I want to start an investment firm and like to invest in capital markets by collecting funds from investors?

Question

what are the procedures for starting an investment firm.

Answer 1

This is the idea behind mutual funds.  So you can register as a Mutual Fund house with SEBI and then start your fund.

Answer 2

Start with the FTC... for sure they'll have all the requirements.

Answer 3

How do you set up a structure to do this? The skinny:

A) You need to set up a Limited Partnership (LP).

B) To protect yourself, you need to set up a C-Corporation as the General Partner. An LLC can work but I like C-Corps better.

C) As stated, you do not need to be Series 7 or other NASD Licensed. What you have to do is have an (securities) attorney write up (or boiler plate) a Private Placement Memorandum (PPM) for the LP. You will need a summary statement, signature docs (investors must notarize). A good securities attorney who knows about Private Placements will do this for you.

D) Once all the legal docs are in order. You register your fund with the state you live in (where business in being conducted). You register the Corporation as the Investment Advisor (Registered Investment Advisor) (RIA), and you state you are the Portfolio Manager for the corporation, and that you personally are only the "Registered Investment Advisor Representative." You don't want to be the RIA = more liability.

You want to be the "RIA Representative."

When asked, always state that the Corporation is the RIA. You personally are just an employees of the Corp (even if you are an officer or director); again, you are not the RIA, you are the RIA REPRESENTATIVE. The difference is a huge potential legal liability. Learn this quickly.

E) Under SEC Rules 505, 506 (I'm assuming the fund will have under $25 Million to start):

1. You can NOT publically advertise your fund (limited partnership).

2. You can NOT make general solicitations of any kind to investors.

F) How do you get money in the fund? You can talk to people whom you have an EXISTING business or personal relationship with.

G) Investors in the fund must be QUALIFIED to invest. You are allowed some 35 max non accredited investors in the fund but I highly would advise AGAINST having ANY non-accredited investors in the fund. These are all potential lawsuits by (legally titled) "unsophisticated investors" who may sue you when you fail to deliver, over promised, had unrealistic returns, I could come up with tons of ways to breach your corporation, based on the hype above and assuming you made no legal errors in your documents.

I'm not trying to discourage you, but if you want to do this by the legal rules, you should be more realistic and NOT offer any forecasting of returns in writing. Make sure you disclaim in your PPM docs:

"you have never done this before,"

"investors can lose all their money,"

"that there are no guarantees,"

"investors have sought the advice by their own financial, tax and legal advisor before investing in the fund or before sending in money," etc.,

and have these DISCLAIMERS in bold off set type so it is very clear on the PPM where investors and a potential opposing attorney or Judge can see it easily and quickly = can help a bit in a legal defense.

H) I would only have "QUALIFIED Purchasers" or "Accredited Investors" invest in the fund. The SEC generally sees these people as wealthy or sophisticated based on their wealth and has less sympathy if they lose money verses grandma with her $300 month social security check. Google these terms in quotes or read links below.

(Note: If you get over $5MM assets in one year, or $25 million in assets you must then register the fund with the SEC. Ask attorney to assist if you don't know how.)

I) Open a brokerage account where you want to trade. They will ask for the paper work above.

J) You have to send out quarterly statements on the fund, performance, net asset values for each investor.

K) When you take a management fee of any kind, make sure the LP pays the fee that was earned by the Corporation, and then the Corporation writes you a check for what the bylaws of the corp say how much you are paid and for what.

L) Every 2 years you will be audited by the state in where you live. Some states may audit more frequently and change you the audit fees. Always have a CPA firm do the funds accounting/ taxes and the corporation’s taxes.

M) IMPORTANT: Make sure NO ONE - NO Investor ever makes a check payable to you or the Corporation (the General Partner of the LP). Investments payable to you or the corp makes you a fiduciary = Massive legal responsibility (potential liability, more legal compliance rules to deal with). Always have a check (certified funds) written in the name of the Limited Partnership (the fund).

N) Costs: If you have never done this before, it can cost $15K to $50K+ to set this all up. Most of the costs are legal fees.

N) Make sure you are in compliance with all your legal filings, registrations, corporate and LP filings, etc. Any errors could be a liability risk to you.

O) You need to become versed to the point of having a thorough understanding of securities law and compliance matters relating to the business of the fund. If you are not sharp in this area, have a securities attorney with you to address questions.

P) Don’t ever guess.

If you don’t know something, tell them (investor or who ever) that you will get back to them with an answer. Call the attorney to give you the answer. You don’t want to say, I’ll check with my attorney. Be professional, and say, let me look into that and I’ll get back to you.

When dealing with regulators, they know the law better than 99% of the people out there. That is what they do. So you need to be clear on exactly how every part of this operation works.

Again, not trying to discourage you, just trying to get you to watch for critical things that regulators will want to know you are in compliance with and you are legit.

Q) There is a bit more, but these are the basics you need to have for now. Seek a legal expert.

FYI:

The FTC does not regulate private funds.

The SEC regulates private funds w/ $25M or more assets; your state will regulate you (Corporate Securities Law) if assets are under $25M.

You would be operating under law under "SEC's Reg D," and subject to the laws in your state or any other state you do business or where investors may live.

Disclaimer: The information contained hereto is not to be deemed as legal or tax advice. Always seek the appropriate advisors to address the appropriate tax or legal questions you may have.