"Referral fees" for fund raising?

Discussion in 'Professional Trading' started by heech, Mar 19, 2010.

  1. heech


    Hi all,

    I have a newly registered CPO, and just looking to understand the options for fund-raising going forward.

    I've been told that only registered broker-dealers can receive commissions for selling private interests in a partnership (like interests in a CPO).

    Is that the case? And if so, how do IBs and 3rd party marketers make their money? Are they all registered broker-dealers as well?

    For friends/colleagues with access to money... is there any legal way to "reward" them for bringing me investors? For that matter, any way for me to "reward" current investors for bringing in new investors and/or raising the size of their investment?
  2. First off you need to consult a lawyer not ET. I could recommend a good one in Chi.

    A broker dealer can be paid a load for selling the fund as well as receiving the commissions for your trades. They do not need to be series 3 as the CPO is viewed in the same light as a security, but they must be series 7.

    On the other hand you can sell through some of the fee only IRA's, but they cannot be paid a load or receive commissions from the trades, I believe they must be series 63 (not sure on the series number) and they have to do it as advising the clients not selling it to them. This can be problematic as most fee only IRA companies do not have access to futures markets with their current account management platform this means that the money that they are managing must leave their platform and go to yours. You will get a lot of push back on this, A LOT!

    You can sell through IB's and FCM's, but in order to do so you must have an appropriate number of RT per million, if you don't they will not meet the commission equity ratio objectives they have. But there are cases where they will market you if you have a good enough and long enough track record along with substantial AUM already. Proposing a fee split can sometimes bridge the gap if you do not meet their RT requirements.

    3PM's tend to be very picky and rightfully so. Do you have an outstanding pedigree with good track record at a major firm? Do you have an outstanding track record two or three years in length with $50 million or so under management? Are you willing to give up a substantial portion of your fees to the 3PM?
  3. heech


    Appreciate the response. If you could pm me with your attorney contact, I'd be happy to follow up. I already have an attorney assisting me with the fund formation process, but perhaps your reference has better expertise in this area.

    In terms of 3pm, I do not have the track record you're speaking of. But I do have a very engaging academic/professional pedigree, and I think a compelling investment story. AUM is only $2.5mm, but it's all my money. On that basis alone, I've had some good conversations with a few marketers. I don't know how legitimate these people are... but we'll see.

    On the IB/FCM side, are IBs exempt from broker/dealer requirements because they're only being paid trade commissions...? I actually have a substantial amount of turnover (15000 RT/million/year), which is why I initially insisted on low commissions. Now I'm wondering whether that makes sense...?
  4. heech


    Hi there,

    This sounds like what I'm looking to learn more about. Can you give me more color, and/or point me to some references that might discuss some of the finer points here?

    I have one specific contact in mind who've raised a number of funds for their own investment project. We're both interested in working together to raise funds for my CPO... but a broker/dealer license is pretty much out of the question.
  5. heech


    To answer my own question, here's an extended discussion:


    What I find confusing is this...

    This seems to suggest a finder's fee isn't going to work for me either... But googling around, I find a number of other private equity (venture/angel capital) finder's fee agreements that explicitly ties compensation to the transaction.

    Time to talk to an attorney, perhaps.
  6. I will pm my attorney contact to you. 15K RT/million. You should have brokers jumping at the chance if that's your number.

    IB's have a series 3 so they can sell you all they want and with 15K rt they will sell you all day long.

    If you're looking for someone to raise capital there is a plethora of people who can sell looking for jobs.
  7. Surdo


    This board is not the place for this kind of advice.

    Consult with a competent atty.
  8. heech


    Question about this... I'm only doing a CPO, not individual managed accounts (at least not at this point).

    How would the IB relationship work here, in terms of a cut of commissions? How do they only get paid for the capital *they* bring in? Even if I don't do a managed account... could I setup individual accounts "for each IB", each with different commission levels, to make this happen?
  9. For a CPO you would generally be charged one commission rate. I have not experienced it any other way. An IB would get paid on commission and the front load you impose on the fund. Now there is a regulation against paying an AP of your firm the load, but I am not sure if that applies to IB's. I am fairly certain a series 3 can accept the front load as long as they are not associated with your firm.

    This is why you need an attorney as opposed to ET.

    I am certain that you can pay BD upfront fees with a front load. CPOs do this all the time.

    Edit: on second thought I have never sold a CPO through an IB so I am not sure if you can have different commission structures from different IBs. In my mind it would be difficult to do since you're only trading one account, but I suppose it would not be impossible. If you are doing that many rt I would think you would want pretty cheap commissions in which case you should not be doing anything through IBs as they generally charge much higher commissions than you can actually get with FCMs.
  10. heech


    Just wanted to say LngEnf2NoBetter's legal contact was great. We had a nice hour long conversation about many of these issues, and I'm much better informed (not necessarily less frustrated!).

    The short answer, though, is that a casual finder/referral fee for CPO fund raising is NOT acceptable. The NFA insists on associated person registration for anyone involved in "soliciting" for the fund. This would be a different story if I was NFA exempt.
    #10     Mar 19, 2010