How to set up investment funds

Forming an investment company can be a rewarding and challenging undertaking for anyone willing to do the necessary planning required to comply with the laws governing the formation and regulation of investment companies. Many investment fund companies have more opportunities today than they did when the U.S. Congress enacted the Investment Company Act of 1940 because of the rapid increase in size of the securities markets and the subsequent expansion of growth that occurred in the mutual fund industry.The knowledgeable person with a good business plan can set up an investment company with the assistance of an experienced attorney.

Read the Investment Company Act. Become familiar with all of the law's provisions, especially section 8, Registration of Investment Companies; section 12, Functions and Activities of Investment Companies; and section 31, Accounts and Records. You do not need to become an expert on the law's contents, but you should be familiar with all of its provisions.

Select a corporate entity for your investment company. Give careful consideration to the responsibilities associated with the important corporate officers you will need to carry out the operations of your investment company. Consult with an experienced corporate attorney to assist you in deciding what corporate entity is right for your business.

Solicit the assistance of an experienced securities lawyer to guide you in completing all the registration forms required to comply with the law. Do not attempt to register your business on your own without first consulting an attorney or another qualified financial professional who is knowledgeable in creating investment fund companies. Give careful consideration to how you intend to invest client money, since there are different laws governing the formation of an investment company that invests in securities, such as stocks and bonds, and managed futures funds, which invest in commodities and exchange traded futures products.

Write a business plan describing what securities you intend to invest in and what corporate business entity you intend to use. Include the start-up funds you will need to pay for all legal and registration fees and corporate filing fees. Decide who will manage your fund's investment policy and how you will market the sale of your investment fund's securities to the public and register your offering with the Securities and Exchange Commission. Identify in your business plan who will serve on your board of directors and who will be responsible for monitoring your compliance program. Finally, describe in your business plan what your fund expense ratio will be, since this is the amount of money you will charge your clients to operate the fund and is stated as a percentage of total assets, usually between 1 and 2 per cent of total assets.

Act on your investment fund business plan by committing your seed capital into the fund, once you are registered and ready to open for business.

Things You'll Need

  • Start up funds
  • Seed capital
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About the Author

Pedro Carrasquillo began writing professionally in 2002 while working for the New Jersey state legislature. He coauthored the legislature's annual "Budget Analysis for the Department of Community Affairs" from 2002-07. Carrasquillo holds a Bachelor of Arts in comparative literature from Haverford College as well as a Master of Science in public policy and management from Carnegie Mellon University.