The Dodd-Frank Act created an exemption from SEC registration for investment advisers who advise only “private funds.” Under the exemption, the investment adviser must (1) have less than $150 million assets under management and (2) advise only “private funds.” This exemption only applies to SEC registration and other requirements may still apply.
Now, a growing number of states have adopted or have proposed to adopt,rules or orders creating a state-level private fund adviser exemption including: California, Colorado, Indiana, Maine, Massachusetts, Michigan, Rhode Island, Virginia, and Wisconsin. More information regarding each of these states is at the end of this post. It is important to note, however, if this or another exemption is not available in the adviser’s home state, then state registration may be required notwithstanding this federal registration exemption. Moreover, state-registered and state-exempt advisers to one or more funds having assets of $25 million or more are generally required to report information to the SEC.
Assets under Management
The private fund exemption requires the investment adviser to manage less than $150 million in fund assets. To calculate the assets managed, the adviser must aggregate all the assets it manages pursuant to the instructions in Form ADV, using the market value of the gross assets it manages, or the fair value if the market value is unavailable. This calculation must be performed annually. If, after the calculation, the adviser exceeds $150 million, then the adviser would likely need to register, unless another exemption is available.
The adviser must solely advise private funds. An adviser may advise an unlimited number of private funds, but if the adviser has one or more clients that are not private funds, it is not eligible for the exemption and must register under the Advisers Act, unless another exemption is available.
Advisers with a Principal Office and Place of Business Inside of the U.S.
An adviser with a principal office and place of business in the United States is treated as a U.S. based manager and all of its assets will be deemed to be managed in the U.S. for purposes of the exemption, even if the adviser has offices outside of the U.S. Assets managed from offices outside the U.S. will count towards the $150 million exemption.
Advisers with a Principal Office and Place of Business Outside of the U.S.
In the case of an adviser with a principal office and place of business outside of the U.S. (a “non-U.S. adviser”), only those assets managed at a place of business within the U.S. count toward the $150 million threshold. A non-U.S. adviser would not lose the private fund adviser exemption as a result of the size or nature of its advisory or other business activities outside of the U.S. The exemption is only available as long as all of the adviser’s clients that are U.S. persons are qualifying private funds.
Although the adviser may qualify as exempt, the adviser must still file and periodically update certain items on Part 1 of the Form ADV. However, the exempt adviser would not have to complete all of the items on the Form. The exempt adviser would still be required to fill out the following: (1) basic identifying information; (2) information about the private funds it manages and the other business activities of the adviser; and (3) disciplinary history of the adviser and its employees that may reflect on the integrity of the firm.
State Private Fund Adviser Exemption Dates
California - California’s proposal had a public comment period lasted until March 25, 2012.
Colorado –Colorado adopted a private fund exemption on March 30, 2012.
Indiana –Indiana extended a 2008 registration exemption for advisers to private equity funds and venture capital funds on January 9, 2012.
Maine –Maine adopted a private fund adviser on February 16, 2012.
Massachusetts –Massachusetts adopted a private fund adviser exemption February 3, 2012.
Michigan -Michigan’s Sixth Transition Order Administering Michigan Uniform Securities Act, includes a private fund adviser exemption and was adopted on March 11, 2011.
Rhode Island – The hearing on the proposed private fund exemption will be held on April 19, 2012.
Virginia– The proposed date for the private fund exemption to become effective is May 1, 2012.
Wisconsin -Wisconsin adopted the “private fund adviser” exemption on February 27, 2012.
For additional information regarding the exemption, feel free to contact me or any other member of our Broker-Dealer and Investment Adviser Industry Group.