Do You Need a License to Start a Hedge Fund?

You don’t need a single “license to start a hedge fund,” because no such license exists. What the law actually requires is that the person or firm managing the money register as an investment adviser with either the SEC or a state securities regulator, that the individuals giving advice hold the appropriate qualification (usually the Series 65), and that the fund itself be structured to fit within specific exemptions from the Investment Company Act and the securities registration rules. Skip any of those layers when it applies to you and the consequences are real: willful violations of the Investment Advisers Act carry fines up to $10,000 and up to five years in prison.¹

The Three Layers Behind the Word “License”

When people ask whether they need a license to run a hedge fund, they’re usually collapsing three separate requirements into one. The first is firm-level registration as an investment adviser. The second is individual qualification for the people providing advice. The third isn’t a license at all but a set of filings and structural choices that keep the fund itself out of regulatory categories it can’t function in. Each one is independent, and satisfying one doesn’t satisfy the others.

The firm-level piece is the heart of it. Under the Investment Advisers Act, anyone who takes compensation for advising others on securities must register, and running a hedge fund fits that definition even if you advise only a single fund holding outside capital.² Registration also brings a fiduciary duty. The SEC has stated that this duty, grounded in the Advisers Act, includes both a duty of care and a duty of loyalty, so the adviser must act in the client’s best interest and disclose material conflicts.³ For a hedge fund manager, that duty runs to the fund and its investors.

SEC or State: Which One Registers You

Whether you file with the SEC or with a state depends on how much money the firm manages. The line is $100 million in assets under management. Below that, you generally register at the state level. At or above it, you register federally with the SEC.⁴

A buffer exists around that line so firms aren’t switching regulators every quarter. You may register with the SEC at $100 million, must register at $110 million, and don’t have to deregister until AUM falls below $90 million.⁴ Firms with less than $25 million in AUM generally can’t register with the SEC at all and must go through their state.

Either way, the registration document is Form ADV, filed electronically through the Investment Adviser Registration Depository (IARD) with a filing fee that scales to AUM: $40 under $25 million, $150 from $25 million to $100 million, and $225 at $100 million or more. Exempt Reporting Advisers pay $150.⁵ The SEC has 45 days from the electronic filing date to grant registration or begin proceedings to deny it, and if the staff finds the application incomplete or unclear, a new 45-day clock starts when you resubmit.⁶ State registration involves its own fees and timelines that vary by jurisdiction, and if you operate across state lines, expect notice filings in each state where you have clients or a place of business.

When You Can Skip Full Registration

The Advisers Act carves out a few exemptions that let you avoid the full registration process, though every one comes with strings attached and none frees you from the anti-fraud rules.

The most common route for new managers is the private fund adviser exemption. If you advise only private funds and your total U.S. private fund assets stay below $150 million, you qualify under Section 203(m) as an Exempt Reporting Adviser. ERAs file an abbreviated Form ADV and skip full registration but remain subject to the Act’s anti-fraud provisions.²⁷ The venture capital fund adviser exemption goes further, exempting advisers who manage only VC funds from registration entirely while still requiring reports. The foreign private adviser exemption covers non-U.S. advisers with no U.S. place of business, fewer than 15 U.S. clients, and less than $25 million in U.S. AUM.

Being an ERA at the federal level doesn’t automatically clear you at the state level. Many states track the federal exemption but add their own filings for ERAs with an in-state place of business and a threshold number of fund clients (often five or six), plus fees and sometimes recordkeeping rules the SEC doesn’t impose, including requirements around proxy voting. Check with the securities regulator in every state you touch.

The Series 65 and Individual Qualification

The closest thing to a personal “hedge fund license” is the Series 65, formally the Uniform Investment Adviser Law Examination. Most states require investment adviser representatives — the individuals who actually provide advice on behalf of a registered firm — to pass it. FINRA administers the exam, which covers securities regulation, ethics, and investment analysis.⁸

The Series 65 has 130 scored questions, a 180-minute time limit, and requires 92 correct answers to pass. The fee is $187. Holders of certain designations, including the CFA, CFP, ChFC, and PFS, can waive the exam in most jurisdictions, though the waiver process varies by state. Representatives are also subject to continuing education in states that have adopted the NASAA model rule, so the exam isn’t a one-time hurdle. State registration fees for representatives run from nothing to a couple hundred dollars per state per year, plus a small IARD fee.

The Fund Itself Has to Fit an Exemption Too

The fund entity is separate from the management firm, and it faces its own regulatory question. A pooled investment vehicle holding securities could technically qualify as an “investment company” under the Investment Company Act of 1940, which would drag it into the mutual-fund rulebook. Hedge funds avoid that by fitting into one of two exemptions.

Section 3(c)(1) exempts a fund whose securities are held by no more than 100 beneficial owners, provided the fund makes no public offering.⁹¹⁰ The choice between the two shapes marketing, minimum investment sizes, and who you can even talk to.

Selling Fund Interests: Regulation D and Form D

Hedge fund interests are securities, and hedge funds don’t register those securities the way a company going public would. They rely on Regulation D private-placement exemptions. Rule 506(b) allows unlimited capital raising without general solicitation — no public advertising — and requires a “reasonable belief” that each investor is accredited. Rule 506(c) permits general solicitation, including public advertising, but you must take “reasonable steps to verify” that every investor is accredited, not merely form a belief.¹¹ Verification usually means reviewing tax returns or bank statements, or getting a licensed professional’s written confirmation. Most hedge funds still use 506(b) because 506(c) verification is heavy and the investor base tends to come through existing networks.

An accredited investor, for reference, is someone with net worth over $1 million (excluding primary residence) or annual income above $200,000 individually or $300,000 jointly for the past two years, with a reasonable expectation of the same in the current year; certain entities, trusts, and holders of professional certifications also qualify.¹²

Whichever rule you use, you must file Form D with the SEC no later than 15 calendar days after the first sale of fund interests.¹³ Most states require a corresponding notice filing, often called a “blue sky” filing, generally consisting of a copy of the Form D and a fee.

What Happens If You Skip Registration

Operating without registration when you’re required to have it is a federal crime. Beyond the willful-violation penalties in the opening paragraph, the SEC can impose administrative fines starting at $5,000 per violation for a natural person and scaling to $100,000 per violation where conduct involved fraud or produced substantial losses.² These penalties apply per violation, so a series of unregistered activities can stack quickly.

Life After Registration

Registration is the beginning of the compliance obligation, not the end of it. SEC-registered advisers must adopt written compliance policies and procedures reasonably designed to prevent violations of the Advisers Act, review them at least once a year, and designate a chief compliance officer to administer them.¹⁴ For a small fund, the CCO is often one of the founding principals, but the role carries real work — the annual policy review by itself is a substantial project.

Hedge fund managers with custody of client assets, which most managers have because the general partner typically controls fund accounts, face extra rules. The standard approach for pooled vehicles is an annual audit by an independent public accountant, with the audited financial statements distributed to all investors within 120 days of fiscal year-end.¹⁵ Skip the audit and you’re subject to surprise examinations instead, with the accountant required to notify the SEC within one business day of discovering any material discrepancy.

Form ADV also needs an annual updating amendment within 90 days of fiscal year-end, and the annual filing fee is the same as the initial fee.⁵ On top of that, recordkeeping rules require detailed books and records — trade memoranda, client communications, financial statements, written recommendations — kept in specific categories the SEC can examine at any time. These aren’t internal best practices. Failing to maintain them can trigger enforcement on its own.

1
Office of the Law Revision Counsel. 15 USC 80b-17 – Penalties
2
Office of the Law Revision Counsel. 15 USC 80b-3 – Registration of Investment Advisers
3
Securities and Exchange Commission. Commission Interpretation Regarding Standard of Conduct for Investment Advisers
4
SEC.gov. Transition of Mid-Sized Investment Advisers from Federal to State Registration
5
U.S. Securities and Exchange Commission. Electronic Filing for Investment Advisers on IARD: IARD Filing Fees
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Securities and Exchange Commission. Frequently Asked Questions on Form ADV and IARD
7
eCFR. 17 CFR 275.203(m)-1 – Private Fund Adviser Exemption
8
FINRA.org. Series 65 – Uniform Investment Adviser Law Exam
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Office of the Law Revision Counsel. 15 USC 80a-3 – Definition of Investment Company
10
Legal Information Institute. Definition: Qualified Purchaser from 15 USC 80a-2(a)(51)
11
U.S. Securities and Exchange Commission. Assessing Accredited Investors under Regulation D
12
eCFR. 17 CFR 230.501 – Definitions and Terms Used in Regulation D
13
Securities and Exchange Commission. Form D – Notice of Exempt Offering of Securities
14
eCFR. 17 CFR 275.206(4)-7 – Compliance Procedures and Practices
15
U.S. Securities & Exchange Commission. Final Rule: Custody of Funds or Securities of Clients by Investment Advisers