How to Start an Individual Investment Company

Mutual funds offer a profitable way to manage investors' money

If you're thinking about starting an investment firm and your clients' portfolios are just big enough for you to manage and still charge a reasonable fee, what can you do? Creating a registered investment company (RIC) through the Securities and Exchange Commission (SEC) under the Investment Company Act of 1940 (Investment Company Act) often offers an attractive alternative. Still, start-up costs and ongoing expenses can be high, so be sure to thoroughly research this opportunity before jumping in. This article does not offer legal advice, and you will need to consult an appropriate attorney to proceed with this plan.

Instructions

How to Register a Mutual Fund With the SEC Under the Investment Company Act

1. Ascertain that you have sufficient start-up cash of about $500,000, a good securities lawyer, the appropriate licenses (which vary by state), familiarity with the SEC and general knowledge of corporate law. Go to the SEC site (see Resources below) and download the Investment Company Registration and Regulation Package. Thoroughly read and understand this package.

2. Talk to your legal counsel and determine within which state you prefer to have your investment company incorporated prior to registering it with the SEC. The state in which you incorporate your mutual fund does not necessarily have to be the state you will do business in.

3. Determine how you will handle all relevant compliance, marketing, distribution and investment issues that will pertain to your investment company while reviewing the SEC package.

4. Select a name for your investment company. Make sure it's not currently being used.

5. Do not register with the SEC until after your investment company has first been incorporated.

6. File Form N-8A (Notification of Registration) with the SEC when you are ready to register your investment company.

7. File the appropriate registration form (which your legal counsel will review and attest to) within three months of filing Form N-8A with the SEC:
   Form N-1A (for mutual funds)
   Form N-2 (for closed-end funds)
   Form N-3 (for separate accounts [defined in Section 2(a)(37) of the Investment Company Act] that offer variable annuity contracts that are registered under the Investment Company Act as management investment companies)
   Form N-4 (for separate accounts that offer variable annuity contracts that are registered under the Investment Company Act as unit investment trusts).
   Form N-6 (for separate accounts that offer variable life insurance policies that are registered under the Investment Company Act as unit investment trusts)

8. Put an anticipated "effective date" on the form filed in Step 7. This is the date you expect to start your investment company. The SEC general will respond to your registration prior to this date. You will need to take care of other business matters while the SEC considers your investment company registration. These other matters can include making sure you have any necessary licenses (these vary by state) and, if not, obtaining them. You cannot do business during this period.

9. Expect the SEC to come back and request changes in your filing, which is normal procedure. Always make sure your attorney reviews these changes before resubmitting your filing.

10. Register your investment company under the blue-sky laws of any states you intend to do business in, and start selling shares in your mutual fund once the SEC gives formal approval.

Tips & Warnings

• Depending on your level of experience, you may wish to hire a consultant (in addition to your securities lawyer) to handle creating your investment company. Try to keep it simple for the first few years. The average annual expense of a mutual fund exceeds $300,000. Some industry consultants say the minimum asset size for a mutual fund is $45 million, although there are plenty that operate well below that number.

• If you pick a name for your investment company that entails an investment objective, the SEC requires your mutual fund to maintain at least 80 percent of its investments consistent with that objective. The biggest potential pitfalls for investment companies are operations and compliance, rather than picking the investments. This is a highly regulated business and should not be pursued unless you intend to totally devote yourself to this project. Each state has its own blue-sky laws, and you may not sell your mutual fund in any state---even your home state---without first registering your investment company (and paying the annual registration fee) with that state. All SEC forms must be filed electronically through the EDGAR system, and some filings may require fees.

Resources

• SEC Investment Company Registration and Regulation Package