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Initial Equity Raising for RIA

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Dec 14, 2009 6:06 pm

Currently running a practice inside of a large B/D, and I’m in the final stages of business planning for my proposed RIA firm. The next step for me is raising equity investments from clients and non-clients alike in the metropolitan area (two states). Looking for any guidance any of you can provide for these 2 questions: 1.) Is there anything I need to watch out for when raising capital under FINRA rules from clients or even common practices from B/D’s on this and 2.) any additional requirements when establishing the RIA about equity investments from clients. I will not be taking custody of the assets, as they will be held at a RIA custodian. Thanks for the insight everyone.

Dec 14, 2009 6:59 pm

That’s tricky.  Your firm may consider the “equity investments” as loans from clients, which is not allowed under FINRA rules (if unrelated to you), or your firm may consider them private placements and you will be in trouble for selling non-registered securities / selling “away” from the firm, etc (ironic because you are using them to leave the firm).

  Why not just use your own money?
Dec 15, 2009 12:52 am

I echo the statement of why not just do it yourself?

Dec 15, 2009 1:06 am

Would a state registered RIA have such restrictions, or just a FINRA Registered Representative? If just FINRA RR, do you believe this conflict would go away immediately upon terminating my employment relationship to begin the RIA? (IE: If I have aligned the capital but not yet accepted it, I can resign and them finalize agreements and accept payments).

As for your question of why, because of the employment agreement I have, I will not be soliciting current AUM under my B/D and will be starting from 0. As such, my business will not be cash flow positive for for 12-24 months safely by my projections, and I do not mind selling a portion of my equity for the safety of continued operation through a potential slow start. This will be a requirement for my business plan.

Dec 15, 2009 1:49 am

Good Evening WCallahan,

  FINRA has specific rules relating to that type of practice.  Whether or not the rules would apply at the State RIA Level varies.  You'll want also to remember that even if your home RIA Resident State might be liberal in this area, your other Non-Resident RIA State might have different interpretations.  I'd advise seeking competent counsel from an RIA Compliance Consultant for guidance on this issue.    Feel free to contact me and I'll be happy to share with you the RIA consultants I recommend.  Your business plan sounds quite interesting and I wish you the very best of luck.
Dec 15, 2009 2:08 am

Yes, be careful and find a good attorney. A fellow colleague formed his RIA while still employed at a firm. Technically, the RIA is an outside activity and needs to be disclosed (great if you are trying to sneak out). His old firm sued him for taking clients (this may not be a problem for you) BUT the big kicker was, the old firm pulled up his RIA registration dates and sent it to FINRA. He had to draft up a response letter -but nothing ever came about it.

If he was approaching people about selling a portion of his RIA before he quit it may have been a big issue.

Dec 15, 2009 2:26 am

You should also not put your real name on this forum…

Dec 15, 2009 2:12 pm

Thanks everyone for your responses, I will.

Squash, you’re probably right also, but I intend to do this fully in a way compliant with the law and my firm policies. Should they review this, they’ll find consistent evidence of compliance.

At most, they could get mad at me for “planning” to leave them, and help me along the way I suppose. I do not plan to violate the non-solicitation agreement before or after my potential move.