You have just spent the last month or two deciding that the fund business is where you should be. The next decision is to determine what type of fund should be created; a public offering or a private placement. What is the difference? What are the advantages of each? More importantly, can you afford the start-up costs, or should you partner up with a firm already in the fund business? This article will attempt to answer those questions, and to educate you as to the pros and cons of each.

Public Funds

Advantages

• The ability to solicit investors, through advertisement, with whom you do not have a pre-existing relationship.
• The ability to solicit an unlimited number of unaccredited investors, as long as there is proper registration at the state and federal level. Thus, lower investor suitability standards apply.
• An unlimited amount of investors means that the minimum contribution per partner can be lower. For example, a minimum investment of as little as $5,000.00 may apply.
• Affords the ability to raise equity or distribute your product through the broker dealer network.

Disadvantages

• Organizational expenses, such as legal, filing fees for the SEC, NASD, NFA, Blue Sky reviews for each state, printing prospectuses, and marketing material can be very costly. If you do not plan to spend at least $100,000 to $200,000 for this project, expect to start a private placement fund.
• Since the entry cost is so steep, you most likely need commitments from the broker dealer community to raise millions of dollars. To amortize the organization cost over a few million dollars would not be an ideal situation for the break-even analysis, as a high percentage of the equity would be consumed by the organization costs alone.
• Monthly administration and the associated expenses are no longer an afterthought. It can be costly, in terms of out-of-pocket expenses and personnel costs, requiring a full-time staff if you expect to do it in-house. Typically, you are dealing with hundreds, or in most cases, thousands of investors per month. A thousand account statements will need to be mailed monthly; a thousand K-1 forms prepared at the end of the year.
• Lastly, the time to complete the project is approximately six months. The review process and the approval process of the NASD, NFA, SEC and states involved is lengthy. Imagine all those regulators trying to agree on one offering document. Thus, hiring a legal firm who is seasoned in this process is an understatement. A legal firm with the expertise needed is typically extremely expensive.

Private Placements

Advantages

• Comparatively inexpensive, as opposed to a public offering. A budget of $10,000 to $25,000 may suffice to complete the project.
• Time of completion is noticeably shorter, as there is no federal registration.
• It is easier to find a competant attorney to complete the project at a set rate, thereby limiting your legal fees considerably.

Disadvantages

• You must only offer the fund to people with whom you have an existing relationship, as advertising is prohibited.
• Private offerings can only accept a limited number of non-accredited investors.

This article was meant to touch on some of the main advantages and disadvantages of venturing into the fund business. In no shape or form is any type of legal opinion being rendered. Please call CCS Financial Services, Inc. to discuss starting a new fund, as well as any other questions you may have to make your new or existing business more efficient and profitable.

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