a fee and a share of the profits. But they skip the part where you have to find out whether you're now required to comply with investment advisor rules. That requirement doesn't go away because a coach didn't mention it. After I explained this requirement to someone, they asked, well, what's the difference between you and one of these fund-of-funds gurus? And I said, I'm an attorney and they're not. Here's what the coaching programs actually sell you. You don't operate or control real estate. You don't have to underwrite properties, manage tenants, or run a value-add plan. You raise capital from your investors and you place it in other sponsors' syndications— deals you didn't build, structured by other people, with your investors' money riding on your judgment about which deals are worthy. For coaches pitching this as a beginner strategy, that's the appeal. No operating track record required. You don't need years of deal experience. You don't have to spend hours, weeks, or months Finding a good deal. You just need investors who trust you and a network of syndicators to place their money with. Here's the part that should be the tell, but instead gets sold as the selling point. You don't have to do anything. Legally, that's backwards. The less operating you do, and the more you're the one finding, deciding, allocating, and vouching where investor money goes, the closer you are to a specific kind of regulated activity. Advising others on the value of, or the advisability of investing in securities makes you fall within the definition of an investment advisor, which is a highly regulated field. Choosing which syndications your fund invests in on behalf of your investors in exchange for a fee or a share of profits is exactly that activity. It doesn't matter that you are not managing the underlying property. You are managing the decision about where the money goes. Even if the investors choose the deals they invest in, you found it, you presented it, they relied on you to only present worthy deals, so they assume you vetted the syndicators, underwrote the deal, and that the whole thing makes sense. But what if you didn't? That's the part the SEC and state regulators care about. So what does compliance with investment advisor rules actually require? Everyone thinks, I can just be an SEC-exempt reporting advisor. Well, that may be true until you reach a certain level of assets under management, but the SEC then passes the ball back to the states, saying, in the meantime, you're subject to state investment advisor rules. Which states depend on where your team maintains offices and may also apply in states where you have a threshold number of investors. Every state has a completely different set of rules regarding registration or being exempt from registration for a limited time. Some states may place higher financial qualifications on your investors, such as requiring you to limit your investors to those with higher net worth than accredited investors, or they may restrict how you can be compensated. Some might require annual audits of each fund you manage. And some might not require anything until you manage more than a certain number of funds. It's all over the board. Qualifying for a state investment advisor exemption or registration often requires filing a portion of the SEC's Form ADV and then providing a copy of it to the state to prove you did it. Form ADV requires you to provide a detailed disclosure of your business, your fee structure, conflicts of interest, a comprehensive compliance program, and standard operating procedures. Being an investment advisor, exempt or registered, means you'll have ongoing compliance obligations— recordkeeping and compliance monitoring and periodic filings. In many states, one or more of your team members might have to pass an exam like a Series 65 or Series 22 exam. It also means taking on a higher fiduciary duty to your investors. Ensuring all of the investments you put them in are suitable for them, which is a higher legal standard than what typically applies to a syndicator raising capital for their own deal. This isn't a form you fill out once and forget. It's an ongoing regulatory relationship that continues for as long as you're operating the fund and continuing your fund-of-funds investment model. That's why people skip it. Not because they don't care. It's because it's genuinely a lot of work. And because the person who told them about Fund of Funds in the first place never mentioned it. Or maybe they even dangerously said those requirements don't apply to them. I hear a version of these same sentences constantly. My coach told me I didn't have to do it. Or, you're telling me I have to do all this too when I just spent all this money with my coach? Think about the incentives. The coach got paid the moment you enrolled in their program. They don't carry any of the regulatory risk that comes after. If the registration requirement gets glossed over or presented as something that probably doesn't apply to you, the coach has already been paid either way. You are the one who has to live with the answer. Here's what happens when you ignore it. Operating as an unregistered investment advisor is its own securities violation, separate from whatever securities exemption you're using to raise the money for the fund itself. It doesn't go away because your underlying deals perform well. It sits there quietly until something forces a closer look. And a closer look happens the same way most compliance gaps surface. An investor in one of the underlying deals has a problem, or one of the deals your fund invested in fails. One of your investors complains to their state regulator, or they hire an attorney and demand their money back. The regulator or attorney starts pulling records, and now the structure of your fund of funds— not just the deal that underperformed— is what's being reviewed. Whether you were required to comply with investment advisor regulations and whether you did Is one of the questions that comes up, along with whether you conducted adequate due diligence on the sponsor's deal and the sponsor themselves before presenting it to your group. There's another version of this that syndicators might think gets them around the problem, and it actually makes things worse, not better. Those are called feeder funds. Instead of one fund of funds where your investors might choose their investments, You set up a single-purpose feeder for each individual deal you're placing investor money into. You think, you know, that a feeder fund tied to one specific offering looks less like ongoing investment advisory activity and more like a one-time capital raise or syndicate. It doesn't work that way. You are still the one deciding which deal the feeder goes into, still doing it for a fee, and now you're doing it repeatedly, deal by deal. Which makes it harder to argue that this was a single passive arrangement. State limitations on the number of funds you can manage before you must get registered or pass a test might get surpassed even sooner. Same registration question, you just get there faster. I do go deeper on why in the companion video to this one. So what does a compliant path actually look like? There are a few, and the one you choose makes all the difference in whether you can meet the state exemption or registration criteria, or whether you or someone on your team has to obtain the license this activity requires. The point isn't that funds of funds is off the table, but it is harder than just raising money and investing passively in others' deals. You need to understand your compliance obligations before you raise the first dollar, not after you've been charged by a securities regulator with acting as an unregistered investment advisor or even an unregistered broker-dealer, or you've been found personally liable for your investors' losses for violating securities laws. At that point, your reputation damage may be irreparable. If you're raising or thinking about raising through a fund-of-funds structure, and you're not sure whether what you're building triggers investment advisor compliance, that's worth checking before you take a single dollar. Schedule a consultation and we'll tell you how we can help. If you'd rather start smaller, we also offer a paid 1-hour consult with me directly. The fee is credited towards your legal fees if you move forward with us. The link is in the description, syndicationattorneys.com. Subscribe for more content like this. And we'll let you know when we post new videos.