Private Capital: Fund Formation and Capital Raising Counsel

Private equity (PE) funds typically use closed-end Delaware limited partnership structure with 10-year fund life, capital commitments drawn over 4-6 year investment period, and management fees of 1.5-2% with 20% carried interest above 8% hurdle. Venture capital (VC) funds follow similar Delaware LP structure but focus on early-stage technology investments with smaller fund sizes ($50M-$500M typical) and longer hold periods reflecting startup growth trajectories. Growth equity funds target later-stage profitable companies with $10-100M investments, longer holding periods, and lower-risk profile between traditional VC and buyout strategies. Real estate, infrastructure, credit, and energy funds use similar Delaware LP architecture with sector-specific terms reflecting underlying asset class characteristics. Our investment funds law practice handles PE/VC/growth fund formation, sector-specific term negotiation, and parallel structural analysis across alternative investment strategies.

General Partner (GP) entity (typically Delaware LLC) manages fund investments, owes fiduciary duties to fund and LPs, and earns management fees plus carried interest under LPA waterfall provisions. Limited Partners (LPs) commit capital, receive distributions, and have limited governance rights with investor protections through Limited Partnership Agreement (LPA) covenants and side letters. Management company (often separate entity from GP for liability separation) employs fund team and receives management fee revenue with operating expense management responsibilities. Investment Adviser entity registered under Investment Advisers Act (or relying on Private Fund Adviser exemption) provides investment advice with parallel SEC examination authority and fiduciary duty obligations. Our investment fund regulation practice handles GP-LP-Adviser entity structuring, conflict of interest analysis, and parallel multi-entity governance design across complex fund architectures.

Securities Act § 5 requires registration of securities offerings unless qualifying exemption applies, with Regulation D providing primary safe harbor exemptions for private capital raising. Rule 506(b) permits unlimited accredited investors plus up to 35 sophisticated non-accredited investors but prohibits general solicitation and general advertising, requiring pre-existing relationships with potential investors. Rule 506(c) permits general solicitation and advertising but requires verified accredited investors only with documented verification procedures (reviewing W-2s, tax returns, brokerage statements, or third-party verification). Section 4(a)(2) provides statutory private placement exemption without Reg D safe harbor protection, requiring sophisticated investors with access to material information, typically used for negotiated institutional offerings. Our equity and debt financing practice handles Reg D exemption selection, accredited investor verification documentation, and parallel state Blue Sky filings across capital raising programs.

VC term sheets establish key economic and control terms including pre-money valuation, liquidation preference (1x non-participating typical), anti-dilution protection (broad-based weighted average vs full ratchet), and pro rata participation rights for follow-on rounds. Founder vesting (typically 4-year vesting with 1-year cliff) and acceleration upon termination/change of control protect company against founder departures while incentivizing long-term commitment. Protective provisions (board approval requirements, supermajority shareholder votes) give investors veto power over key corporate actions including future financings, asset sales, and IPO timing. Down-round protection through anti-dilution adjustments and pay-to-play provisions create complex cap table mechanics during distressed financings affecting founder and prior investor ownership. Our capital markets practice handles VC term sheet negotiation, anti-dilution mechanics analysis, and parallel cap table modeling across financing rounds.

Limited Partnership Agreement (LPA) establishes economic terms (management fee, carried interest, waterfall), governance rights (LP Advisory Committee composition, key person provisions, suspension/removal rights), and operational covenants binding all LPs and GP. Side letters between GP and individual LPs (typically anchor or strategic investors) provide additional rights including fee discounts, co-investment priorities, transparency rights, and excuse provisions for specific investment categories. Most Favored Nation (MFN) clauses in side letters require GP to disclose other side letter terms and offer comparable terms to MFN-holding LPs, with tiered MFN reflecting commitment size driving negotiation leverage. ILPA Principles 3.0 (2019) provides industry standard framework for LP-GP relationships with transparency, governance, and alignment of interests guidelines. Our fund finance practice handles LPA negotiation, side letter coordination, and parallel MFN compliance across multi-LP fund closings.

Investment Advisers Act of 1940 (15 U.S.C. § 80b-1) imposes fiduciary duties on registered investment advisers including duty of loyalty, duty of care, and disclosure of material conflicts of interest as established in SEC v. Capital Gains Research Bureau, 375 U.S. 180 (1963). Form ADV Part 1A (registration) and Part 2A (firm brochure) require disclosure of business practices, fee arrangements, conflicts of interest, and disciplinary history, with annual updates and prompt material amendments. SEC Marketing Rule (Rule 206(4)-1, effective November 4, 2022) replaced prior advertising and cash solicitation rules with comprehensive framework governing performance presentation, hypothetical performance, third-party ratings, and testimonials/endorsements. Private Fund Adviser exemption under Investment Advisers Act § 203(m) exempts certain non-US advisers and private fund advisers with less than $150 million AUM from full registration, requiring "exempt reporting adviser" status. Our business investment law practice handles Form ADV preparation, Marketing Rule compliance, and parallel SEC examination preparation across registered adviser operations.

General Partner fiduciary duties under Delaware Revised Uniform Limited Partnership Act and LPA terms include duty of care, duty of loyalty, and good faith obligations, subject to LPA modification under DRULPA § 17-1101(d) provisions. LP claims for fiduciary breach include direct claims for personal injury and derivative claims on behalf of fund for fund-level harm, with substantive distinctions in remedies, standing, and procedural posture. Self-dealing transactions, fee misallocation, conflict of interest violations, and breach of investment guidelines drive substantial LP-GP litigation with parallel arbitration provisions in many LPAs governing dispute resolution forum. Limited partner activism through LP Advisory Committee challenges, key person rights enforcement, and LP voting (typically 75% supermajority) to remove GP creates governance-level remedy mechanisms. Our partnership dispute resolution practice handles GP fiduciary breach claims, LP derivative litigation, and parallel arbitration coordination across fund-level disputes.

SEC Marketing Rule (Rule 206(4)-1) enforcement focus includes hypothetical performance presentations, performance attribution analysis, testimonials/endorsements compensation disclosure, and recordkeeping requirements with substantial examination focus since 2023 compliance date. SEC Private Fund Advisers Rule (issued August 2023) was vacated by National Association of Private Fund Managers v. SEC, 103 F.4th 1097 (5th Cir. June 5, 2024) on grounds that SEC exceeded authority under Investment Advisers Act § 211(h) for non-retail customers. Form PF (private fund reporting) provides confidential reporting to SEC and Financial Stability Oversight Council with quarterly hedge fund reporting (large advisers) and annual reporting for other private fund advisers. Custody Rule (Rule 206(4)-2) governs adviser custody of client assets with qualified custodian, surprise examination, and annual audit requirements for pooled investment vehicles. Coordinated financial investments defense manages SEC Marketing Rule examination response, Form PF compliance, and parallel Custody Rule enforcement across registered adviser operations.