What is a Private Equity Fund and How is it Formed?

By: Daniel A. Perry 

A private equity fund is an investment entity formed by individuals who are interested in raising capital to make investments based on specific investment strategy. This may include individuals wanting to acquire ownership in specific companies as their investment strategy. The fund is owned by accredited investors. An accredited investor is defined by the Securities and Exchange Commission (“SEC”) as “an individual who earned more than $200,000 per year or has a joint income of more than $300,000 per year, and a net worth exceeding $1 million.” The accredited investor will thereby offer a certain amount of capital assets over time to the private fund. The individuals who formed the private fund will then acquire and manage the investments over time. When an opportunity for a sale is identified that will achieve a high return on investment (typically above market value), the sale of securities will be made.

This is a rather simple definition of a complex securities transaction. The type and terms of a private fund will depend upon how the fund was created and the purposes of the fund.

In general, a private fund is created with a subscription package. This will generally include a private placement memorandum, an organizational agreement, a subscription agreement, and an investor questionnaire.

Do not forget that private equity funds are regulated by the Securities Act, the Investment Company Act, the Investment Adviser Act, and the Securities Exchange Act. Therefore, whenever you establish a private equity fund it is always important to involve an attorney who is knowledgeable of the securities law when it comes to establishing the private fund, as well to ensure that the fund stays in compliance with the various federal laws and regulations.

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If you are interested in establishing a private equity fund or have additional questions regarding compliance of your private fund, please contact our office by calling (513) 241-0400 or visiting our website. We look forward to hearing from you!