Exemptions

Table of Private Fund Exemptions of Multiple States

May 3, 2012 | Steve Parker

Numerous states have recently adopted or proposed rules that exempt hedge funds, or “private funds” from the registration requirement of those states’ investment adviser laws. We have previously blogged about a number of state rules including those in Virginia, California, Maine, Massachusetts, Wisconsin, Colorado and Rhode Island. The majority of the rules are similar to one another; however, there are a few key differences. Attached is a table detailing the similarities and differences among the seven different states.
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Colorado Adopts Private Fund Adviser Exemption

April 30, 2012 | Steve Parker

Colorado is the ninth state to adopt a private fund adviser exemption by rule. The exemption became effective on March 30, 2012. The other states that have created similar rules are California, Indiana, Maine, Massachusetts, Michigan, Rhode Island, Virginia, and Wisconsin, most of which we have already blogged about.

The Colorado rule exempts investment advisers who manage one or more “venture capital funds,” as defined by Rule 203(l)-1 under the Investment Advisers Act of 1940 (“Advisers Act”), and who comply with the SEC Rule 204-4 reporting requirements. Investment advisers that are relying on this exemption will not be required to file the SEC Rule 204-4 reports with the Colorado Securities Commissioner. The rule also incorporates by reference the “grandfather” provision in Rule 203(l)-1(b) under the Advisers Act. Similar to the rules adopted in other states, it also exempts investment adviser representatives who are employed by or associated with an investment adviser that is already exempt under a private fund exemption. Finally, any investment adviser who is subject to disqualification under the “bad boy” provisions in Rule 262 of SEC Regulation A will not be entitled to the exemption.
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Rhode Island Issues Proposed Private Fund Exemption

April 10, 2012 | Steve Parker

Like numerous other states, Rhode Island has issued a proposed private fund exemption. We have previously discussed various other states that have created the same type of rule in Multiple States Create Private Fund Adviser Exemption, Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, and California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule.

Under the proposed rule, in order for a private fund adviser to be exempt from registration, the private fund adviser has to satisfy a number of conditions: (1) neither the advisers nor their advisory affiliates are subject to “bad boy” disqualification provisions under Rule 262 of SEC Regulation A, (2) pursuant to SEC Rule 204-4, the private fund adviser files with the state each report and amendment that an exempt reporting adviser is required to file with the Securities and Exchange Commission, and (3) the private fund adviser pays a $300 fee.
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JOBS Act Passes Both Chambers and Will be Sent to President

April 2, 2012 | Steve Parker

The House passed the Jumpstart Our Business Act (JOBS Act) again this week with a 380 to 41 vote after the Senate sent it back with amendments. Last week, the Senate passed the JOBS Act with a 73 to 26 vote. The House of Representatives originally passed the bill with an overwhelming majority on March 9, which we discussed in House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act.

The JOBS Act received significant bipartisan support. House Majority Leader Eric Cantor (R-Va.) stated that the bill was “an increasingly rare legislative victory in Washington where both sides seized the opportunity to work together, improved the bill and passed it with strong support.” President Obama has shown strong support for the bill, and he has said he will sign it as soon as it is sent to him.
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Multiple States Create Private Fund Adviser Exemption

March 28, 2012 | Steve Parker

Three more states have taken action either to adopt a private fund exemption or to create an interim exemption until final rules are proposed. As previously discussed in California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule and Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers, California and Virginia have already started the process of creating a private fund adviser exemption. The states which have adopted exemption provisions most recently are Maine, Massachusetts and Wisconsin.

Maine issued an interim order exempting private fund advisers from registration, which became effective on February 16, 2012. It will remain effective until a private fund adviser rule is proposed. According to the exemption, in order to be exempt:

The investment adviser must advise one or more “qualified private funds” which are defined in SEC Rule 203(m)-1;
The adviser must maintain a place of business in Maine;
The adviser cannot hold himself/herself out to the public as an investment adviser;
Neither the adviser nor their advisory affiliates may be subject to “bad boy” disqualification provisions which are defined in Rule 262 of SEC Regulation A; and
Under Rule 204-4 of the Investment Advisers Act of 1940, the adviser must file with the Maine Office of Securities the SEC-filed reports and amendments required for exempt reporting advisers.

If a private fund adviser advises at least one 3(c)(1) fund, defined in the Investment Company Act of 1940, that is not a venture capital fund, the fund must satisfy the same additional requirements of the Virginia Proposed Rule that we have previously discussed. (A 3(c)(1) fund is a fund with less than 100 beneficial owners and which does not presently propose to make a public offering of its securities.)
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House of Representatives Pass Crowdfunding Bill for the Second Time in JOBS Act

March 9, 2012 | Steve Parker

With an overwhelming majority, 390 to 23, the House of Representatives passed another crowdfunding bill on March 9, 2012. The House had previously passed a similar bill in November 2011 called the “Entrepreneur Access to Capital Act” which we previously discussed in a blog, New “Invest Georgia Exemption” Helps Small Businesses Raise Capital. That Republican bill stalled in the Democratic-controlled Senate, as did another bill related to crowdfunding requirements which included lower investment amounts and the requirement to use a “crowdfunding intermediary.” The Senate currently has three crowdfunding bills before it, although none of the bills have yet to move out of committee. The Senate Banking Committee did hold another hearing on the topic of crowdfunding earlier this week.

The bill that passed most recently in the House was originally introduced by Representative Patrick McHenry (R-NC) and was rolled into a broader package called the Jumpstart Our Business Startups (JOBS), which included six bills bundled together. Rep. McHenry stated, “Crowdfunding is a key component of the JOBS Act. Economists predict the legislation will lead to a ten percent increase in new business startups, helping to create at least 170,000 jobs in the next five years. The bill is critical in getting our economy back on the right track.”
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Virginia Releases Proposed Rule Amending Its Exemption for Private Fund Advisers

February 27, 2012 | Steve Parker

Virginia’s previous private fund adviser exemption could be short-lived because it may be replaced by a new proposed rule. The previous rule was effective September 7, 2011 and the current proposed rule is expected to be effective on May 1, 2012. Interested persons may submit their comments on the proposed rule on or before April 12, 2012. This new rule is also currently being considered by California, Massachusetts and Rhode Island. We previously discussed the California proposed exemption rule in a blog, California Extends Comment Date on its Proposed Private Fund Exemption Rule.

Currently, the rule provides for an exemption for any adviser where the adviser advises only clients that are either a corporation, general partnership, limited partnership, limited liability company, trust or other organization that:

Has assets of $5,000,000 or more and
Receives investment advice based on the investment objectives of the entity instead of individual investment objectives, provided that the adviser was exempt from registration pursuant to §203(b)(3) of the Investment Advisers Act of 1940 and the adviser is subject to SEC rule 203 1(e).

California Extends Public Comment Date on Its Proposed Private Fund Exemption Rule

February 16, 2012 | Steve Parker

The California Department of Corporations has extended the comment period for a proposed rule to amend Rule 260.204.9 of Title 10 of the California Code of Regulations, which exempts private advisers from registration under certain circumstances. The public comment period for this exemption was extended from February 20, 2012 to March 25, 2012. To date, there are no public hearings scheduled; however comments may be mailed to the Department of Corporations.

The amended proposed rule significantly changes the current rule in place. Currently, the rule provides for an exemption for any adviser that:

Has had fewer than 15 clients in the preceding 12 months;
Does not hold itself out to the public as an investment adviser;
Does not act as an investment adviser to a registered company or a company that has elected to be a business development company; and
Either has assets under management of $25 million or more or provides investment advice solely to one or more venture capital companies.

New “Invest Georgia Exemption” Helps Small Businesses Raise Capital

January 10, 2012 | Steve Parker

The Georgia Commissioner of Securities recently adopted the “Invest Georgia Exemption,” which will make it easier and less expensive for almost any small business located in Georgia to raise capital from fellow Georgians. Unlike most other securities registration exemptions, the Invest Georgia Exemption allows businesses to engage in public solicitations of investors, provided certain conditions are met.

Any business wanting to raise capital using this new exemption must be a corporation or limited liability company (LLC) organized in Georgia and registered with the Secretary of State. In addition,

The offering of securities must meet the federal exemption for intrastate offerings requirements, Rule 147, meaning all investors must be Georgia residents;
The total amount raised cannot exceed $1,000,000, not including investments from control persons of the business;
Unaccredited investors (as defined by the SEC) may not invest more than $10,000 each. However, there is no investment limitation for accredited investors;
All investments received must be deposited in an institution authorized to do business in the state of Georgia;
The issuer must file a form of notice with the Commissioner briefly explaining the offering. The notice may be filed after sales have been made, unless there is any general solicitation, in which case the notice must be filed prior to the solicitation; and
The issuer must inform the purchaser that the securities have not been registered and that there are resale restrictions.

Dodd-Frank Registration Requirements Driven By State Law Distinctions

September 7, 2011 | Steve Parker

Now that the effective date of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank) has arrived and the SEC has adopted rules implementing changes to the investment adviser registration regime, the landscape can be relatively confusing. For investment advisers currently registered either with the state in which it maintains its principal office or with the SEC, the new rules are fairly easy to apply, particularly in light of the transition rules adopted on June 22, 2011 by the SEC as explained in Parker MacIntyre’s previous post. For others, however, the application of the new rules will prove more complicated, particularly for those advisers whose principal office and place of business are in states that have unusual registration or regulatory provisions.

Take, for example, Wyoming. Since that state does not provide for investment adviser registration, it has always been somewhat of an anomaly, even before Dodd-Frank. Section 203A(a)(1) of the Investment Advisers Act only prohibits registration with the SEC of investment advisers who have assets under management of less than $25 million and are “regulated or required to be regulated as an investment adviser in the State in which it maintains its principal office and place of business.” Wyoming-based advisers must therefore register with the SEC regardless of their assets under management, unless otherwise exempt from registration under the Investment Advisers Act or a private adviser able to rely upon the transition rule provided in 203-1(e).
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