Registration Exemptions for Investment AdvisersBy: Joshua H. Watson
June 8, 2017
A person who acts as an investment adviser must register with the appropriate regulatory authorities or qualify for a registration exemption. An investment adviser generally is any person who, for compensation, engages in the business of advising others as to the value of securities, or as to the advisability of investing in, purchasing, or selling securities. Two commonly relied upon exemptions are the private fund adviser exemption and the venture capital fund adviser exemption, each of which is discussed in more detail below.
The private fund adviser exemption
An investment adviser is exempt from the requirement to register with the Securities Exchange Commission under the private fund adviser exemption if it solely advises “private funds” and its total “regulatory assets under management” are less than $150 million.
A “private fund” is a pooled investment fund that satisfies the requirements of Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940. To satisfy the requirements of Section 3(c)(1), a pooled investment fund must have fewer than 100 beneficial owners and must not make a public offering of its securities. To satisfy the requirements of Section 3(c)(7), all of the pooled investment fund’s beneficial owners must be “qualified purchasers” and the fund must not make a public offering of its securities. A qualified purchaser generally is a sophisticated investor that has a minimum amount of investable assets. For example, an individual that has more than $5 million of investments is a qualified purchaser, as is a company that has more than $25 million of investments.
An adviser’s “regulatory assets under management” are the sum of the “regulatory assets” of the private funds that it manages. A private fund’s “regulatory assets” are calculated as the sum of (a) the current market value of the fund’s assets and (b) the additional amounts that its investors are contractually obligated to contribute to the fund.
The venture capital fund adviser exemption
An investment adviser is exempt from the requirement to register with the Securities Exchange Commission under the venture capital fund adviser exemption if it solely advises “venture capital funds.” A venture capital fund is a pooled investment fund that satisfies all of the criteria listed below.
- The fund is a private fund that satisfies the requirements of Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940 (see above).
- The fund represents to investors and potential investors that it pursues a venture capital strategy.
- The fund invests at least 80% of its assets in “qualifying investments,” which generally are equity securities of privately-held companies (other than private funds) that are issued directly to the fund.
- The fund does not borrow or provide guarantees for more than 15 percent of its aggregate capital contributions and uncalled committed capital.
- Any borrowing by the fund is for a non-renewable term of 120 or fewer calendar days.
- The fund’s governing documents prohibit investors from withdrawing or redeeming their interests except in extraordinary circumstances.
A side-by-side comparison
The key characteristics of each exemption are summarized in the table below.
|Private fund adviser||Venture capital fund adviser|
|Maximum assets under management:||$150 million||Unlimited|
|Permitted clients:||Private funds only||Private funds only|
|Permitted investment strategies:||Any||Venture capital only|
|Required to register with the SEC?||No||No|
Federal v. state registration
An adviser that does not qualify for a registration exemption must register with the appropriate regulatory authorities. Unless it qualifies for an exemption, an adviser that has $100 million or more of regulatory assets under management must register with the Securities and Exchange Commission, while an adviser that has less than $25 million of regulatory assets under management must register with the state in which it has its principle office, subject to certain exceptions that are not discussed in this article. A non-exempt adviser that has $25 to $100 million of regulatory assets under management must register with the state in which it has its principal office, unless the adviser would not be “subject to examination” by that state’s securities authority (in which case the adviser must register with the Securities and Exchange Commission).
Regulation of “exempt” advisers
An adviser that qualifies for a registration exemption will be relieved of some of the more burdensome regulatory requirements that apply to SEC-registered investment advisers. Unlike an SEC-registered investment adviser, an exempt adviser is not subject to the SEC’s rules regarding what an adviser may say in an advertisement, what records an adviser must retain, and what policies and procedures the adviser must implement to avoid violating its fiduciary and legal obligations. An exempt adviser, however, remains subject to a range of other regulations that are intended to protect investors. An exempt adviser, for example, remains subject to federal anti-fraud and pay-to-play regulations, must periodically report information about itself on part 1 of Form ADV, and remains subject to inspection by regulatory authorities. Exemption from registration therefore does not mean exemption from regulation.
For more information, please contact Josh Watson.