What you need to do if you want to accept money from:
💰 Tax-exempt investors
🌍 Non-US investors

A big post discussing UBTI, ECI, blockers, and more.

⚠️ This is especially true for real estate and private equity (but is sometimes relevant for venture capital...we've seen it before).

Please share if you find this content helpful 🙏 Tax-exempt investors and UBTI

What is "carried interest" 💰 taxation and why is everyone so excited about it (again)?

⚖️ Is it fair?

(A big post and a chart explaining how this works 📊) Carried interest is the share of an investment fund's profits earned by the investment manager (the GP). GPs typically take 20-30% of the fund's profits (sometimes after investors receive a priority return).

It got its name from centuries ago when people on merchant ships got a share of the goods they "carried" across the ocean. ⛵️

Carried interest is a key component of GP compensation.

It's the red line in the chart.

Typical tax structure of a US-based investment fund.

A thread 🧵 to explain the Fund, General Partner, and Management Company.

(And why you want to split up the GP and ManCo.)

Please share if you find this valuable 🙏 Background on the structure

4 graphics explaining how investment fund distribution waterfalls actually work 🌊

1. European Waterfall
2. American Waterfall
3. Preferred Return
4. GP Catchup

Please share this thread 🧵 if you find this helpful 🙏 1. European Waterfall

Here, LPs get back ALL of their invested capital before the profit split kicks in and the GP gets carried interest (also called "promote").

This is considered more LP-favorable.

What team members do you need to raise an investment fund or syndication? 👩‍👩‍👧‍👧

💵And who pays for them...?

A thread 🧵for successful fundraising. Who pays for all of this?

Fund Expenses: Part 1

7 things to do before contacting a lawyer to form your fund.

This will save you money 💸 1⃣ Target your asset class.

Determine which specific asset class you want to focus on.

In many cases, specific is better than general.

Your target investment class will inform the entire fund formation process.

How the Corporate Transparency Act Affects Investment Funds.

A thread 🧵on how to not get fined $500/day or go to jail for 2 years.

⚠️Starting January 2024, corporations, LLCs, LPs, etc. will need to start providing information regarding their beneficial owners to FinCEN.
Each entity in the fund structure (Fund, GP, Management Company, etc.) will need to register with FinCEN and disclose the following persons:

👨🏾‍🦱 Individuals who directly or indirectly own 25% of the entity
👱🏻‍♀️ Individuals who exercise substantial control over the entity

10 logical fallacies to avoid when investing. 📈

A thread 🧵to keep us from making stupid decisions.

The "endowment effect" is particularly difficult to shake... 1. Confirmation Bias ☠️

🔍We tend to seek out or interpret information in a way that confirms our pre-existing beliefs.

🔍For example, if you believe an investment will perform well, you may overlook negative information about it.

4 Documents You Should Review Before Investing.

A thread 🧵on doing your diligence.

- Summary of Terms
- Fund Agreement
- Subscription Documents
- Private Placement Memorandum 1 - Background

🔎Reviewing a GP’s documents is an essential diligence exercise before you invest in a fund or SPV.

🔎The documents contain the deal between you and the GP.

🔎Here, we’ll briefly touch on four key documents.

Real Estate Fund/SPV Fees Explained

A thread 🧵

💰 Asset Management Fee
💰 Acquisition Fee
💰 Disposition Fee
💰 Loan Guarantee Fee
💰 Property Management Fee
💰 Construction Management Fee

What's reasonable? 1 - Asset Management Fee

This ongoing fee covers GP salaries, offices, and investment oversight.

It's often 1-2% of:
💸 Invested capital (lowest)
💸 Commitments (medium)
💸 Fair market value (highest)

⚠️Always check the basis of calculation. It can make a big difference!

5 Investment Fund Return Metrics Explained:

💰 IRR
💰 MOIC
💰 DPI
💰 TVPI
💰 CoC

A thread🧵to make evaluating investment funds just a little bit easier.

Let me be your translator. 1 - IRR (Internal Rate of Return)

🪙 IRR offers a simple estimate of the profitability of potential investments.

🪙 If an investment opportunity has an IRR of 12%, they're expecting that your money will grow at 12% each year.

⚖️Securities Laws and Social Media⚖️

Part 2: What can I say on social media?

A thread 🧵to keep you out of trouble when fundraising on Twitter 1 - Are you selling securities?

This thread only applies if you're selling securities.

Examples of securities are LP interests, stocks, etc.

If you're selling lawnmowers or haircuts, this doesn't apply to you.

If unsure, check out this thread:

https://twitter.com/investing_law/status/1652314540221272067?s=20

Investment Funds

Open-ended vs. Closed-ended

A thread 🧵 on the differences between the two main fund types. 1/ 👨‍👩‍👧‍👦 Admitting Investors

📊 Open-ended funds can admit new investors at any time.

📊 Closed-ended funds only admit new investors during the fundraising period, which is usually 6-18 months.

⚖️Securities Laws and Social Media⚖️

Part 1: What is a "Security"?

A thread 🧵with examples and a case study 1 - The Basic Rule

In general, if you are selling securities, you need to either:

1⃣ Register the securities with the Securities and Exchange Commission (SEC)

OR

2⃣ Sell the securities pursuant to an exemption from SEC registration

3 Laws Every Investment Fund GP Must Know!

A thread 🧵to keep you out of trouble.

📜 Securities Act
📜 Investment Company Act
📜 Investment Advisers Act of 1/ Securities Act

The Securities Act governs the sale of securities.

Ownership interests in your investment fund are securities.

As a general rule, you must:

1⃣ Register securities with the SEC (such as via IPO)

OR

2⃣ Find an exemption

4 Ways to Structure Expenses in Single-Asset SPVs 💰

A thread 🧵on the nuts and bolts of running an investment fund. 0 - Background

Single-asset SPVs hold one asset.

Examples:
➡️Apartment complex
➡️Small business
➡️Securities

It costs money to:
1⃣ Set up the SPV and execute the purchase
2⃣ Run and maintain the asset
3⃣ Pay salaries of GP personnel

So where do you get the money?

4 Ways to Lose Limited Liability Protection of your Corporation or LLC

A thread 🧵on how to stay safe in business. ➡️Background

Many business owners form an LLC or corporation to limit personal liability for business debts and obligations.

This is a great move - something all business owners should consider.

Can Investment Funds Have More than 100 LPs?

Sometimes!

A thread 🧵 on the Investment Company Act. 1 - The Investment Company Act

Investment funds are subject to many laws.

One such law is the "Investment Company Act"

The Investment Company Act is an ordeal to comply with...

...so most private investment funds find an EXEMPTION from the Act.

Pros and Cons of 6 Common Business Entities

A thread 🧵

- LLCs
- C-Corps
- S-Corps
- Limited Partnerships
- General Partnerships
- Sole Proprietorships 1. LLCs

LLCs are great. An excellent choice for most businesses and investment entities.

✅LLCs are easy to set up and administer
✅LLCs offer limited liability protection
✅LLCs can be taxed as passthrough entities, S-corps, or C-corps, offering maximum flexibility

How Investment Fund Carried Interest Works

A big thread 🧵(with graphics)

(American vs. European waterfalls) 1/ Background

An investment fund’s “waterfall” governs how the fund’s earnings are distributed between the GP and the LPs.

The 4 Key Investment Fund Documents

A thread 🧵 1. Fund Agreement

This is the main document that governs the relationship between the GP and the LPs.

It contains the deal points.

If the fund is a limited partnership, this is an LPA.

If the fund is an LLC, this is an LLC Agreement.

This is a long, complex document.