Key Takeaways

  • Launching a public closed-end fund under the Investment Company Act of 1940 requires up to 18 months of unpaid preparation before earning a dollar in management fees.
  • Regulatory overhead forces founders to hire a full-time CFO, a Chief Compliance Officer, two outside law firms, and a second in-house general counsel before launch.
  • Public closed-end venture vehicles like Powerlaw Corp. (Nasdaq: PWRL) replace standard 20 percent carried interest with management fees pegged to net asset value (NAV) growth.
  • Securities attorneys regularly struggle with translating illiquid private technology secondaries into a 1940 regulatory framework built for public equities and mutual funds.

The 18-Month Regulatory Sunk Cost

Running a private venture fund is operationally light compared to the public alternative. A standard GP raises capital via a limited partnership agreement, calls capital over several years, collects a two percent fee on committed capital, and waits for a carried interest payout on exits.

Benjamin Black took a different path with Powerlaw Corp. (Nasdaq: PWRL), structuring it as a publicly traded closed-end fund under the Investment Company Act of 1940 to hold private technology assets. The choice provides permanent capital, but it brings an aggressive compliance apparatus.

“The opportunity for closing fund is created by something called the 1940 act,” Black said. “The 1940 act is the same law that created index funds, ETFs, mutual funds, interval funds, and then closed end funds are like this little dirty stepchild that people don't use so much.”

For an emerging manager, private fund formation takes standard legal templates and a few months. Launching a 1940 Act vehicle requires absorbing deep financial pain before the ticker trades. Black spent 18 months in preparation without collecting fees.

The regulatory baseline demands immediate institutional payroll before reaching the market. “I had to hire a full-time very fancy CFO,” Black noted. “I had to have hire a chief compliance officer. I had to hire two law firms. I had to hire second general counsel and to deal with the regulatory side of the businesses full-time.”

The legal translation layer creates friction because securities attorneys rarely handle venture secondaries inside 1940 Act wrappers. “I spent my life translating how these venture assets are supposed to fit in the framework created by law in 1940,” Black said. “There's tremendous uncertainty. The lawyers don't really understand it.”

Trading Carried Interest for NAV Fees

The economics of a public closed-end fund force a break from classic venture compensation. Traditional private fund managers look to carried interest for the bulk of their earnings. A 1940 Act public vehicle eliminates that mechanism entirely.

“Our fees are based on net asset value,” Black explained. “So, as net asset value goes up, our fees go up. We can't get carried interest. So that's a downside, but you can get a little pieces of the fund at the beginning.”

This structure shifts the manager's financial profile from transactional carry spikes to steady asset growth. The vehicle earns its revenue by expanding portfolio NAV through valuation appreciation and new share issuance. Because fees do not turn on until the shares list publicly, managers carry all upfront operational expenses on their own balance sheets during the filing process.

“Doing this from scratch, it does require and like I said, you have tremendous amount of upfront costs and you don't get your fees until you're actually trading in the public markets and that takes a long time,” Black said.

Why It Matters

As late-stage technology companies stay private for 12 to 15 years, the push to create evergreen liquidity is pulling managers toward permanent capital vehicles. The structural tradeoff is steep: sponsors gain permanent public liquidity for retail and institutional LPs, but they trade away carried interest upside and take on compliance friction that prices out undercapitalized operators.