How to Launch a Crypto Fund
With all the excitement of the crypto markets, you can’t wait to jump in and turn your investment or trading acumen into the institutional world of fund management.
STRATEGY
After you decide upon your strategy: VC, PE infrastructure, fundamental, exchange focused, ICOs, technical analysis, quantitative. Whatever you choose, you will need a lot of partners to help you launch your fund. Hopefully this will be a guide to the kinds of partners, who can help you, and how you can evaluate them. So here comes a list of all the fun loving people to fill your days of the launch.
LEGAL
My dad still tells people that I graduated from Law School, which is untrue. You will need an experienced attorney at fund formation to help you draft the (most likely) limited partnership agreement(s), the subscription document(s), and investment memorandum. The skilled attorney will help you decide upon offshore/onshore and how to structure the investment vehicle. There exist tons of attorneys that draft limited partnership agreements everyday. However, I would suggest that an attorney who has direct experience in digital assets is best suited to help navigate blue sky laws, tax laws, and other pitfalls that you want to avoid. You should also see what areas of expertise they can assist you in. For example, the fund may only begin your travels. If you need help in broker-dealers, money services businesses, etc, just ask. Some of the most prominent players are from the traditional ranks of attorneys, with direct experience in digital assets. Some new players have sprung up that focus upon digital asset formations.
BANK
After you draft your limited partnership agreements and speak with your investors, you will need to find a bank that will handle a corporate bank account for digital assets. Interestingly, this is a harder task than can be imagined. Your personal bank may allow you to personally trade crypto on the exchanges… however, that same bank will close down your account quickly as soon as you handle OPM Other People’s Money. However, if you already have a great bank relationship because you manager several billion dollars of AUM, your bank will most likely allow you to open a digital asset bank account with them. The banks will have stringent requirements, will ask to review your fund documents and interview you intensely.
I recommend that you draft KYC AML plan, to show the bank that you will be strict about AML procedures. FINRA provides a template for AML policies.
It would also be useful to have a nice powerpoint of your Flow of Funds. This shows the bank how you will be using the bank and give a sense of what costs and risks they will be incurring. It also shows how prepared and thoughtful you are.
AUDITORS
And the fun cast of characters continues. Many banks will only work with funds that receive an audit. An audit can be expensive. When you meet with auditors, ask of their experience in audit for crypto. Inquire as to what additional risks are involved in a crypto audit v. other investment vehicle audits, in order to get a sense of pricing. Ask what technology they utilize in order to receive a thorough audit of your financial situation; do they link into APIs; can they audit the blockchain? As you price each firm, look closely at the services provided; do they cover tax at federal and state level; do they cover K-1’s for each investor (including foreign investors). Currently, most Big Four accounting firms will not perform crypto fund audits; though thi sis changing. Also realize that most audit firms (accounting firms) are collections of offices, meaning, although one office of a firm may demure, another office may invite you to become a client.
ADMINISTRATOR
If you notice the pattern now, you will guess that Auditors will ask who the Administrator is. Administrators became crucial to the fund management industry after the Madoff scandal, where Bernie Madoff pilfered large sums of money from his investors in a Ponzi scheme. Hence, investors have required an administrator for investment funds. Some banks only work with certain administrators.
When you engage with Administrators, ask questions regarding minimum AUM how they charge with flat fees and percentage of AUM. Of utmost importance is how they will integrate with your investments… will it be manual or digital, real time. Also ask how many clients they have in digital assets, what type, and what the AUM is.
CUSTODY
Here is the big one! If you are a Registered Investment Advisor, meaning you have assets over $ 150 million, you are required to have an SEC Qualified Custodian. The other great use case is for the emerging manager that wants to grow its AUM and provide assurances to its investors that they play by the big boy rules.
Be cognizant of wallet services that use the term “custody,” even if they have a big name brand. There are some fantastic wallet services out there…but are they a Qualified Custodian? Check closely for wholistic pricing: what’s the on boarding price as well as the AUM charge. Review what coins they custody for you…also look at independence. Finally confirm their license and see if any infractions or complaints have been recorded.
Several people in the digital asset investment space have asked for guidance on launching. Byzantine General does not endorse any service providers.
If you would like to discuss in detail, please reach out to me or comment below.
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