The recent exponential surge of the price and market cap of bitcoin and other cryptocurrencies, such as Ethereum, Litecoin and Ripple, as well as many other “alt” coins and tokens, has many people excited about new opportunities to capitalize from the growth of this new industry based on blockchain and other new competing technologies.
Let’s say you’ve had success investing in cryptocurrency and have seen substantial returns from your personal investment. This individual success is great and should be applauded– you had foresight regarding the potential of the industry and have made great investment decisions all along the way. News of your success may even start to spread around your circle and as cryptocurrency and blockchain hits the mainstream media, friends, family and even acquaintances may start asking you for investment advice.
At this point, we often hear the same question, which is basically as follows: how does one scale this “one-man band” success into something bigger? One potential option to consider is to form a cryptocurrency fund and have others invest in the fund. But taking the leap from investing for yourself to forming a fund and investing for others can initially be daunting, especially without the proper guidance. Consulting with experienced fund attorneys can help you navigate these waters and understand the new responsibilities in forming and managing a fund, as well as the potential lucrative rewards.
The following are some fund formation considerations:
- You will need to engage legal counsel for services which include discussion of optimal fund structure, formation of fund entities and drafting of offering documents (private placement memorandum, limited partnership agreement and subscription agreement);
- There are also many other legal issues that may arise such as ERISA and IRAs issues, tax considerations, State and Federal Investment Adviser registration and other compliance requirements and crypto specific regulatory matters.
- You will need to advance organizational costs (including legal fees) which may vary based on fund structure and complexity. Typically, these costs are reimbursed to you by the fund upon launch and amortized over a period of 5 years;
- You may need to hire and manage people internally for the fund and you’ll also be dealing with outside service providers. Service providers that you may need to engage include an administrator and an auditor, as well as possibly third party marketers;
- You will be managing a portfolio of other people’s money and as such, you’ll have a fiduciary duty to those limited partners in your fund.
What it really comes down to is the ability to raise capital, but if you are successful, there are substantial benefits, including the following:
- A pooled portfolio to manage, which will be larger than one would have as an individual investor and as such, may open up new investment opportunities and permit diversification that may not otherwise be available;
- Management Fees – received by the general partner of the fund, which are typically 2% of assets under management; and
- Performance Fees – received by the investment manager of the fund, which are typically 20% of all profits over the “high water” mark.
If you have any questions or would like discuss cryptocurrency fund formation further, please don’t hesitate to contact us. We have the relevant experience in both the hedge fund and crypto spaces to help you effectively establish your fund.