How to Start an Investment Firm in 2026: The First-Fund Playbook

How to Start an Investment Firm in 2026: The First-Fund Playbook

I'm Sean Yu, co-founder of Peony. Before this I sat on the investor side of enough first-fund raises to notice a pattern: the hardest part of starting an investment firm is not the thesis, it is the order of operations. Emerging managers lose months because the regulatory thresholds are scattered across the CFR, the U.S. Code, and secondary blogs that quietly go stale, and because the entity stack and the registration decision get tangled together when they should be sequenced.

This is the roadmap I wish first-time sponsors had. Every regulatory figure below is copied verbatim from the primary text (the eCFR, the U.S. Code, the Federal Register) as it read in 2026, with the rule named in the sentence. Nothing here is legal advice; retain fund counsel before you file anything.

What does it take to start an investment firm?

Starting an investment firm is a six-step sequence, and doing it in order saves the most time:

1. Pick the vehicle. A pooled private fund (an LP or LLC that invests other people's money), a separate-account registered investment adviser (RIA) managing accounts client-by-client, or both. This drives every downstream choice.
2. Build the entity stack. A fund is really three entities: the fund itself, the general partner (GP) that controls it and holds the carried interest, and the management company that employs the team and collects the fee. The management company is the "investment adviser."
3. Clear the registration or exemption decision. Below $100M in regulatory AUM you generally register with your state; above the threshold, with the SEC; two federal exemptions can make you an exempt reporting adviser instead.
4. Prepare the offering documents. Private placement memorandum (PPM), limited partnership agreement (LPA), subscription documents, and the investor due-diligence questionnaire (DDQ). Then file a Form D notice with the SEC within 15 days of your first sale.
5. Retain the service providers. Fund administrator, independent auditor, fund counsel, a qualified custodian or prime broker, and often a compliance consultant.
6. Open the LP data room and raise. Everything above becomes the contents of a room that LPs diligence before they wire. Who sees what, and who actually reads it, is the part most first funds underinvest in (our data room for emerging managers guide covers the build).

The rest of this post walks each step with the exact rules.

Do you have to register with the SEC to start an investment firm?

Not necessarily, and this is the single most misunderstood question emerging managers ask. The SEC and the states split adviser oversight by size. Under the SEC's rule 203A-1 (17 CFR 275.203A-1), a "mid-sized adviser" with regulatory assets under management between $25M and $100M generally registers with the state, not the Commission. The verbatim buffer text reads: "You may, but are not required to register with the Commission if you have assets under management of at least $100,000,000 but less than $110,000,000, and you need not withdraw your registration unless you have less than $90,000,000 of assets under management."

Read that carefully, because the $90M number is the nuance most summaries drop. There are three bands: at $100M you may register with the SEC, at $110M you must (absent an exemption), and once SEC-registered a later slide in AUM does not force you off until you fall below the $90M downdraft buffer. The rule also sets the switching mechanics: a state adviser that becomes SEC-eligible must "apply for registration with the Commission within 90 days of filing an annual updating amendment," and an SEC adviser that becomes ineligible files Form ADV-W "within 180 days of your fiscal year end." (Regulatory AUM itself is determined under Item 5.F of Form ADV.)

But most first-fund sponsors never fully register, because two exemptions were built for exactly this situation. Those exemptions make you an exempt reporting adviser.

Which adviser exemption or registration applies at your AUM?

Two federal exemptions can keep a private-fund manager off the full-registration track while still requiring some Form ADV reporting.

The private fund adviser exemption (17 CFR 275.203(m)-1) applies where the adviser, per the eCFR text of that section, "(1) Acts solely as an investment adviser to one or more qualifying private funds; and (2) Manages private fund assets of less than $150 million." A "qualifying private fund" is one not registered under the Investment Company Act and not a BDC, meaning a fund relying on 3(c)(1) or 3(c)(7). Advisers using this exemption are exempt reporting advisers (ERAs): they still file the public portions of Form ADV. Exempt does not mean silent.

The venture capital fund adviser exemption (17 CFR 275.203(l)-1) covers advisers that solely advise venture capital funds and carries no AUM cap; it is a fund-type exemption, distinct from the $150M dollar test. The same rule defines a "venture capital fund," and two numeric limits matter. A qualifying VC fund "holds no more than 20 percent of the amount of the fund's aggregate capital contributions and uncalled committed capital in assets (other than short-term holdings) that are not qualifying investments" (the 20% non-qualifying basket), and it "does not borrow... or otherwise incur leverage, in excess of 15 percent of the private fund's aggregate capital contributions and uncalled committed capital, and any such borrowing... is for a non-renewable term of no longer than 120 calendar days" (the 15% / 120-day leverage limit).

A worked example: a manager advising a single $120M private fund is under the $150M line, so she can be an ERA under 203(m); grow that fund to $160M and she loses the exemption and, being over $110M, must register with the SEC.

Form ADV is the uniform adviser form: Part 1 is regulatory data filed through IARD, Part 2 is the plain-English brochure, and Part 3 (CRS) is for retail; both fully registered advisers and ERAs file portions of it. And keep the adviser role distinct from a broker-dealer, which effects securities transactions and registers as a FINRA member: a sponsor raising its own fund under Reg D is generally not a broker-dealer, but paying transaction-based compensation to unregistered finders is a classic registration trap to route through counsel.

How is an investment fund actually structured?

A private fund is three entities working together, and drawing the box once removes most of the jargon confusion. The fund is a limited partnership or LLC, the pooled vehicle that holds the investments, relying on a 3(c)(1) or 3(c)(7) exclusion from the Investment Company Act so it does not register as an investment company. The general partner (GP) controls the fund and holds the carried interest (the "20% of profits" carry). The management company employs the team, receives the management fee, is the "investment adviser," and is what the registration thresholds above are measured against. You split them so the carry and the fee flow to different entities and the fund's investors hold no ownership of the management business.

The exclusion choice is where 3(c)(1) versus 3(c)(7) comes in. Under 15 U.S.C. 80a-3(c)(1), a 3(c)(1) fund is one whose outstanding securities "are beneficially owned by not more than one hundred persons (or, in the case of a qualifying venture capital fund, 250 persons)." That 250-owner variant is not free: under 17 CFR 270.3c-7, "the term qualifying venture capital fund means a venture capital fund... that has not more than $12,000,000 in aggregate capital contributions and uncalled committed capital." The statute's original $10,000,000 base was inflation-adjusted; the current figure is $12,000,000, with the next re-adjustment on or about November 1, 2029. The old $10M number that still circulates online is stale.

Under 15 U.S.C. 80a-3(c)(7), a 3(c)(7) fund's securities are "owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers." There is no numeric owner cap under the Act, but the investor bar is higher: a qualified purchaser includes, per 15 U.S.C. 80a-2(a)(51)(A), "any natural person... who owns not less than $5,000,000 in investments," and "any person... who in the aggregate owns and invests on a discretionary basis, not less than $25,000,000 in investments." There is also a $5,000,000 family-company prong.

So the practical trade-off: a 3(c)(1) fund with 98 accredited (non-qualified-purchaser) investors is fine because it is under 100. Cross 100 owners and you must either use the 250-owner qualifying-VC-fund path (only if you stay at or under $12,000,000) or switch to 3(c)(7), where every investor must be a qualified purchaser. Most Fund I sponsors start at 3(c)(1) because they cannot yet fill a fund exclusively with qualified purchasers.

How do you legally raise capital for a fund?

Almost every first fund raises through a private placement under Regulation D, and the choice between its two workhorse rules, 506(b) and 506(c), is a choice between advertising and verification.

Under 17 CFR 230.506, Rule 506(b) prohibits general solicitation and allows an offering where "there are no more than... 35 purchasers of securities from the issuer... in any 90-calendar-day period." A critical nuance: the rule says 35 purchasers, not 35 investors, and under 17 CFR 230.501(e) accredited investors are excluded from that count. So the practical effect is up to 35 non-accredited purchasers (accredited investors do not count toward the 35), with effectively no cap on accredited investors. Each non-accredited purchaser must also have "such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks." You cannot advertise, but you may rely on investor self-representations of accredited status.

Rule 506(c) flips both dials. It permits general solicitation, so you can publicly market the fund, but under 17 CFR 230.506 "all purchasers of securities sold in any offering under paragraph (c) of this section are accredited investors," and "the issuer shall take reasonable steps to verify" accredited status. Verification is the price of advertising. On that burden there was a real 2025 development that is easy to overstate: on March 12, 2025, the SEC's Division of Corporation Finance issued a no-action letter recognizing that a high minimum investment amount can itself be a reasonable verification step, provided the issuer obtains written representations that the purchaser is accredited and that the minimum was not financed by a third party, and has no knowledge to the contrary. The precise reading matters: this is a high-minimum-investment accommodation, not a rule that "lets investors self-certify by checking a box." Bare checkbox self-certification with no other basis remains insufficient for 506(c).

Accredited investor itself has verbatim dollar tests under 17 CFR 230.501(a): a net-worth test for "any natural person whose individual net worth, or joint net worth with that person's spouse or spousal equivalent, exceeds $1,000,000" (excluding the primary residence), and an income test for anyone with "individual income in excess of $200,000 in each of the two most recent years or joint income... in excess of $300,000 in each of those years" with a reasonable expectation of the same this year. Reg D also recognizes entity categories, including trusts over $5,000,000.

Whichever rule you use, the fund files a Form D notice with the SEC within 15 days of the first sale, plus state blue-sky notice filings. If the language of equity rounds is new to you, our primer on what equity financing is covers the fundraising vocabulary from the issuer's side.

What does it cost to start a fund and who do you need on the team?

I am going to resist quoting a dollar figure to "launch a fund." Formation costs vary widely by strategy, jurisdiction, and how much counsel customizes the documents; anyone who gives you a precise "$X to start a fund" number online is estimating. What is standard is the roster of providers a new fund needs: a fund administrator (NAV, books, investor reporting), an independent auditor (annual GAAP audit), fund counsel (formation plus PPM, LPA, subscription docs), a qualified custodian or prime broker, and often a compliance consultant for the written program.

That compliance program is a rule, not a nicety. Under 17 CFR 275.206(4)-7, a registered adviser must "(a) Adopt and implement written policies and procedures reasonably designed to prevent violation... (b) Review, no less frequently than annually, the adequacy of the policies and procedures... and (c)... Designate an individual (who is a supervised person) responsible for administering the policies and procedures," meaning a chief compliance officer.

On custody: under 17 CFR 275.206(4)-2, an adviser with custody normally arranges an annual surprise examination, where its client funds and securities are "verified by actual examination at least once during each calendar year... by an independent public accountant... at a time that is chosen by the accountant without prior notice or announcement to you and that is irregular from year to year," with the accountant filing Form ADV-E within 120 days. The important exception for private funds is the pooled-fund audit exception: a fund subject to audit, meaning audited financials are distributed to investors, satisfies the independent-verification requirement and is relieved of the surprise-exam mechanics. The annual GAAP audit substitutes for the surprise exam, which is why the administrator and auditor are non-negotiable even at Fund I.

What extra requirements apply to a bitcoin or crypto fund?

A bitcoin or crypto fund is, at its core, the same private-fund stack: the three-entity structure, a 3(c)(1) or 3(c)(7) exclusion, and a Reg D raise. The extra layer is digital-asset custody, and this is where a lot of writing online is out of date, so read the status carefully as it stood in 2026.

Custody is easing but unsettled. Two things happened, neither producing a final crypto-custody rule. First, on January 23, 2025, Staff Accounting Bulletin No. 122 rescinded SAB 121, which had required custodians to gross up a balance-sheet liability for safeguarded crypto; that is an accounting change easing banks and custodians, not a change to the Advisers Act custody rule. Second, a September 30, 2025 Division of Investment Management no-action letter said staff would not recommend enforcement if a registered adviser or fund treats certain state trust companies as qualified custodians ("banks") for crypto assets, subject to conditions (a state bank regulator, fiduciary powers, an annual reasonable-basis review, documented safeguarding policies including cold storage). There is no final SEC crypto-custody rule, so the operative rule is still 206(4)-2. The question is easing, not resolved.

The Safeguarding Rule is withdrawn, not pending. This is the trap I see most often. The SEC's proposed Safeguarding Advisory Client Assets rule (proposed March 9, 2023, which would have become Rule 223-1) was formally withdrawn on June 17, 2025, per the Federal Register notice at 90 FR 25531, whose abstract states: "The Commission does not intend to issue final rules with respect to these proposals. If the Commission decides to pursue future regulatory action in any of these areas, it will issue a new proposed rule." It is not pending and was never adopted. Anyone describing the SEC's "pending Safeguarding Rule" is wrong as of today.

Legislation status matters too. The GENIUS Act, which creates the first federal regulatory system for stablecoins, was signed into law on July 18, 2025. But it is a payment-stablecoin framework, its operative provisions phase in after enactment, and a bitcoin (not stablecoin) fund is largely outside it. The CLARITY Act, the digital-asset market-structure bill, passed the U.S. House on July 17, 2025 but is not law; it remains pending in the Senate as of 2026, so treat any summary that calls it enacted with suspicion.

Money transmission and BitLicense. A private fund that merely buys and holds bitcoin for its own account, relying on a licensed third-party custodian or exchange, is generally not engaged in "virtual currency business activity" under regimes like New York's BitLicense (23 NYCRR Part 200), which exempts those using virtual currency "for investment purposes." Those regimes target intermediaries (exchanges, custodians, transmitters), not the fund-as-investor. I say "generally not required" rather than "never," because a fund that itself takes custody of or transmits crypto for others could be captured.

Futures trigger the CFTC. If your crypto fund trades commodity interests (futures, options on futures, swaps, or retail forex) it is a commodity pool and its operator is a Commodity Pool Operator (CPO), registered with the CFTC and an NFA member unless exempt. Bitcoin futures are commodity interests; spot bitcoin held directly generally is not, so buy-and-hold spot funds usually avoid this analysis. If futures are in scope, the common relief is the 17 CFR 4.13(a)(3) de minimis exemption, which turns on one of two tests: either "the aggregate initial margin, premiums, and required minimum security deposit for retail forex transactions... will not exceed 5 percent of the liquidation value of the pool's portfolio," or "the aggregate net notional value of such positions... does not exceed 100 percent of the liquidation value of the pool's portfolio," and every participant must be an accredited investor (or knowledgeable employee) with interests offered under 506(c) or 144A.

What do LPs actually diligence before they commit?

Once the entity stack is built and the exemption path is picked, the raise becomes a diligence process. For a first fund the LP's request is a fairly consistent set:

• The DDQ. The investor due-diligence questionnaire: team, strategy, terms, service providers, references, and conflicts. Institutional LPs often send their own template (the ILPA DDQ is common).
• The track record. Your attributed deal history, whether from a prior firm, angel investing, or an operator background. LPs scrutinize this hardest, and it is often the most sensitive to share.
• The fund documents. PPM, LPA, and subscription documents, plus the Form D once filed.
• References. Founders you have backed, co-investors, and prior colleagues.

For independent sponsors and searchers, where the track-record question is unusually pointed because there may not be a prior fund, our guide to capital partners for independent sponsors and search funds walks the funding sources that back those managers.

All four items are confidential, and you are sending them to LPs who may pass, forward, or overlap with your competitors. That is why the raise runs in a data room, not an email thread.

The first-fund LP data room: where the raise actually runs

Every item an LP diligences lives in one place: an LP data room. The point of the room is control. You decide which LP sees which folder, you know who actually read the PPM, and you can shut off access the moment a conversation ends.

I run Peony, a data room company, and I built it after watching emerging managers lose control of exactly these documents. Three capabilities matter most for a first-fund raise:

• Visitor groups per LP. A prospective anchor LP does not need to see the same folders as a fund-of-funds analyst doing a first pass. Granular permissions gate the track-record appendix separately from the cover materials, so each LP sees the tier appropriate to where the conversation actually is.
• Page-level analytics on every tier, free. The one I would not raise without. You can see which LP opened the PPM, which page they lingered on, and which one downloaded it once and never came back. That is your follow-up priority list, and on Peony page-by-page analytics are free on every plan, including the free tier.
• Dynamic per-viewer watermarks. Because a leaked track record or thesis appendix is a real risk, per-viewer watermarks print the recipient's identity on every page, so any forwarded copy traces back to the LP it was issued to.

On pricing, I keep Peony honest and public. A first-fund raise usually starts on the free tier (50 documents, page-by-page analytics, link expiry and revoke) with no credit card, genuinely enough to run an early LP process. The $30/month Business plan adds screenshot protection; the $52/month Data Room plan adds dynamic per-viewer watermarks, granular permissions, and unlimited documents and rooms. Link expiry and revoke are on every tier, including free. Peony is trusted by 6,800+ customers, and viewers are always free, so inviting 40 LPs to review never changes your bill. The full breakdown is on our pricing page.

One related risk worth reading before you send a single deck: pitch deck leaks for emerging managers covers how first-fund materials actually get forwarded, and the leak surface for spinout and operator-led GPs specifically. The free tier is the natural first step: load your DDQ, track record, and fund documents, invite two friendly LPs, and watch the analytics before you widen the list.

A closing word on all of the above: this guide is general information, not legal advice. The thresholds and rule statuses are copied from the primary sources as of August 2026, but they change — retain fund counsel and a compliance consultant before you form entities, file, or take a dollar of outside capital.

Frequently asked questions

how do I start an investment firm

Work in this order. First pick the vehicle (a private fund, a separate-account RIA, or both). Second, build the entity stack: the fund limited partnership or LLC, the general partner that holds the carry, and the management company that employs the team and acts as the adviser. Third, decide where you register: your state below $100M in regulatory AUM, the SEC above the threshold, or an exempt reporting adviser path. Fourth, prepare offering documents and file Form D. Fifth, retain a fund administrator, auditor, and counsel. Sixth, open an LP data room and raise.

do I need to register with the SEC to start a fund

Not always. Under 17 CFR 275.203A-1, a mid-sized adviser with $25M to $100M in regulatory assets under management generally registers with the state, not the SEC. At $100M you may register with the SEC, and at $110M you must, absent an exemption. Separately, an adviser solely to private funds with less than $150 million in private-fund assets (17 CFR 275.203(m)-1), or an adviser solely to venture capital funds (17 CFR 275.203(l)-1), can be an exempt reporting adviser: it still files portions of Form ADV but does not fully register.

what is an exempt reporting adviser

An exempt reporting adviser (ERA) is an adviser that qualifies for one of two federal exemptions from full registration but still has to file public portions of Form ADV. The two paths are in the Advisers Act rules: the private fund adviser exemption under 17 CFR 275.203(m)-1, for an adviser acting solely as adviser to qualifying private funds and managing less than $150 million in private-fund assets; and the venture capital fund adviser exemption under 17 CFR 275.203(l)-1, for an adviser solely to venture capital funds. Exempt does not mean no filing: ERAs still report on Form ADV.

what is the difference between a 3(c)(1) and 3(c)(7) fund

Both are exclusions from the Investment Company Act so a private fund does not register as an investment company. Under 15 U.S.C. 80a-3(c)(1), a 3(c)(1) fund's securities are beneficially owned by not more than 100 persons (or 250 persons for a qualifying venture capital fund with no more than $12,000,000 in aggregate capital contributions and uncalled committed capital, per 17 CFR 270.3c-7). A 3(c)(7) fund under 15 U.S.C. 80a-3(c)(7) has no numeric owner cap under the Act, but every investor must be a qualified purchaser, meaning a natural person owning not less than $5,000,000 in investments, among other categories.

how do investment firms raise money legally

Most first funds raise through a private placement under Regulation D. Under 17 CFR 230.506, Rule 506(b) prohibits general solicitation and allows up to 35 non-accredited purchasers in any 90-calendar-day period (accredited investors do not count toward the 35). Rule 506(c) permits general solicitation, but all purchasers must be accredited investors and the issuer must take reasonable steps to verify accredited status. Either way, the fund files a Form D notice with the SEC within 15 days of the first sale, plus state blue-sky notice filings.

what is the difference between a 506(b) and 506(c) offering

The trade-off is advertising versus verification. Under 17 CFR 230.506, a Rule 506(b) offering cannot use general solicitation, may include up to 35 non-accredited purchasers per 90-day period (accredited investors are excluded from that count), and lets the issuer rely on investor self-representations of accredited status. A Rule 506(c) offering can advertise publicly, but every purchaser must be accredited and the issuer must take reasonable steps to verify it. A March 12, 2025 SEC staff no-action letter recognized a high minimum investment amount as one reasonable verification step, with written representations, not bare checkbox self-certification.

what are the requirements to start a bitcoin investment fund

A bitcoin fund is a private fund with the same core stack (entity structure, a 3(c)(1) or 3(c)(7) exclusion, Reg D raise), plus digital-asset custody questions. As of 2026 the qualified-custodian question is easing but unsettled: the SEC rescinded SAB 121 via SAB 122 on January 23, 2025, and a September 30, 2025 no-action letter let advisers treat qualifying state trust companies as custodians for crypto assets, but there is no final SEC crypto-custody rule, so the operative rule is still 206(4)-2. A fund buying and holding bitcoin for its own account generally does not need a money-transmitter license or BitLicense. Bitcoin futures, not spot, implicate CFTC CPO analysis.

does a hedge fund manager have to register as an investment adviser

It depends on assets and structure. A manager solely to private funds with less than $150 million in private-fund assets can be an exempt reporting adviser under 17 CFR 275.203(m)-1, filing portions of Form ADV without full registration. Above $110 million and outside an exemption, the manager registers with the SEC under 17 CFR 275.203A-1; between $25M and $100M it generally registers with the state. A fully registered adviser must adopt a written compliance program and designate a chief compliance officer under 17 CFR 275.206(4)-7.

do I need an audit for my private fund

For most pooled private funds, an annual audit is the practical way to satisfy the adviser custody rule. Under 17 CFR 275.206(4)-2, an adviser with custody normally arranges an annual surprise examination by an independent public accountant, who files Form ADV-E within 120 days. But a fund that is subject to audit, meaning audited GAAP financials are distributed to investors, is deemed to satisfy the independent-verification requirement and is relieved of the surprise-exam and account-statement mechanics. That is why a fund administrator plus an independent auditor are standard first-fund service providers.

what do emerging managers use for their LP data room

Emerging managers use a data room to share the DDQ, track record, fund documents, and references with LPs while keeping control of who sees what. I run Peony, a data room company trusted by 6,800+ customers. A first-fund raise typically runs on the free tier to start (50 documents, page-by-page analytics, link expiry and revoke) or the $30/month Business plan (adds screenshot protection); the $52/month Data Room plan adds dynamic per-viewer watermarks and granular permissions. Page-level analytics are free on every tier, so you can see which LP actually read the PPM instead of guessing.