.png)
Nobody wants to get tangled up with the SEC. I’ve seen firsthand how devastating it can be—a close family member of mine was dealing in securities and made one mistake in regulations. Two years later, they’ve just barely gotten back on their feet after being put under investigation. That’s why it’s crucial to understand the nature of SEC licenses and when you actually need one.
When you’re working with investment funds, the two primary licenses you’ll encounter are the Series 65 and Series 7. However, my real goal today is to show you how you can legally set up a fund without needing a license at all.
Let’s dive in!
Management Fees: The Traditional Route
Management fees are something you’ll commonly see with large, established funds—the ones you hear about on Wall Street. This fee allows the General Partner (GP) to charge a percentage—usually between 0.5% and 5%—of the total assets under management (AUM) just for overseeing the fund’s operations.
At first glance, this might not seem like much, but when you’re dealing with hundreds of millions of dollars, even 3% starts to look pretty lucrative. However, charging a management fee implies that you are highly qualified as a fund manager, so much so that the Limited Partners (LPs) need to compensate you just for being there, regardless of how the investments or projects actually perform.
To put yourself in a position to charge a management fee, you typically need to secure licenses like the Series 65 or Series 7. But let’s be honest—getting these licenses can get complicated and messy, not to mention the challenge of pitching a management fee to investors if you have little to no track record.
Differences Between Series 7 and Series 65
If you do decide to go down the path of acquiring a license so you can charge a management fee, it’s important to understand the differences between the Series 7 and Series 65 licenses:
- Series 7: With a Series 7 license, you’ll be structuring your fund as a Broker/Dealer setup, allowing you to charge commissions on the fund itself.
- Series 65: This license doesn’t qualify you for commissions. Instead, you’ll charge an advisory fee and position yourself as a Registered Investment Advisor (RIA).
While both paths can lead to the ability to charge a management fee, these are key differences you’ll need to consider.
The Performance Fee: A License-Free Alternative
So how do you get around needing a license? How can you set up a fund without licenses and still make money? The answer lies in performance fees.
A performance fee is essentially carried interest based on the return of the investment or project that the fund is working on. You can read more on carried interest here.
A performance fee shows the SEC that you’re not claiming to be an RIA. Instead, you’re only making money if your fund does well enough to compensate your investors, with any leftover return coming to you. This is how I’ve structured each of my debt funds in the past, and it’s been very successful.
Not only does this approach keep you clear of SEC licensing requirements, but it’s also a great way to attract investors if you’re new to the fund space. You’re essentially telling them that you’re so confident in your deals that you’ll ensure they get a great return before you ever see a dime.
Of course, the key here is to ensure you can identify the right deals.
Conclusion
Once you can identify the best deals, structuring a fund without a license should be a no-brainer. If you’re looking to become an RIA, then go ahead and get those Series licenses to reap the rewards. Either way, be careful with the SEC and do your research before you launch.
Best of Luck,
DISCLAIMER: This content is for educational and informational purposes only. It is not to be taken as tax, financial, or legal advice. You should always consult a legal professional before taking action. Furthermore, this is not a recommendation to buy or sell any security. The content is solely just the opinion of the authors.
