Carried Interest In SPVs
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaim all liability with respect to any actions taken or not taken based on any content of this post. The views expressed herein are personal opinion.
A common question from investors setting up an SPV or RUV is, can I take a carried interest? Many are familiar with the two and twenty structure in venture and angel capital funds and may want to apply the same carried interest setup to the SPV or RUV. The answer to whether carried interest is permitted depends on the circumstances.
When a company starts raising money to deploy into investment opportunities, it needs to analyze whether it has exemptions under the Investment Company Act of 1940. Certain kinds of exemptions can apply to these vehicles under the act. Generally speaking, private funds try to fall under the 3c1 or 3c7 exemptions. These exemptions refer to the Investment Company Act sections that exempt the manager from registering as an investment company. There’s also an analysis of the Investment Advisor Act. In general, if someone is investing on behalf of someone else and taking a fee for facilitating the investment, whether it’s compensation or otherwise, there’s generally an Investment Advisor Act analysis that’s required. Certain kinds of investment advisors are historically exempt from registering as an investment adviser. One of those exemptions is for advisers to qualifying venture capital funds. This exemption is why funds can take a carried interest. In addition to the Investment Company Act and the Investment Advisors Act, a state-specific analysis needs to take place.
Some companies are trying to give managers of SPVs and RUVs easy ways to take a carried interest. For example, some platforms let the person organizing the SPV or RUV tag on to registered investment advisor status. We would advise talking to a lawyer before moving forward, as a circumstance test will likely be associated with any type of carry.
Another option for a manager to take a fee is through their role as manager. For instance, the vehicle could elect to be managed by a board. The board could decide to pay itself a fee (or salary) similar to a two-and-twenty structure. The issue with this setup is that clear conflicts of interest could become problematic. It’s not customary or typical that a board would take a management fee.
These are some issues that SPV/RUV managers need to think through before trying to take a carried interest. Like any fund or pulled investment vehicle, the answer is that a manager could take some fee, but the regulations need to be analyzed critically. There may be a higher standard and more cost for the vehicle organizer to take on a fee. There could be additional audits or financial control requirements. There could be heightened disclosure requirements. It’s essential to go through the analysis and look at it before deciding whether it’s worth the time and expense to take a fee.
Learn more about SPVs and RUVs here or get started with a flat fee quote here.
Disclaimer: This post discusses general legal issues, but it does not constitute legal advice in any respect. This post is not a substitute for legal advice and is intended to generate discussion of various issues. No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel. Cara Stone, LLP and the author expressly disclaim all liability with respect to any actions taken or not taken based on any content of this post. The views expressed herein are personal opinion.
A common question from investors setting up an SPV or RUV is, can I take a carried interest? Many are familiar with the two and twenty structure in venture and angel capital funds and may want to apply the same carried interest setup to the SPV or RUV. The answer to whether carried interest is permitted depends on the circumstances.
When a company starts raising money to deploy into investment opportunities, it needs to analyze whether it has exemptions under the Investment Company Act of 1940. Certain kinds of exemptions can apply to these vehicles under the act. Generally speaking, private funds try to fall under the 3c1 or 3c7 exemptions. These exemptions refer to the Investment Company Act sections that exempt the manager from registering as an investment company. There’s also an analysis of the Investment Advisor Act. In general, if someone is investing on behalf of someone else and taking a fee for facilitating the investment, whether it’s compensation or otherwise, there’s generally an Investment Advisor Act analysis that’s required. Certain kinds of investment advisors are historically exempt from registering as an investment adviser. One of those exemptions is for advisers to qualifying venture capital funds. This exemption is why funds can take a carried interest. In addition to the Investment Company Act and the Investment Advisors Act, a state-specific analysis needs to take place.
Some companies are trying to give managers of SPVs and RUVs easy ways to take a carried interest. For example, some platforms let the person organizing the SPV or RUV tag on to registered investment advisor status. We would advise talking to a lawyer before moving forward, as a circumstance test will likely be associated with any type of carry.
Another option for a manager to take a fee is through their role as manager. For instance, the vehicle could elect to be managed by a board. The board could decide to pay itself a fee (or salary) similar to a two-and-twenty structure. The issue with this setup is that clear conflicts of interest could become problematic. It’s not customary or typical that a board would take a management fee.
These are some issues that SPV/RUV managers need to think through before trying to take a carried interest. Like any fund or pulled investment vehicle, the answer is that a manager could take some fee, but the regulations need to be analyzed critically. There may be a higher standard and more cost for the vehicle organizer to take on a fee. There could be additional audits or financial control requirements. There could be heightened disclosure requirements. It’s essential to go through the analysis and look at it before deciding whether it’s worth the time and expense to take a fee.
Learn more about SPVs and RUVs here or get started with a flat fee quote here.
