How to Legally Invest Other People’s Money in the United States

Investing other people’s money can mean managing a family member’s account, advising clients, trading a pooled fund, or raising capital for an investment. Each arrangement can trigger different federal and state rules. The key is to identify the role being performed, the way compensation works, and whether money is being pooled or solicited before accepting funds. This guide explains the main legal considerations, common registration paths, and practical steps for operating compliantly in the United States. It is general information, not legal or tax advice.

What It Means to Invest Other People’s Money

There is no single legal structure for investing on someone else’s behalf. A person may provide investment advice, exercise discretion over a client’s account, sell securities, manage a private fund, or simply invest alongside others. Those activities can fall under different laws, including the Investment Advisers Act of 1940, state securities laws, the Securities Act of 1933, and broker-dealer regulations.

The legal analysis depends on the actual activity—not just the title used. Calling someone a “consultant,” “money manager,” or “partner” does not by itself avoid regulation. Before accepting money or making investment decisions, determine which of these roles applies:

• Investment adviser: A person or firm that, for compensation, provides advice about securities or manages securities portfolios may meet the federal or state definition of an investment adviser.
• Fund manager or general partner: A manager who pools investors’ capital may have investment-adviser obligations and must consider the rules governing the fund’s offering and structure.
• Broker or placement agent: A person who solicits investors or arranges securities transactions for compensation may need broker-dealer registration.
• Account manager: A person with authority to trade in a client’s account may have advisory, contract, custody, and operational obligations even when the client retains ownership of the account.

Decide Whether Registration Is Required

Investment advisers generally must register with the Securities and Exchange Commission (SEC) or one or more state securities regulators, unless an exclusion or exemption applies. The correct regulator depends on factors such as assets under management, the adviser’s location, client types, and the nature of the business. Many smaller advisers register with states; certain larger advisers register with the SEC. The rules contain specific thresholds and exceptions, so an assets-under-management figure alone does not settle the question.

Some private fund advisers may qualify for an exemption from SEC registration, but “exempt” does not necessarily mean unregulated. Advisers relying on the private fund adviser exemption generally file as exempt reporting advisers with the SEC, while advisers relying on the venture capital adviser exemption also have reporting obligations. State registration or reporting requirements may still apply. Exemption conditions are technical and depend on the adviser’s activities and fund structure.

Other exclusions and exemptions can apply in limited situations, such as certain family offices or advisers whose business is confined to particular types of securities. These should not be assumed to cover an ordinary business managing outside investors’ money. Registration status should be checked before offering services, and then monitored as the business grows or its clients change.

Understand the Difference Between Managing Accounts and a Fund

Separately Managed Client Accounts

In a separately managed account, each client owns an individual brokerage or custodial account. The manager may receive limited trading authority through a written agreement, while the client’s assets remain at a qualified financial institution. This structure can make ownership and reporting clearer, but it does not automatically exempt the manager from investment-adviser laws.

Account agreements should define the investment mandate, discretion granted, fees, reporting, conflicts, withdrawal procedures, and termination rights. A manager should not take possession of a client’s funds or transfer them to a personal account. Trading authority and authority to withdraw money are different; unnecessary withdrawal authority can create serious custody and fraud concerns.

Pooled Investment Funds

A private fund pools capital from multiple investors and is commonly organized as a limited partnership or limited liability company. Investors usually buy interests in the fund, while a general partner or manager makes investment decisions. A fund interest is generally a security, so both the fund and its offering require legal analysis.

Private funds often rely on exclusions from the Investment Company Act of 1940, commonly Section 3(c)(1) or Section 3(c)(7). A 3(c)(1) fund is generally limited to 100 beneficial owners, subject to statutory details and exceptions. A 3(c)(7) fund generally limits ownership to qualified purchasers. These are fund-structure rules, not blanket permission to solicit investors or manage assets without complying with other laws.

Follow Securities Offering Rules When Raising Capital

Offering interests in a fund usually involves a securities offering. Many private funds rely on Regulation D under the Securities Act. The exemption used determines how the offering may be marketed, who may invest, and what filings and verification steps are required.

• Rule 506(b): An issuer generally cannot use general solicitation or advertising. It may sell to an unlimited number of accredited investors and, subject to additional requirements, up to 35 sophisticated non-accredited investors. Required disclosures and other conditions can apply.
• Rule 506(c): General solicitation is permitted, but every purchaser must be an accredited investor, and the issuer must take reasonable steps to verify accredited status.
• Form D: An issuer relying on Regulation D generally files a notice with the SEC after the first sale. State “blue sky” notice filings and fees may also be required.

Accredited-investor status is defined by SEC rules and may be based on income, net worth, or certain professional credentials or entity criteria. An investor’s verbal assurance may not be enough, particularly for a Rule 506(c) offering. The issuer should document its process and keep offering records.

Offering documents commonly include a private placement memorandum, subscription agreement, and limited partnership or operating agreement. Their content depends on the offering, but investors need accurate information about strategy, fees, risks, conflicts, liquidity, valuation, and the manager. Antifraud provisions apply even when an offering is exempt from registration. Misleading statements, material omissions, or unrealistic performance claims can create liability.

Do Not Overlook Broker-Dealer Rules

A person who finds investors, negotiates securities transactions, or receives compensation tied to the amount raised may be acting as a broker. Transaction-based compensation—such as a percentage of capital raised or a success fee—is a significant warning sign. Calling it a “consulting fee” does not determine its legal status.

Broker-dealer registration requirements can apply to fund sponsors, employees, finders, or third-party placement agents. There is no broad, automatic federal exemption for anyone described as a finder. Before paying someone to solicit investors or compensate a person for fundraising, securities counsel should review the proposed activities and compensation. Unregistered brokerage activity can expose both the intermediary and the issuer to enforcement action and other consequences.

Meet Fiduciary, Disclosure, and Compliance Duties

Registered investment advisers owe fiduciary duties to their clients. The SEC describes those duties as including a duty of care and a duty of loyalty. In practice, advisers should provide advice in the client’s best interest, disclose material conflicts fully and fairly, and avoid putting their own interests ahead of clients’ interests.

Common conflicts include management fees, performance compensation, investments in affiliated products, allocations among accounts, personal trading, valuation of illiquid assets, and referrals. Disclosing a conflict does not always make it acceptable; some conflicts may need to be avoided or managed through controls. Disclosures should be clear enough for investors to understand the conflict and its practical effects.

Registered advisers generally need written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act and its rules. Depending on the business, compliance work may include a code of ethics, advertising review, personal trading controls, books and records, privacy safeguards, business continuity planning, custody procedures, and periodic compliance reviews. State-registered advisers may have different or additional requirements.

Handle Client Assets and Records Carefully

Custody rules are especially important when an adviser holds client funds or securities, has authority to withdraw them, or has certain other forms of access. Advisers with custody may face requirements involving qualified custodians, account statements, and examinations or audits, subject to the rule’s terms and exceptions. A private fund adviser’s audit approach can involve specific conditions; it should be designed with counsel and an independent accounting firm rather than assumed to satisfy the rules automatically.

Using an independent custodian, keeping client assets separate from business assets, reconciling accounts, and limiting access can reduce operational risk. Records should support trades, fee calculations, investor qualifications, disclosures, valuations, and communications. Records-retention duties vary by regulatory status and document type, so a written retention schedule is useful.

Set Up Fees, Performance Claims, and Tax Reporting Properly

Fees should be authorized in written agreements and disclosed in a way clients can understand. A management fee may be based on assets under management or committed capital, while a performance fee or carried interest may be subject to eligibility restrictions and detailed calculation rules. Federal and state laws can limit performance-based compensation for certain clients or advisers. The applicable definition of a “qualified client” and current thresholds should be confirmed before using such fees.

Performance presentations require particular care. Returns should be calculated consistently, supported by records, and presented with material assumptions and risks. Advisers subject to the SEC marketing rule must follow requirements for advertisements, testimonials and endorsements, third-party ratings, and hypothetical performance. Other advisers may face separate state rules and antifraud standards.

Fund structures also create tax and reporting work. Partnerships typically issue Schedule K-1 forms to investors, while other structures may have different tax treatment. A fund’s legal form does not determine its tax result in every circumstance. A qualified tax professional should review entity formation, allocations, carried interest, state filings, and investor reporting before launch.

A Practical Legal Checklist Before Accepting Money

1. Define the activity: Identify whether the business will advise, manage accounts, pool capital, sell securities, or perform more than one role.
2. Choose the structure: Compare separately managed accounts with a pooled fund, including ownership, costs, liquidity, governance, and reporting.
3. Confirm regulatory status: Analyze SEC and state adviser registration, reporting, and any applicable exclusions or exemptions.
4. Plan the offering: Select a securities exemption, set investor eligibility standards, prepare disclosures, and calendar federal and state filings.
5. Review fundraising compensation: Check whether anyone soliciting investors or receiving transaction-based compensation needs broker-dealer registration.
6. Prepare documents and controls: Draft agreements and disclosures, establish custody and recordkeeping procedures, and adopt compliance policies appropriate to the business.
7. Use qualified professionals: Engage securities counsel, a tax adviser, and an independent fund administrator or accountant where appropriate.

Reliable Sources for Further Research

Primary sources are the best starting point because registration and offering rules depend on specific facts. The SEC’s Investment Adviser Registration resources explain federal registration concepts. Its Regulation D Offerings materials describe common private-offering pathways. The SEC also provides information on private placements and investment adviser marketing requirements.

FINRA’s materials can help explain broker-dealer registration and the risks of using unregistered intermediaries. State securities regulators, often coordinated through the North American Securities Administrators Association (NASAA), provide state-specific registration and notice-filing information. Because federal rules, state requirements, and interpretations can change, a qualified securities attorney should review the specific plan before money is solicited, accepted, or invested.