Forming a Private Fund: A Practical Guide

Document type: Guide Practice area: Corporate — Investment Funds Jurisdiction: United States (federal and state) Last reviewed: 5 September 2026

Before you draft anything

Fund formation is a project with a long critical path and a small number of decisions that constrain everything after them. Make those decisions deliberately and early, because unwinding them later costs months.

Step one: define the strategy precisely enough to structure it. What will the fund buy, in what jurisdictions, in what form, held for how long, and financed how? Every structuring answer depends on this, and a strategy described in marketing language — "opportunistic value across the capital structure" — cannot be structured.

Step two: identify the target investor base. Institutional or high-net-worth. U.S. or global. Taxable, tax-exempt, or governmental. Benefit plan investors or not. This single input determines the exclusion, the domicile, the parallel vehicles, the pay-to-play exposure, and half the side letter negotiations.

Step three: fix the manager's regulatory position. Registered adviser, exempt reporting adviser, or state-registered — determined by assets under management and client type under 15 U.S.C. § 80b-3 and the federal/state allocation in 15 U.S.C. § 80b-3a. This determines whether a full compliance program is needed before launch, which is a several-month workstream.

Step four: decide the Investment Company Act exclusion. Section 3(c)(1) or 3(c)(7), 15 U.S.C. § 80a-3. Qualified purchasers only with no holder cap, or accredited investors with a hundred-holder cap. If you want both, you are forming parallel funds and you should know that now.

Step five: budget honestly. Legal, administration, audit, tax, and formation costs for a first-time institutional fund are substantial, and the LPA's organizational expense cap will not cover all of it. The manager funds the gap. Managers who do not plan for this run out of money mid-raise, which is visible to investors and fatal.

Phase one: structuring (weeks one through four)

Choose the exclusion, then the entity chain. Under 15 U.S.C. § 80a-3, a 3(c)(7) fund takes only qualified purchasers and has no holder cap; a 3(c)(1) fund takes accredited investors but is capped at one hundred beneficial owners, with look-through for certain ten-percent entity holders and integration risk across parallel vehicles. Institutional strategies default to 3(c)(7).

Then build the chain. A Delaware limited partnership as the fund. A separate general partner entity holding the carried interest. A separate management company employing the team and receiving the fee. Add a Cayman or Luxembourg parallel or feeder if the investor base requires it, and reserve the right in the LPA to form blockers and alternative investment vehicles later.

Why three entities and not one. The general partner holds carry and bears general partner liability; the management company holds employees, leases, and operating risk; keeping them apart limits how far a problem in one travels into the other, and it makes the carry allocable among a team that will change.

Run the ERISA analysis now. If benefit plan investors will exceed twenty-five percent of any class of equity — measured excluding manager and affiliate interests — the fund's assets become plan assets and the manager becomes an ERISA fiduciary under 29 U.S.C. § 1002. The alternatives are the twenty-five percent significant participation test, backed by a redemption or forced-transfer mechanic in the LPA, or venture capital operating company status, which carries its own annual testing burden. Decide which and draft for it.

Run the commodity pool analysis now. If the fund may hold any futures, swap, or FX forward — including for hedging — 7 U.S.C. § 6m puts the manager in commodity pool operator territory absent an exemption. Determine whether CFTC Rule 4.13(a)(3) will be claimed, note the notional and margin limits it imposes, and calendar the annual affirmation before you forget it exists.

Run the tax structuring. Flow-through treatment under the classification framework of 26 U.S.C. § 7701; the three-year holding period for carried interest capital gain treatment; blocker strategy for non-U.S. and tax-exempt investors; state tax filing footprint; and the partnership representative designation for the centralized audit regime. Tax counsel should be in the first structuring meeting, not the last.

Deliverable for phase one: a structure chart, a one-page summary of the regulatory positions taken, and a term sheet.

Phase two: the manager's regulatory position (weeks two through ten, in parallel)

Determine registration status. Section 203, 15 U.S.C. § 80b-3, and the federal/state allocation in 15 U.S.C. § 80b-3a. Above the private fund adviser threshold, register with the Commission. Below it, file as an exempt reporting adviser. A venture strategy may qualify for the venture capital adviser exemption regardless of size.

If registering, build the compliance program before the first close. Rule 206(4)-7, adopted under 15 U.S.C. § 80b-11, requires written policies reasonably designed to prevent violation of the Act, a chief compliance officer, and an annual review. Minimum contents:

Code of ethics with personal trading pre-clearance, reporting, and a restricted list.
Allocation policy covering investment allocation among the fund, parallel funds, and co-investors — written before the first deal.
Valuation policy stating methodology by asset type, frequency, preparer, reviewer, approver, and documentation.
Expense allocation policy identifying which costs the fund bears, which the manager bears, and how shared costs split among vehicles.
Political contributions policy implementing the pay-to-play restrictions of Rule 206(4)-5, including a two-year lookback questionnaire for new hires — because the lookback captures people you have not hired yet.
Marketing and performance policy governing gross and net presentation, hypotheticals, track record portability, and testimonials.
Custody, books and records, business continuity, cybersecurity, insider trading, and gifts and entertainment.

Appoint a real CCO. Senior enough to be heard, independent enough to say no, and not so overloaded that the annual review becomes a memo written in December. Operational due diligence teams ask about this directly.

File Form ADV. Part 1 is data; Part 2A is the narrative brochure; Part 2B covers supervised persons. Everything in the ADV will be read by every prospective investor and by every examiner. Draft the conflicts and fee disclosures to be specific — general disclosure does not obtain informed consent, and § 206, 15 U.S.C. § 80b-6, together with SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963), requires full and fair disclosure of material facts and conflicts.

Remember that the antifraud provisions apply whether or not you register. Exempt reporting advisers are not exempt from § 206. The client, under Goldstein v. SEC, 451 F.3d 873 (D.C. Cir. 2006), is ordinarily the fund itself — which does not narrow the duty so much as identify to whom it primarily runs.

And note what is no longer mandatory. The Private Fund Adviser Rules — quarterly statements, mandatory audits, adviser-led secondary fairness opinions, restrictions on preferential treatment — were vacated in National Association of Private Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. 2024). Institutional investors demand most of it in side letters anyway. Plan to deliver it; just recognize you are delivering it under contract rather than regulation.

Phase three: the document set (weeks four through twelve)

The limited partnership agreement. The controlling document. Priorities in drafting order:

Definitions — especially Transaction Fee, Portfolio Investment, Capital Contribution, Net Income, Distributable Proceeds, and Investment Period. Most later disputes are definitional.
Capital commitments, calls, defaults — notice periods, minimum call amounts, default remedies.
Management fee — rate, base, step-down, offsets, and the offset definition.
Distributions and the waterfall — with a worked numeric example appended. Draft the waterfall with numbers or you will not find the ambiguity.
Clawback — computation, escrow, guarantees, tax netting, survival.
Expenses — specific, not general.
Key person, removal, no-fault termination, successor funds.
Advisory committee — powers, and an express statement that it approves conflicts rather than manages the fund, with a fiduciary duty disclaimer for its members.
Transfers, withdrawals, ERISA mechanics, publicly traded partnership safe harbors.
Indemnification, exculpation, and the fiduciary duty modification Delaware law permits.

The private placement memorandum. Not marketing. A disclosure document subject to § 206 and to Rule 10b-5. It carries the strategy description, the team, the track record with its attribution basis, the terms summary, the risk factors, the conflicts of interest, and the expense disclosure. Conflicts and expenses are where enforcement lives; write them like you will have to defend them, because that is the use case.

The subscription agreement and investor questionnaire. Establishes accredited investor status, qualified purchaser status where 3(c)(7) applies, benefit plan investor status, bad actor facts under Rule 506(d), anti-money-laundering and sanctions information, tax certifications, and the representations that support every exemption you are relying on. This is your evidence file. Build it carefully.

The general partner agreement and management agreement. Carry allocation among principals, vesting, forfeiture on departure, good leaver and bad leaver definitions, and the clawback guarantee mechanics. This is the document the team will care about most and will read last.

Ancillary documents. Administration agreement, audit engagement, custody arrangements, subscription facility documents if any, and the side letter form.

Phase four: service providers (weeks four through ten)

Fund administrator. Maintains books, calculates capital accounts, processes calls and distributions, prepares investor statements. Institutional investors expect a third-party administrator; self-administration invites questions the manager will not enjoy answering.

Auditor. A recognized firm with private fund practice, engaged for annual audited financial statements prepared under generally accepted accounting principles and delivered within a stated period after year end. The audit requirement is now contractual rather than regulatory after the vacatur — and it is universal.

Tax preparer. Schedule K-1 preparation and delivery timing is one of the most frequent operational complaints from investors. Agree a delivery target and put it in the LPA if you can meet it.

Custodian. Where securities are held, and the arrangements that satisfy the custody rule.

Legal counsel. Fund counsel for formation; separate transaction counsel is common; specialized ERISA, tax, and regulatory counsel as needed.

Placement agent, if used. Verify registration under 15 U.S.C. § 78o. Transaction-based compensation to an unregistered person is a broker registration violation and it will surface in diligence for the next fund. Confirm the agent's own pay-to-play compliance, because the adviser is responsible for solicitors it uses with government entities.

Insurance. Errors and omissions, directors and officers, and general partner liability. Coverage terms, retention, and who pays — the fund, the manager, or both — should be settled in the LPA's expense provision.

Phase five: the raise

Sequencing. Anchor investor first, then the institutional core, then the balance. The anchor sets the terms that everyone else will benchmark against and will often demand terms that reflect that role. Decide before you sign the anchor's side letter which of its terms will be MFN-eligible.

Choose 506(b) or 506(c) under Regulation D, 17 C.F.R. Part 230. Most institutional funds use 506(b) and therefore must avoid general solicitation — which constrains conference behavior, website content, and press. Train the team on what solicitation means before somebody posts a fundraising update.

Run the data room properly. Track record with attribution; audited financials of predecessor funds where available; the operational due diligence package; policies; ADV; references; and the document set. Version control matters. A prospective investor who receives two inconsistent versions of the track record will ask why.

Expect operational due diligence as a separate workstream from investment diligence, often conducted by a consultant with a standardized questionnaire covering administration, valuation, cash controls, cybersecurity, business continuity, compliance, insurance, key person risk, and the manager's own financial stability.

Negotiate side letters against a matrix, not one at a time. Maintain, from the first letter, a spreadsheet with one row per investor and one column per obligation: fee terms, excuse rights and their triggers, reporting deliverables and cadence, co-investment priority, transfer rights, advisory committee seats, confidentiality treatment, and regulatory representations. The matrix is an operating document for the life of the fund, not a closing artifact.

Handle public pension investors' confidentiality constraints explicitly. State public records statutes prevent them from agreeing to resist disclosure. Adapt the confidentiality provision or decline the commitment; there is no third option.

Structure the MFN before you grant the first side letter. Tier by commitment size; carve out advisory committee seats, capacity and co-investment rights, and status-driven regulatory terms; and set an election window that starts at final closing with a hard deadline.

Phase six: closing mechanics

First closing. Requires signed subscription agreements, completed questionnaires, satisfied anti-money-laundering and sanctions checks, executed LPA signature pages, refreshed bad actor diligence, and a funded or committed administrator relationship. File Form D within fifteen days of the first sale and make the state notice filings.

Subsequent closings. Later investors pay an equalization amount — their share of prior capital calls plus an interest factor at a negotiated rate — so all investors stand as though admitted at the first closing. Refresh bad actor diligence at each closing. Re-run the plan asset percentage at each closing. Both refreshes are routinely forgotten.

Final closing. Fixes fund size, starts or confirms the investment period, and starts the MFN election clock. Circulate the side letters in the form and redaction agreed, track elections against the matrix, and issue a consolidated statement of the resulting terms.

The first capital call. Deploy the notice mechanics the LPA describes, on the notice period it requires, in the form it specifies. A first call that departs from the document teaches investors that the document is aspirational.

Phase seven: the first hundred days of operating

Stand up the compliance calendar. Annual compliance review; Form ADV annual updating amendment; Form PF if applicable; state notice filing renewals; CFTC exemption reaffirmation; blue sky renewals; audit and K-1 delivery dates; MFN election deadline; advisory committee meeting schedule; and the plan asset test.

Stand up the side letter obligation calendar. Extract every dated deliverable from the matrix into the same calendar. A quarterly report owed to one investor in a bespoke format on a nonstandard date is exactly the obligation that gets missed.

Adopt the allocation policy in practice, not just on paper. Document the allocation rationale for the first several deals contemporaneously. The habit is what survives an examination; the policy alone is not.

Test the valuation process on the first mark. Run it through preparer, reviewer, and approver, and keep the workpapers. The first valuation is the cheapest one to get right.

Run the plan asset test again. Transfers, defaults, and the admission of a benefit plan investor at a later closing all move the percentage.

Hold the first advisory committee meeting with a real agenda: conflicts inventory, valuation approach, expense report, and pipeline. Committees that meet only when the manager needs a conflict approved are perceived exactly that way.

Worked example: the timeline that actually ran

Marisol Okonjo's Fund II, target four hundred million, ran on this schedule.

Weeks 1–4. Structuring. Delaware LP, Cayman parallel, 3(c)(7). SEC registration determined under § 203A. ERISA: twenty-five percent test with a redemption mechanic, VCOC as backstop. CFTC: Rule 4.13(a)(3) to be claimed. Term sheet circulated to two prospective anchors.

Weeks 3–10. Compliance program build, running in parallel. CCO hired in week five. Policies drafted weeks five through nine. Form ADV filed week ten.

Weeks 4–12. Document drafting. LPA through five turns. PPM through four. Subscription documents finalized week eleven.

Weeks 6–10. Service providers engaged: administrator week six, auditor week seven, tax preparer week eight, insurance bound week ten.

Weeks 10–34. The raise. Anchor state pension commitment signed week eighteen after a twelve-week operational due diligence process. First closing week twenty-two at two hundred forty million. Second closing week thirty at three hundred sixty. Final closing week thirty-four at four hundred twenty million, above target.

What went wrong and what it cost. In week twenty-six the deal team hedged a euro exposure before the CFTC notice was filed; counsel filed the following day and documented the sequence — a two-day problem that would have been a two-month problem if it had been discovered by an examiner instead of by the general counsel. In week thirty-one benefit plan participation was projected at thirty-two percent; two commitments were restructured through a parallel vehicle and the redemption mechanic was never needed. In week thirty-five the MFN circulation was three days late because nobody owned the deadline; it was cured, and the matrix acquired an owner.

What went right. The allocation and expense policies were written in week eight, before the first deal, and both survived the anchor's operational due diligence without a comment. The waterfall was drafted with a numeric appendix that surfaced an ambiguity in the catch-up computation in week seven — an ambiguity that, undetected, would have been worth several million dollars of argument in year six.

Drafting the waterfall: a step-by-step method

More money is lost to an ambiguous waterfall than to any other drafting defect in a fund document, and the cure is mechanical.

Step one: choose the model. Whole-fund (European) returns all contributed capital plus preferred return before carry. Deal-by-deal (American) pays carry on each realization. Hybrids — deal-by-deal conditioned on return of all contributed capital — are where most institutional funds land.

Step two: define the tiers in order and in words that reference defined terms only. A conventional hybrid:

Return of capital. To the investors until they have received distributions equal to all capital contributions made in respect of realized investments, plus contributions made for fees and expenses, plus the cost basis of investments written down or written off.
Preferred return. To the investors until they have received a stated internal rate of return on those contributions, compounded annually.
Catch-up. To the general partner until it has received a stated percentage of the aggregate of tier two and tier three.
Residual split. Eighty to the investors, twenty to the general partner.

Step three: decide the write-down question. Whether unrealized losses on retained investments reduce the amount available for carry before an exit is one of the most consequential and most frequently muddled points. Investor-favorable drafting requires a write-down of any investment whose fair value is materially below cost to be treated as a realized loss for waterfall purposes.

Step four: write the interim clawback test. At each distribution, compute whether the general partner has received more than it would have received on a liquidation basis, and if so, hold back. This is the mechanism that keeps the final clawback small.

Step five: append the numeric example. Four scenarios: an early winner followed by losses; a whole-fund modest return just above the hurdle; a strong fund; and a fund that returns less than capital. Run each through the tiers in a table. Every ambiguity in the words becomes visible the moment two people compute the same scenario differently — which is exactly what you want to happen in week seven rather than in year eight.

Step six: circulate the example to the accountants and the administrator before the LPA is final. They will implement it; they should confirm they can.

Negotiating with an institutional investor: what to expect

The process is longer than you think. A large public pension or sovereign fund runs investment diligence, operational diligence, legal review, and an internal approval process, each on its own clock, often sequentially. Twelve to twenty weeks from first meeting to commitment is normal and not a signal of trouble.

The legal review will produce a markup, not a list of questions. Expect twenty to sixty comments on the LPA. The productive response is a categorized reply: accepted; accepted with modification; declined with reason; and declined because it is market. Answering "that's market" without data is the least effective response available.

The terms that move most often, in rough order of frequency: the fee offset percentage and definition; the clawback escrow and guarantee structure; the key person list and cure mechanics; the no-fault removal threshold; the expense provision's specificity; the advisory committee's composition and powers; the successor fund restriction; the subscription facility limits; and the reporting package.

The terms that rarely move: the headline management fee rate and the twenty percent carry, at least for a manager with a track record. Investors negotiate around the headline rather than at it.

Excuse rights deserve careful drafting. An investor's right to opt out of an investment should be tied to specific, objectively determinable criteria — a named sector, a named jurisdiction, a legal prohibition applicable to the investor — and should include a mechanism for the manager to determine quickly whether it is triggered. "Investments inconsistent with the Investor's responsible investment policy" is not administrable and should not be accepted in that form.

Reporting demands compound. Each investor's bespoke template is individually reasonable and collectively unmanageable. Push toward the industry-standard reporting templates, and where a bespoke format is unavoidable, price the operational cost into the relationship.

Fund reporting: what goes out and when

Quarterly. Unaudited financial statements; a schedule of investments with cost and fair value; a capital account statement per investor; a management fee and expense report; a portfolio company narrative; and — increasingly demanded even after the NAPFM vacatur — a statement of fees and expenses paid to the adviser and its affiliates by the fund and by portfolio companies.

Annually. Audited financial statements within a stated period after year end; the annual investor meeting; Schedule K-1s; the annual compliance review summary where side letters require it; and confirmations of valuation policy compliance.

On events. Capital call notices with the required notice period; distribution notices with waterfall computation; key person notices; material litigation or regulatory notices; and changes in key personnel.

A practical point on capital call notices. They should show, every time, the investor's commitment, prior contributions, the current call, remaining unfunded commitment, and the purpose. Administrators produce this automatically; managers who produce it by hand produce errors.

When the manager fails: winding down and successor arrangements

Not every fund reaches its term in good order, and the LPA should contemplate the alternatives.

Investment period termination. By expiry, by key person event, or by investor vote. On termination, the fee base steps to invested capital, no new investments may be made except follow-ons and signed commitments, and the fund enters harvest mode.

General partner removal. For cause on a final adjudication, or without cause on a supermajority. The consequences differ: for-cause removal typically forfeits some or all of the unvested carry; no-fault removal typically reduces but does not eliminate it. Draft the successor mechanics — who manages in the interim, how a successor is appointed, what happens to the management agreement, and how the removed general partner's carried interest is computed and paid.

Term extensions. Most funds run ten years with two one-year extensions, the first at the manager's discretion with advisory committee consent and the second requiring investor approval. Beyond that, extensions require a real vote and usually a fee concession.

Continuation vehicles and adviser-led secondaries. A structure in which the manager sells one or more assets from the fund into a new vehicle it also manages, with existing investors choosing to roll or to cash out. It is a conflicted transaction of the most obvious kind. The vacated rules would have required a fairness or valuation opinion; the market now requires it by convention and by side letter. The practical protections are an independent opinion, advisory committee approval, a genuine election period with adequate information, and a status quo option that is actually neutral.

Dissolution. Distribution in kind is permitted by most LPAs and disliked by most investors; a liquidating trust is the alternative for a residual tail. Final clawback computation and payment occurs here, which is when the escrow and the guarantees either work or do not.

The first-time manager's additional problems

A spin-out raising a debut fund faces a set of obstacles an established firm does not.

Track record portability. The performance the principals generated at a prior firm belongs, in an important sense, to that firm. Using it requires that the individuals were primarily responsible for the results, that the prior accounts are sufficiently similar to the new strategy, that the records supporting the claims are available, and — as a practical and often a contractual matter — that the prior firm consents. Resolve this before the deck is printed. A track record claim that has to be withdrawn mid-raise is very difficult to recover from.

Restrictive covenants. Non-competes, non-solicits, and confidentiality obligations from the prior firm govern who may be recruited, what may be said to former colleagues and to former investors, and what information may be used. Get the prior employment agreements reviewed by employment counsel, not by fund counsel, and get the review done before the first conversation rather than after.

Working capital. The management fee does not begin until the first closing, and the formation costs precede it. First-time managers fund the gap from personal capital, from a seed investor, or from a credit facility secured by the management fee stream. Running out of money during a raise is visible and it ends raises.

The seed investor question. A seeder provides working capital and an anchor commitment in exchange for a share of the management company's economics — commonly a percentage of gross revenue for a period of years, sometimes with a share of carry and a right of first refusal on future funds. It solves the working capital problem and it permanently reduces the enterprise value of the firm. The negotiable points are the revenue share percentage, its duration, whether it applies to successor funds, buyout rights and their pricing, and any governance rights. Read the buyout provision carefully; it is where the value is.

Team economics. Carry allocation among founders, vesting schedules, good leaver and bad leaver definitions, and treatment of the departed partner's vested carry. Founders who defer this conversation because it is uncomfortable have it later under worse conditions.

Fewer references. A first-time manager cannot point to prior investors in its own fund. It can point to portfolio company executives, co-investors, lenders, and prior colleagues — and it should assemble that list deliberately rather than reactively.

Managing the compliance examination you will eventually have

Registered advisers get examined. The examination is not an adversarial proceeding and it goes better when the manager treats it as a demonstration rather than a defense.

The document request arrives first, and it is broad: organizational documents, ADV, policies, the compliance annual review, the code of ethics and personal trading records, valuation workpapers, expense allocations, marketing materials, side letters, investor communications, and trade or deal records.

What examiners focus on for private fund advisers, consistently: fee and expense allocation against the disclosure; valuation process and documentation; conflicts — allocation of investment opportunity, co-investment, cross trades, affiliate transactions; marketing and performance presentation; custody; and the compliance program's actual operation, which means testing, not just documents.

The three things that make the difference. First, contemporaneous documentation — an allocation rationale written the week of the deal is worth ten times one written the week of the exam. Second, a compliance program whose annual review shows findings and remediation, because a review that finds nothing every year reads as a review that looks at nothing. Third, disclosure that is specific enough that the practice matches it. Capital Gains and § 206 put disclosure at the center; a general disclosure paired with a specific practice is where deficiency letters come from.

Handle the deficiency letter properly. Respond on time, address each item, describe the remediation with dates, and — where you disagree — say so with reasoning rather than silence. Investors will ask about examination history in the next fund's diligence, and a clean remediation record is a better answer than an unblemished one that turns out to be incomplete.

A note on offshore and parallel structures

Cayman. The default offshore domicile for non-U.S. and tax-exempt investors. Exempted limited partnership or exempted company depending on strategy. Registration with the local regulator, economic substance considerations, and beneficial ownership reporting all apply, and the local counsel and administrator relationships are separate engagements.

Luxembourg and Ireland. Preferred where European institutional investors face regulatory constraints on non-EU vehicles, and where marketing into the European Union under the alternative investment fund managers regime is contemplated. Marketing into Europe is its own project — national private placement regimes vary, and pre-marketing rules constrain conversations that would be unremarkable in the United States.

Parallel versus feeder. A parallel fund invests directly alongside the main fund, pro rata, and keeps each vehicle's investors out of the other's tax and regulatory profile. A feeder invests through the main fund and is simpler but creates look-through and blocker questions. Institutional structures generally prefer parallel funds for tax reasons and accept the additional documentation cost.

The pro rata covenant matters. The LPA and the parallel fund agreement should require investment and divestment side by side, in proportion to available capital, with defined exceptions for regulatory or tax constraints and a requirement to document any deviation. Without it, the allocation conflict between two vehicles the same manager controls has no rule.

Anti-money laundering, sanctions, and investor onboarding

The obligation is partly regulatory and mostly contractual and reputational. Investment advisers have historically sat outside some of the formal program requirements that apply to banks and broker-dealers, and the direction of travel is toward more, not less. Independently, every institutional investor's operational diligence asks what the manager's onboarding process is, and every administrator has its own program the manager must satisfy.

What onboarding actually requires. Identification and verification of the investor entity; identification of beneficial owners above a stated threshold and of control persons; screening against sanctions and politically exposed person lists; source of funds inquiry proportionate to risk; and periodic refresh.

Sanctions screening is not optional and not delegable in substance. A subscription accepted from a sanctioned party is a serious problem regardless of who ran the screen. The administrator performs the work; the manager owns the outcome.

Build the refusal path. The uncomfortable case is the investor who clears no screen cleanly and whose commitment the manager wants. Decide the escalation path — to the CCO, to outside counsel, to a documented decision — before you are in it.

Fund documents as a system: keeping them consistent

Fund formation produces six or seven documents drafted in parallel by different people under time pressure, and inconsistency among them is the most common defect a careful reviewer finds.

The definitional spine. Defined terms in the LPA should be used identically in the PPM's terms summary, the subscription agreement, the side letter form, and the management agreement. A "Transaction Fee" defined one way in the LPA and described differently in the PPM is a disclosure problem, not a typo.

The terms summary reconciliation. Before final, someone should sit with the PPM's summary of principal terms and the LPA side by side and confirm every number, every period, and every threshold. This job should be given to a person who did not draft either document.

The side letter form. Drafting a form early — with the manager's preferred MFN language, the carve-out list, and the standard reporting menu — converts each negotiation from a blank page into an edit. It also makes the matrix easier to maintain because the letters share a structure.

Version control. Signature pages get executed against versions. A closing where the executed LPA signature pages reference a draft that was superseded is a real and recurring problem, and it is solved by discipline rather than by cleverness.

The closing set. Assemble it as you go: executed LPA with all signature pages, subscription agreements and questionnaires, side letters, formation documents and good standing certificates, filed Form D and state notices, service provider agreements, insurance binders, resolutions and consents, and the compliance policy set adopted with dates. A complete closing set assembled contemporaneously takes hours; reconstructed two years later it takes weeks.

Common mistakes

Starting the raise before the structure is fixed. Every structural change after the first investor meeting is a credibility cost.

Treating the PPM as a brochure. It is a disclosure document governed by § 206.

Deferring the compliance program. A registered adviser needs it on day one.

Paying unregistered finders. Section 15 means what it says, and rescission risk does not expire quietly.

Testing plan asset participation once. It moves. Test at every closing and every transfer.

Signing side letters without a matrix. Forty letters and no matrix is forty unmanaged obligations.

Granting MFN without tiering and carve-outs. You will hand a fifty-million investor the terms you gave a three-hundred-million anchor, and you will have no way to say no.

Leaving the expense provision general. Specificity in the LPA is the manager's best protection against a fiduciary argument later.

Forgetting the annual CFTC affirmation. It takes minutes, and it lapses silently.

Skipping the numeric waterfall example. Every fund lawyer who has done this once does it every time afterward.

Practice pointers

Write the allocation, valuation, and expense policies before the first deal, and follow them visibly. These three documents do more to shorten operational due diligence than anything else you can produce.

Make the key person clause self-executing — suspension by operation of the agreement, reinstatement by investor vote.

Secure the clawback with escrow plus several guarantees from the individuals, net of taxes, surviving departure.

Define Transaction Fee broadly and offset it at one hundred percent; the label a portfolio company puts on a payment should not change the answer.

Give the side letter matrix an owner with a name, and put every dated obligation in it on the same calendar as the regulatory deadlines.

Assume every document you produce will be read by an examiner, an operational due diligence consultant, and a plaintiff's lawyer — three audiences with different questions and the same low tolerance for a document that says less than the practice does.