Private lending funds have become a popular vehicle for investors seeking higher returns and direct control over their investments. But forming a private lending fund involves critical legal steps, many of which vary significantly across U.S. states. Understanding these differences is essential for private lenders aiming to establish compliant, efficient, and investor-friendly funds.
At Geraci LLP, we specialize in advising private lenders nationwide on fund formation, helping them navigate the complex legal landscape and comply with both federal and state regulations.
What Is Fund Formation for Private Lenders?
Fund formation is the legal process of creating an investment vehicle—often structured as a Limited Partnership (LP) or Limited Liability Company (LLC)—through which private lenders pool capital to invest in real estate, loans, or other opportunities. This process involves entity formation, securities compliance, drafting offering documents, and ongoing regulatory adherence.
Why Do Legal Requirements Differ by State?
While federal securities laws (administered by the SEC) govern many aspects of fund formation, each state enforces its own securities laws, known as Blue Sky Laws, and has varying regulations on lending activities, business entities, and licensing. These differences can impact:
- The choice of legal entity
- Registration or exemption filings for securities offerings
- Licensing requirements for lenders or fund managers
- Reporting and disclosure obligations
- State tax treatment of funds and investors
Ignoring state-specific laws risks penalties, rescission rights for investors, and operational hurdles.
Key Legal Differences in Fund Formation Across States
Here’s an overview of important state-level distinctions private lenders should consider:
- Entity Formation and Business Laws
- Delaware: The most popular state for fund formation due to its flexible corporate laws, investor-friendly LLC statutes, and well-developed case law. Delaware LLCs and LPs offer strong liability protections and privacy.
- California: Requires stricter compliance and registration processes. LLCs must pay annual minimum franchise tax, and private lenders face state-specific licensing requirements.
- Texas: Known for straightforward entity formation processes and favorable tax treatment, but lending activities are tightly regulated under the Texas Finance Code.
- Florida: Offers simple LLC and LP formations, but securities offerings must comply with Florida’s Division of Securities requirements, which include notice filings and fees.
- Securities Law Compliance (Blue Sky Laws)
- States like New York and California have rigorous securities regulations requiring detailed filings, fees, and disclosures, even if relying on federal exemptions.
- Some states such as Wyoming and Nevada offer streamlined notice filings with minimal fees, appealing to funds seeking efficiency.
- Many states permit reliance on Rule 506(b) and 506(c) of Regulation D but differ in notice filing deadlines and document submission requirements.
- Licensing and Lending Regulations
- California requires private lenders to obtain a California Finance Lenders License for many lending activities, including some private loan originations.
- New York imposes mortgage banker licenses and regulates loan servicing closely.
- Other states like Arizona and Colorado have more relaxed lending license requirements but still mandate compliance with consumer protection laws.
- Tax Treatment and Reporting
- States such as California and New York impose entity-level taxes and require annual tax filings.
- Delaware does not impose income tax on LLCs that do not conduct business in the state, but there is an annual franchise tax.
- States like Texas use a margin tax that may apply to some fund structures.
How Geraci LLP Helps Private Lenders Form Funds Compliantly
At Geraci LLP, we guide private lenders through every step of fund formation:
- Selecting the optimal fund structure tailored to investor goals and state laws
- Preparing and filing required federal and state securities notices
- Drafting clear, enforceable offering documents and agreements
- Advising on lender licensing and regulatory compliance
- Coordinating tax planning and reporting strategies
Our nationwide experience ensures your fund formation meets all legal requirements while positioning your fund for long-term success.
State-Specific Legal Expertise Is Essential
Forming a private lending fund requires more than just legal paperwork — it demands a deep understanding of nuanced state and federal laws. With legal frameworks varying widely across states, private lenders must work with experienced counsel to avoid costly mistakes and ensure compliance.
Geraci LLP combines industry expertise with a state-by-state approach to help private lenders launch their funds confidently and efficiently. Contact us today to discuss how we can support your private lending fund formation needs.
