Creating a private equity fund requires drafting a standard set of legal documents. The primary documents drafted in the fund formation process include a private placement memorandum (PPM), subscription agreement, investor questionnaire, and investment management agreement. Forming a private equity fund also requires extensive familiarity with the Investment Company Act, the Investment Advisers Act, the Employee Retirement Income Security Act (ERISA), and U.S. securities laws.

The key marketing document shared with investors during the fundraising process is called the private placement memorandum (PPM). The PPM provides details about the fund’s structure, investment strategy, and management team.

A subscription agreement sets forth each investor’s capital commitment amount to the private equity fund. Each investor also makes certain representations and warranties to the fund in the subscription agreement, such as confirming that the investor is qualified to invest in the fund. Each investor will be required to complete an investor questionnaire attesting that it is a qualified investor under applicable laws.

The private equity fund may enter into side letter agreements with certain investors in order to accommodate specific needs. For example, an investor may request special information rights or economic benefits that would be memorialized in a side letter agreement between the fund and that particular investor.

An investment management agreement, also sometimes called an investment advisory agreement, may be entered into between an investment adviser and the private equity fund. The agreement will outline the terms of their relationship, including the conditions under which the investment adviser is permitted to manage the fund in return for collecting management fees.

Raising capital for a private equity fund is usually done as a private placement of securities in reliance on an exemption from the registration requirements of the Securities Act of 1933. If the sponsor is relying on Regulation D, a Form D may have to be filed with the SEC. A Form D must be filed by certain funds to provide notice of an exempt offering of securities.

There are a number of laws and regulations that place restrictions on private equity funds. Under ERISA, it may be determined that a fund holds plan assets based on the ERISA plan asset rules. Private equity funds try to satisfy an exception to the ERISA plan asset rules. One commonly relied upon exception is the 25% rule. This exception stipulates that a private equity fund is exempt from the ERISA requirements if less than 25% of the fund’s equity is held by benefit plan investors. Benefit plans include 401(k) plans, pension plans, individual retirement accounts, and other employee benefit plans subject to Title I of ERISA.

Under the Investment Company Act, entities whose primary focus is investing, reinvesting, and trading in securities are required to be registered with the SEC. In order to avoid SEC registration, private equity funds will be structured to rely on an exemption from registration under the Investment Company Act.  Investment advisors to the private equity fund must adhere to the provisions of the Investment Advisers Act of 1940, which stipulates when guidance may constitute investment advice.