Lessons from the Field: Legal Challenges Faced by First-Time Fund Managers

Launching your first investment fund is an exciting milestone—but it’s also a legal minefield if you’re not prepared. From fundraising compliance to fund governance, first-time fund managers often encounter hurdles that can delay launches, damage investor confidence, or trigger regulatory issues.

In this article, we explore the most common legal challenges new fund managers face—and how to overcome them with smart planning and expert counsel.

Why Legal Readiness Is Critical for Emerging Managers
Managing a fund isn’t just about deal flow or LP relationships—it’s about creating a legal framework that protects your interests, inspires investor trust, and ensures long-term viability.

Key benefits of getting the legal foundation right include:
✔ Smooth fundraising and onboarding
✔ Clear and compliant operations
✔ Mitigated risk of disputes or regulatory penalties

Top Legal Challenges First-Time Fund Managers Face

1. Fund Formation Delays
Forming the right fund entity—and structuring it correctly—can be a slow process without the right legal team. Many new managers underestimate how long it takes to finalize the limited partnership agreement (LPA), private placement memorandum (PPM), and subscription docs.

Solution: Engage fund formation counsel early and build a project timeline that accounts for investor diligence and regulatory filings.

2. Securities Law Compliance (Especially in Fundraising)
Raising capital means you're dealing with securities law. Missteps in offering terms or investor qualification can trigger SEC scrutiny.

Solution: Ensure your fundraise is structured under valid exemptions (e.g., Regulation D) and that investor communications are carefully vetted.

3. Drafting and Negotiating the LPA
Your limited partnership agreement is the cornerstone of the fund. It defines how decisions are made, how profits are shared, and what rights LPs have.

Challenge: New managers often accept boilerplate LPAs or overlook subtle terms that can restrict future flexibility.

Solution: Customize your LPA with an eye toward scalability, co-investments, and your management style.

4. Regulatory Registration and Exemptions
First-time fund managers may not be required to register with the SEC—but misunderstanding exemptions (like the private fund adviser exemption) can lead to costly errors.

Solution: Work with legal advisors to assess whether you qualify for federal or state exemptions—and track your AUM thresholds closely.

5. Lack of Internal Compliance Infrastructure
Compliance isn’t just about checking boxes. Without a compliance manual, code of ethics, or training protocols, your fund could breach fiduciary duties or face operational risks.

Solution: Build internal policies for valuation, deal allocation, insider trading, and conflicts of interest—even if you’re small.

6. Inadequate Side Letter Management
Early LPs often negotiate special rights via side letters—like fee discounts or advisory board seats. Managing these terms without conflict or duplication is tricky.

Solution: Use a side letter matrix and ensure “most favored nation” (MFN) provisions are clearly tracked across investors.

7. Employee and Service Provider Agreements
Your fund will likely engage analysts, advisors, or service providers. Without proper employment, consulting, or confidentiality agreements, your IP, performance data, or investor lists may be at risk.

Solution: Secure robust legal contracts for everyone touching fund operations—from interns to fund admins.

8. Co-Investments and Parallel Vehicles
Many first-time managers explore co-investment vehicles to boost capital or attract anchor LPs. But structuring these without clear terms or proper disclosures can create fiduciary issues.

Solution: Spell out co-investment rights and conflicts in your LPA and offering documents.

9. Misunderstanding Tax Structuring
Fund taxation—especially if you have U.S. and non-U.S. investors—can be complicated. A wrong setup can trigger withholding tax issues or investor complaints.

Solution: Coordinate with fund counsel and tax advisors to ensure optimal entity structure (e.g., Delaware LP, Cayman feeder, blocker corporations).

10. Managing Expectations and Disclosures
Legal risk also comes from how you communicate. Promising too much during fundraising, using vague IRR projections, or skipping disclosures can lead to liability.

Solution: Keep fundraising language conservative and disclosures robust. When in doubt, disclose.

Build Smart, Grow Strong
The early legal decisions you make as a first-time fund manager will shape your fund’s success for years to come. Legal missteps can slow down your momentum—but legal preparedness builds investor trust and operational strength.

For personalized support in forming and launching your first fund, contact our Miami-based fund attorneys at 786.461.1617. We specialize in helping emerging managers navigate the legal challenges of fund formation, compliance, and growth.