Establishing a fund? Cryptocurrency focused

Wondering if anyone here has experience establishing an entity for investment purposes. This would be more like a family office than a hedge fund, but focused on crypto and decentralized finance (DeFi) so with all that risk, let's call it a hedge fund. 

Backstory: I've been a crypto fan for a long time, and recently got into all the DeFi protocols and such just for myself. In talking about it with family & friends, it's clear they have interest and are eager to give me money to do it for them.

The idea is very appealing to me. However, I imagine it would be a tax nightmare if a group of people gave me $1 million and I made tons of money investing in my own name. The obvious solution is to set up an LP, LLC, or whatever and act as the general partner/manager. 

Is there anyone who's gone through this process (or something similar) and could offer some advice on how to get started?

My initial questions are:

Do I incorporate in Delaware? Or Wyoming, with its crypto-friendly environment given the nature of the assets under management?

How early and how often to involve lawyers in the process? 

With an entity established, capital raised and deployed into investments, does that immediately grant the status "institutional investor" or is there more? 

Thanks in advance for any help!

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Comments (22)

Jun 2, 2021 - 10:09pm

Setting up a foreign entity with US owners can pretty obnoxious tax compliance work. Not saying that's wrong, necessarily. 

Do you have cash for an actual law firm to give you advice, or would the cost of fund documents exceed your management fee? The most vanilla,  reasonable option is probably a Delaware LLC or Lllp with an LLC manager/GP. Not a lawyer or familiar with crypto, other than US federal treatment. 

Jun 4, 2021 - 8:15pm

Yeah the off-shore entities and such are a bridge too far, realistically if it does happen it will be a Delaware LLC with a GP, nothing special. I've read quite a bit about Wyoming with respect to crypto friendly regulation and their state legislature basically encourages the kind of business formation that Delaware accommodates for traditional purposes. Just takes a lot of time deep diving that I don't necessarily have to do it right, and if I do end up doing something like this it has to be done right from the start.

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  • Analyst 1 in IB-M&A
Jun 5, 2021 - 3:09am

Lol at all the people giving you monkey shit. I have no idea how this works, but I'd be interested in you explaining if you do it. I personally manage some money for friends/family in crypto, but I had them set up a Coinbase account to buy, then transfer the coins to my wallets and then I sent them money to take out the same way - to their Coinbase to avoid the other nightmares.

Most Helpful
Jun 7, 2021 - 2:59pm

This is exactly how it started for me. But I didn't want to do it this way because all of the gains and losses would be on my personal taxes, and having 10-20+ friends and family involved in different amounts and different strategies/appetites would make that a major headache. And I work with a lot of clients who have FLPs and investment holding companies and so on, which is the "right" way to do it if you're gonna do that sort of thing so I'd rather do it the right way with LP agreements and everything in writing so we don't ruin Thanksgiving haha. 

Just out of curiosity, how do you plan to manage the tax aspect of what you're doing? And what are your/their strategies generally?

I am most intrigued by DeFi (decentralized finance), where you can make 10-20% APR on deposits pegged to the dollar. And that's before getting into the more exotic things you can do. 

  • Research Analyst in ER
Jun 24, 2021 - 2:30pm

I'd like to see it. But i think the enviable crash would proceed. It's taxed the same as normal securities and we don't ultimately no where or if someone is controlling the various prices.

I'm all for replacing the dollar but unless you're hedged to protect. I don't see it happening.

Look to see more industry focused HF in the future such as energy only etc, much like VC is now.

Jun 24, 2021 - 2:34pm

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