After you have created your entity and finalized the documents, you can invite investors to join the venture investment process. This step requires a lot of administrative expertise as well as compliance and legal considerations.
Investor onboarding process
Investor onboarding is the process of verifying and gathering information about potential investors, such as their identity, accreditation status, and investment preferences, before allowing them to invest in a venture or fund. The process is typically required to comply with legal and regulatory requirements, such as anti-money laundering (AML) and know-your-customer (KYC) laws. The process generally includes the following steps:
Collection of investor information: Investors are required to provide personal information, such as name, address, and government-issued ID, and financial information, such as source of funds and investment history.
Accreditation verification: In some cases, only accredited investors, as defined by securities laws, are allowed to invest. Verification of accreditation status may include income and net worth tests.
Compliance checks: The collected information is used to perform compliance checks, such as AML and KYC checks, to ensure that the investors are not involved in illegal activities, such as money laundering or terrorism financing.
Signature of subscription agreement and other legal documents: After the compliance checks are cleared, investors are required to sign a subscription agreement or other legal documents, outlining the terms and conditions of the investment and the rights and responsibilities of the investor.
Fund transfer: Once the legal documentation process is done, Investors are required to transfer the funds to the company account.
Sign SPV documents
To complete this step they must sign an operating agreement, complete all forms, and sign the signature pages of the subscription agreement
This agreement outlines the rights and restrictions of SPV. Each investor gives the SPV the following information by signing and completing the subscription agreement:
- Who or what entity subscribes?
- How much they will invest
- Additional details, such as address, phone number and tax ID numbers, entity type, and so on, are also available.
Transfer LP funds to the SPV bank account
They can do this by wire transfer, depositing a certified cheque or physically delivering cash directly to the account.
SPV compliance checks
Investors are considered onboarded once they have signed all the documents and wired their money. This step involves legal tasks such as checking subscription documents for completeness. Compliance includes KYC/AML checks (know your customer/anti money laundering), accreditation verification, conforming to investor limits, as well as following a variety of other rules and processes.
Know your customer (KYC) compliance
Know your customer (KYC) compliance is a requirement for financial institutions and other regulated companies to verify the identity of their customers and understand their financial background.
The process of KYC is an essential part of anti-money laundering (AML) compliance and is designed to prevent criminals from using the financial system to move, hide, and benefit from the proceeds of illegal activities.
KYC compliance typically includes the following steps:
Customer identification and verification: This involves verifying the customer's identity using government-issued identification, such as a passport or driver's license, and checking the customer's name against sanctions lists and other watchlists to ensure they are not a prohibited person.
Customer due diligence: This involves gathering information about the customer's financial background and their expected activities, such as their source of funds, occupation, and expected transactions.
Ongoing monitoring: This involves continuously monitoring the customer's activities and transactions to detect any unusual or suspicious behavior.
KYC requirements vary by country and by institution, but in general, financial institutions are required to collect personal information of their clients to comply with laws like AML, CTF (Counter Terrorist Financing) and sanctions laws.
Anti-money laundering (AML) compliance
Anti-money laundering (AML) compliance is a set of laws, regulations, and procedures that financial institutions and other regulated companies are required to follow in order to prevent, detect, and report money laundering activities. The purpose of AML compliance is to stop criminals from using the financial system to move, hide, and ultimately benefit from the proceeds of their illegal activities.
AML compliance includes a variety of activities such as:
- Customer identification and verification (KYC)
- Monitoring of transactions and customer activity for suspicious patterns
- Filing of suspicious activity reports (SARs) with the financial intelligence unit or regulatory authority.
KYC (Know Your Customer) process is an essential part of AML compliance, which is the process of verifying the identity of customers, understanding their financial background and monitoring their transactions for any suspicious activities.
AML regulations have been put in place in many countries as a result of international standards set by the Financial Action Task Force (FATF) and similar organizations.
Financial institutions, such as banks and money service businesses, and other regulated companies, such as broker-dealers and casinos, are required to implement AML compliance programs and are subject to examination by regulatory agencies for compliance with AML laws and regulations.
Accreditation verification is a process used to determine whether an individual meets certain financial thresholds and requirements in order to be considered an accredited investor under securities laws. Accredited investors are considered to have a higher level of financial sophistication and are therefore generally allowed to participate in investment opportunities that are not available to the general public. In the United States, the SEC define an accredited investor as:
An individual with a net worth of more than $1 million, either alone or with a spouse.
An individual with income of more than $200,000 in each of the two most recent years or joint income with a spouse of more than $300,000.
The verification process typically requires investors to provide documentation, such as tax returns, bank statements, and pay stubs, to prove that they meet the accreditation requirements.
Answering Investor Questions
Answering investor questions is an important step in the process of raising capital for a venture or fund. It typically involves working with investors to address any concerns they may have, and providing them with the information they need to make an informed decision about investing.
During this step, the company is expected to:
- Provide clear, accurate, and timely information to investors
- Respond promptly and professionally to investor inquiries
- Address any concerns that investors may have in a timely and effective manner
- Understand and provide information on the terms of the investment, including the rights and restrictions of SPV
- Explain the role of the investment and the expected return
- Update the investors with the information on the progress of the investment
Properly answering investor questions is not only an important part of building a relationship with them, but also for attracting and retaining investors. This can help in creating a sense of trust and transparency, which can further help in a smooth and successful capital raising process.
Example investor questions may include:
- "Okay, I'm signed up. Now what?"
- "Did you receive my wire?"
- "When will the deal be closed?"
- "Is the deal still open?" "Why not?"
- "Now is the deal done...finally"
- "Why haven’t the documents been sent back to me and countersigned?"
- "When can I get the documents?"
- "Is it possible to get these documents?"
Moving Ahead with Capital Raising: Satisfying Investors and Signing the Purchase Agreement
After you have addressed the concerns of all your investors to their satisfaction, you can move on to the actual capital-raising activity of your SPV, signing the purchase agreement & SPV fund wiring.