Advisers Act Registration Exemptions for Venture Capital Fund Advisers and Private

July 20, 2011
Practice Groups:
Hedge Funds and
Venture Funds
Financial Services
Private Equity
Advisers Act Registration Exemptions for
Venture Capital Fund Advisers and Private
Fund Advisers: The SEC Adopts Final
On June 22, 2011, the Securities and Exchange Commission (“SEC”) issued a release adopting rules
to implement and define the scope of two new exemptions from registration under the Investment
Advisers Act of 1940 (“Advisers Act”).1 Congress created or directed the SEC to create these
exemptions in Title IV of the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted
on July 21, 2010 (“Dodd-Frank Act”). The Dodd-Frank Act exempts from registration, among others:
• advisers solely to one or more venture capital funds (“Venture Capital Advisers”), and
• advisers solely to one or more qualifying private funds with aggregate assets under management in
the United States of less than $150 million (“Private Fund Advisers”).
The Release adopts rules and definitions that give substance to these exemptions and clarify the terms
and methods of their application. Below we discuss each exemption and the rules in the Release
relating to such exemptions.
Exempted advisers do not avoid new regulation entirely. We discuss below reporting requirements
that will be applicable to Venture Capital Advisers and Private Fund Advisers (referred to collectively
in the Release as “Exempt Reporting Advisers”) that were simultaneously adopted in a separate
release (the “Reporting Release”). The Reporting Release addresses a broad range of changes to
investment adviser registration and regulation as a result of the Dodd-Frank Act.2
As also noted below, Exempt Reporting Advisers will be subject to inspections (generally only for
cause) by the SEC staff.
I. Venture Capital Advisers
Section 407 of the Dodd-Frank Act creates a new Section 203(l) of the Advisers Act, which exempts
Venture Capital Advisers from registration. The Dodd-Frank Act charged the SEC with defining the
term “venture capital fund” within one year of the Dodd-Frank Act’s enactment. The Release adopts a
definition of “venture capital fund” and also a broad grandfathering provision that would permit
existing funds that meet certain requirements to be treated as venture capital funds even if they do not
meet the definition.
A. The Definition. The Release adopts a new Rule 203(l)-1, which defines the term “venture capital
Exemptions for Advisers to Venture Capital Funds, Private Fund Advisers with Less than $150 Million in Assets Under
Management, and Foreign Private Advisers, Investment Advisers Act Release No. 3222 (June 22, 2011) (the “Release”),
available here. The rules adopted were initially proposed on November 19, 2010.
Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 3221
(June 22, 2011), available here. For a more detailed discussion of these additional changes to investment adviser
registration and reporting, see K&L Gates’ alerts on the subject, available here and here, respectively.
fund” as a private fund that:
• represents to investors and potential investors that it pursues a venture capital strategy;
• immediately after acquisition of any asset (other than “qualifying investments” (as defined below)
or “short-term holdings”3) holds no more than 20% of its aggregate capital contributions and
uncalled capital commitments in assets (other than short-term holdings) that are not qualifying
investments, valued at cost or fair value, consistently applied by the fund;
• does not borrow, issue debt obligations, provide guarantees or otherwise incur leverage in excess
of 15% of the fund’s aggregate capital contributions and uncalled capital (“Permitted Borrowing”),
and limits Permitted Borrowing arrangements to a non-renewable term of no longer than 120
calendar days (provided that the 120-day limit does not apply to guarantees of obligations of
qualifying portfolio companies (as defined below) up to the value of the fund’s investment);
• does not provide investors with redemption, withdrawal or repurchase rights, except in
extraordinary circumstances;4 and
• is not registered under Section 8 of the Investment Company Act of 1940 (“1940 Act”) and has not
elected to be treated as a business development company.
A “qualifying investment” means:
• an equity security:5
o issued by a “qualifying portfolio company” (as defined below) that has been acquired directly
by the fund from the company;
o issued by a qualifying portfolio company in exchange for an equity security issued by the
parent company or predecessor of the qualifying portfolio company; or
o issued by a company of which a qualifying portfolio company is a majority-owned subsidiary
or a predecessor acquired in exchange for an equity security described in the two bullet points
“Short-term holdings” are defined as cash and cash equivalents (meaning bank deposits, certificates of deposit, bankers
acceptances and similar bank instruments), U.S. Treasuries with a remaining maturity of 60 days or less and registered
money market mutual funds. This definition broadens the proposed definition by adding registered money market funds
as a cash management option.
The Release provides examples of “extraordinary circumstances,” including “a material change in tax law after an
investor invests in the fund” or “the enactment of laws that may prohibit an investor’s participation in the fund’s investment
in particular countries or industries.” See Release at 62. The touchstone of “extraordinary circumstances” appears to be
that “the trigger events.. are typically beyond the control of the adviser and fund investor (e.g., tax and regulatory
“Equity security” is defined in the rules by reference to Section 3(a)(11) of the Securities Exchange Act of 1934 (the
“Exchange Act”) and Rule 3a11-1 thereunder to include “any stock or similar security, certificate of interest or participation
in any profit sharing agreement, preorganization certificate or subscription, transferable share, voting trust certificate or
certificate of deposit for an equity security, limited partnership interest, interest in a joint venture, or certificate of interest in
a business trust; any security future on any such security; or any security convertible, with or without consideration into
such a security, or carrying any warrant or right to subscribe to or purchase such a security; or any such warrant or right;
or any put, call, straddle, or other option or privilege of buying such a security from or selling such a security to another
without being bound to do so.”
A “qualifying portfolio company” is a company that:
• is not a reporting company or foreign traded6 and does not control, is not controlled by, and is not
under common control with a reporting or foreign traded company, either directly or indirectly (but
private companies that begin reporting or become foreign traded will continue to qualify);
• does not borrow or issue debt obligations in connection with the venture capital fund’s investment
and distribute to the fund the proceeds of such borrowing or issuance in exchange for the fund’s
investment; and
• is not an investment company, a private fund, an issuer of asset-backed securities or a commodity
Under the adopted definition, a qualifying portfolio company must not be reporting or foreign traded
at the time of each investment made by the venture capital fund; however, a venture capital fund can
continue to hold a qualifying portfolio company’s securities once the company begins reporting,
becomes foreign traded or otherwise subsequently fails to satisfy the definition.
B. Grandfathering Provision. The Release adopts a broad grandfathering provision for existing
funds that do not meet the criteria of the venture capital fund definition. The grandfathering provision
includes as an exempt venture capital fund an existing fund that:
• represented to investors and potential investors at the time of offering its securities that it pursues a
venture capital strategy;
• prior to December 31, 2010, sold securities to one or more investors that are not “related persons”
of any adviser to the private fund; and
• does not sell securities to any person after July 21, 2011.
Given the broad scope of the grandfathering relief, the Venture Capital Advisers exemption is
primarily forward-looking in application.
C. Key Issues.
1. 20% Non-Qualifying Asset Basket. Under the exemption as originally proposed, a venture
capital fund was only permitted to hold equity securities of qualifying portfolio companies and
short-term holdings. As adopted, the exemption provides venture capital funds with greater
flexibility by permitting a fund to hold 20% of its aggregate capital contributions and outstanding
capital commitments (measured at the time of the investment) in other types of investments. This
gives a venture capital fund manager the ability (albeit limited) to pursue attractive investment
opportunities that may not fall within the parameters of a qualifying portfolio company (such as
securities acquired in a leveraged buyout or of publicly reporting companies) and to make nonequity investments related to its qualifying portfolio company investments, such as short-term
loans for bridge financing or other purposes that may take the form of pure debt, rather than a
convertible equity security.
In addition, a venture capital fund is not required to sell assets from its 20% non-qualifying assets
because of changes in the relative values of the fund’s assets. If the non-qualifying assets increase
“Reporting” is defined in the rule to mean a company that is subject to the reporting requirements under Sections 13 or
15(d) of the Exchange Act. “Foreign traded” means a company having a security listed or traded on any exchange or
organized market operating in a non-U.S. jurisdiction.
to more than 20% of aggregate capital contributions and capital commitments after purchase, the
fund is simply unable to purchase additional non-qualifying assets until the overage is remedied.
2. Opt-Outs and Other Non-Traditional Venture Fund Structures. The SEC’s definition of
“venture capital fund” envisions a traditional venture capital fund. The SEC intentionally chose
not to include venture capital funds of funds within the definition. The Release does not indicate,
however, how the SEC would treat less traditional venture fund structures, such as pledge funds
or other vehicles in which investors have opt-out rights on an investment-by-investment basis,
stating for instance that the status of the latter depends on the facts and circumstances. It is
possible that the SEC would look through these types of vehicles as facilitating individual
investments and require the adviser to treat each investor as a client, making the exemption for
Venture Capital Advisers unavailable.
3. Redemptions. The definition of venture capital fund does not define “extraordinary
circumstances” under which redemptions are permissible, but the Release provides some
guidance. The Release states that the ability to withdraw or opt out of a particular investment
could be considered to occur under “extraordinary circumstances” if the withdrawal or opt out is
triggered, for example, by a material change in law or the enactment of laws that may prohibit an
investor’s participation in the fund’s investment in particular countries or industries. Such tax or
regulatory changes would be considered extraordinary circumstances because they are “beyond
the control of the adviser and fund investor[.]”7 The Release states, however, that “a fund that
permits quarterly or other periodic withdrawals would be considered to have granted investors
redemption rights in the ordinary course even if those rights may be subject to an initial lock-up or
suspension or restrictions on redemption.”8
The SEC further notes that certain practices, such as the common practice of facilitating transfers
of fund interests in secondary transactions, could result in de facto redemption rights. The SEC
states that a fund would not be able to rely on the venture capital fund exemption if it creates such
de facto redemption options by, for example, “regularly identifying potential investors on behalf
of fund investors seeking to transfer or redeem fund interests.”9
4. Representing or Holding Out a Fund as Pursuing a Venture Strategy. A venture capital fund
must represent to investors and potential investors that it pursues a venture capital strategy.
Similarly, in order to qualify for the grandfathering relief, a fund must have made similar
representations at the time it offered its securities. This express representation requirement is a
key element of the rule’s attempt to distinguish private equity, hedge and other types of funds
from venture capital funds; in the case of the grandfathering relief, a fund’s representation to
investors that it pursues a venture capital strategy is the sole factor delineating grandfathered
venture funds from other types of funds. Advisers may find it difficult in some cases, however, to
determine whether it is representing or has represented its funds as pursuing a venture capital
strategy.10 The Release states that the analysis is based on all relevant facts and circumstances,
including “all of the statements (and omissions) made by the fund to its investors and prospective
Release at 62.
Id. at 63.
Id. at 64.
The Release states that the requirement is meant to capture “funds that do not significantly differ from the common
understanding of what a venture capital fund is[.]” Release at 65. The ambiguity inherent in the representation
requirement is made evident, however, by the SEC’s difficulty in crafting a precise definition of a venture capital fund.
investors.”11 The name of a fund is not determinative, and a venture fund need not include any
variation of “venture” or “venture capital” in its name.12 A fund that identifies itself as a hedge
fund, private equity or multi-strategy fund (in which venture capital strategies are framed as only
one of a number of strategies), however, would not meet the requirement.13 An adviser should
take great care in crafting descriptions of its funds’ strategies and its marketing materials, and
should promptly begin reviewing its past funds’ marketing materials to determine whether they
would meet the representation requirement of the grandfathering relief.
5. Limitations on Leveraged Buyouts. The rule provides that a qualifying portfolio company may
not “borrow or issue debt obligations in connection with the [venture capital fund’s] investment in
such company and distribute to the [venture capital fund] the proceeds of such borrowing or
issuance in exchange for the private fund’s investment[.]”14 The Release states that a
distinguishing feature of a venture capital fund, as opposed to a private equity buyout fund, is that
venture funds “invest capital directly in portfolio companies for the purpose of funding the
expansion and development of the company’s business, rather than buying out existing security
holders [or] otherwise purchasing securities from other shareholders[.]”15 Although the SEC
sought to limit a venture capital fund’s participation in buyouts to the 20% non-qualifying asset
basket, the borrowing limitation in the definition of a “qualifying portfolio company” restricts a
venture capital fund from participating in a leveraged recapitalization (which results in borrowed
funds being distributed to portfolio company shareholders) but does not prevent many types of
leveraged buyouts of a qualifying portfolio company. In a typical leveraged buyout, the borrowed
funds would go to the selling shareholders, not to the venture capital fund. This may be an
unintended loophole, or may be a point the SEC will clarify in later guidance.
6. Expanded but Still Restricted Ability to Manage Cash. The rule, as adopted, gives venture
capital funds limited flexibility in holding short-term investments for cash management purposes.
As adopted, the rule expands the types of permissible cash management investments by including
registered money market funds. Although the addition of money market funds is an improvement
over the proposed rule, the rule nevertheless significantly limits the types of cash management
instruments an exempted venture capital fund may use. The rule fails to include a variety of
liquid, conservative instruments venture capital funds currently use to invest cash temporarily.
7. Portfolio Company as Investment Company. The rule expressly requires that a qualifying
portfolio company not be an investment company or a “private fund,” meaning an entity that
relies on the exemptions from investment company status in either Section 3(c)(1) or 3(c)(7) of
the 1940 Act; the SEC thereby expressly intended to exclude funds of venture capital funds from
the exception to registration. On occasion, a venture-stage company may inadvertently fall within
the definition of an investment company by virtue of its cash management investments pending its
use of capital in operations or for research and development. A venture capital fund should make
certain that a potential portfolio company either is not within the definition of an investment
Id. at 67.
Id. at 66-67.
Id. The non-qualifying asset basket would allow a fund to pursue attractive strategies that may fall outside the SEC’s
conception of a venture fund strategy, but highlighting these strategies in marketing materials as a key component of a
fund’s overall strategy could cause the fund to fail the venture fund representation requirement.
Rule 203(l)-1(c)(4)(ii).
Id. at 44.
company or can rely on an exemption from registration other than those in Section 3(c)(1) or
3(c)(7) (such as 1940 Act Rules 3a-1 and 3a-8).
8. Removal of Requirement for Managerial Assistance or Control. Under the proposed rules, a
venture capital fund would have been required to either (i) offer to provide to a portfolio
company, and if the offer is accepted would have had to provide, “significant guidance and
counsel concerning the operations or business objectives and policies” of the portfolio company,
or (ii) control the portfolio company. In the Release, the SEC removed this condition, noting that
active involvement in a portfolio company’s business is not always a feature of venture capital
investing and that the level of involvement would vary among advisers and even from investment
to investment.16
9. Non-U.S. Advisers. The exemption for Private Fund Advisers, discussed below, treats non-U.S.
advisers differently than U.S. advisers. That is not the case with the exemption for Venture
Capital Advisers. Thus, while an adviser with or without a U.S. place of business may rely on the
exemption for Venture Capital Advisers, it must comply with the requirements of the exemption
with respect to all of its clients, both in the U.S. and outside the U.S.17
10. VCOC Status under ERISA. The SEC’s definition of “venture capital fund” for purposes of the
Venture Capital Advisers exemption contrasts with that of a “venture capital operating company”
(or “VCOC”) as defined in U.S. Department of Labor (“DOL”) regulations under the Employee
Retirement Income Security Act of 1974 (“ERISA”).18 Both definitions contemplate an
unregistered fund, but differ in certain other respects, a complete discussion of which is beyond
the scope of this alert. A key difference, however, relates to portfolio content. As described
above, at least 80% of the assets of a “venture capital fund” (valued at cost or fair value,
excluding short-term investments) must consist of “qualifying investments” in “qualifying
portfolio companies.” On the other hand, at least 50% of the assets of a VCOC (valued at cost,
excluding short-term investments) must consist of “venture capital investments” in “operating
companies.” “Qualifying investments” under the Venture Capital Advisers exemption include
certain equity securities issued by a qualifying portfolio company. As discussed above, the
requirement that the fund provide “significant guidance and counsel” concerning the operations or
business objectives and policies of the portfolio company was removed in the final rule. A
“venture capital investment” of a VCOC, in contrast, generally is an investment (equity or debt)
that provides “management rights” to the VCOC, which in turn are defined as contractual rights to
substantially participate in or influence the conduct of the management of the operating company.
The Venture Capital Advisers exemption generally defines “qualifying portfolio company” in the
negative by requiring in part that the company not be an investment company, private fund, issuer
of asset-backed securities, or a commodity pool. DOL regulations on the other hand define
“operating company” affirmatively as an entity “primarily engaged, directly or through a majority
owned subsidiary or subsidiaries, in the production or sale of a product or service other than the
investment of capital.” As a result, an adviser managing a venture capital fund that seeks to take
advantage of the Venture Capital Advisers exemption and avoid the application of ERISA (while
Id. at 54.
Id. at 68 (“A non-U.S. adviser may rely on the venture capital exemption if all of its clients, whether U.S. or non-U.S., are
venture capital funds.”).
DOL regulations provide that the assets of a VCOC are not considered “plan assets” of ERISA plans that may invest in
the VCOC. Consequently, the adviser of a VCOC is not required to conform to the fiduciary responsibility standards and
prohibited transaction restrictions of ERISA in its management of the fund.
allowing ERISA plans as investors) must navigate separate, not entirely consistent, regulatory
II. Private Fund Advisers
The Dodd-Frank Act creates a new Section 203(m) of the Advisers Act that exempts Private Fund
Advisers from registration. As noted above, a Private Fund Adviser is one that (1) advises only
qualifying private funds,19 and (2) has aggregate assets under management in the United States of less
than $150 million. The Release adopts a rule that (1) defines when assets are deemed to be managed
in the United States, and (2) provides a means for calculating assets under management for purposes
of the exemption’s $150 million assets under management limitation (the “AUM Limit”).
A. U.S. vs. Non-U.S. Advisers. As adopted, the Private Fund Adviser exemption applies
differently to an adviser with its principal office and place of business20 in the United States (“U.S.
Fund Advisers”) than it does to an adviser with a principal office and place of business outside the
United States (“Non-U.S. Fund Advisers”).
B. Qualifying Private Fund Clients.
1. U.S. Fund Adviser. All of the clients of a U.S. Fund Adviser, regardless of whether the clients
are U.S. or non-U.S. clients, must be qualifying private funds.
2. Non-U.S. Fund Adviser. A Non-U.S. Fund Adviser cannot have clients that are “U.S. persons”
(as that term is defined in Regulation S under the Securities Act of 1933 (“1933 Act”)) other than
qualifying private funds; however, a Non-U.S. Fund Adviser may have other types of clients that
are not U.S. persons, so long as these clients’ assets are not managed from a U.S. place of
business. (A “U.S. person” under Regulation S includes, among other persons, natural persons
resident in the United States and any partnership or corporation organized or incorporated under
the laws of the United States.) For these purposes, U.S. investors in a fund would not be treated
as clients; therefore, a Non-U.S. Fund Adviser could allow U.S. investors in an offshore fund
without being deemed to have a client in the United States that is not a qualifying private fund. A
Non-U.S. Fund Adviser must treat as a U.S. client, however, any discretionary account set up by
or for the benefit of a U.S. person by the adviser or by an affiliate of the adviser.
C. Assets Managed in the United States.
1. U.S. Fund Adviser. A U.S. Fund Adviser must include all of its qualifying private funds’ assets,
including the assets of non-U.S. private funds, in calculating its assets under management for
purposes of the AUM Limit. All of these funds are deemed managed from the United States.
2. Non-U.S. Fund Adviser. A Non-U.S. Fund Adviser, however, only has to count in the AUM
Limit calculation the aggregate assets of its U.S. qualifying private funds and other qualifying
The rule uses the term “qualifying private funds,” which is broader than the term “private fund” as that term is otherwise
used in the Advisers Act (as a result of the amendments made by the Dodd-Frank Act). A “qualifying private fund”
includes funds exempt from investment company registration under any of the exemptions in Section 3 of the 1940 Act,
and thus is not restricted, as is the case with the term “private fund,” only to Section 3(c)(1) or 3(c)(7).
“Principal office and place of business” means the executive office of the investment adviser from which the officers,
partners, or managers of the investment adviser direct, control and coordinate the activities of the investment adviser.
Rule 203(m)-1(d)(3).
private fund assets that it manages from a “place of business”21 in the United States (whether U.S.
or non-U.S. clients). Thus, a Non-U.S. Adviser without a U.S. place of business can accept an
unlimited amount of U.S. investor investments into one or more non-U.S. funds without being
deemed to manage any amount in the United States for purposes of the AUM Limit; this is a
significant exception to the Rule.
D. Calculating Assets under Management Annually; Undrawn Commitments Count.
Under the rule as adopted, a Private Fund Adviser must aggregate the value of all of its funds (or, in
the case of a Non-U.S. Fund Adviser, all of its U.S. funds managed from a place of business in the
United States) in determining whether it crosses the AUM Limit. In valuing assets of its qualifying
private funds, the Private Fund Adviser has to apply a market value standard of measurement (or,
where market value is not available, a “fair value” standard). In addition to actual assets, a Private
Fund Adviser also must include the amount of any outstanding but uncalled capital commitments and
must include proprietary assets and assets managed without compensation. The Private Fund Adviser
is not permitted to subtract outstanding indebtedness or other liabilities; thus, an adviser would not be
able to deduct accrued fees, incentive allocations or expenses or the amount of any borrowing.
A Private Fund Adviser is required to calculate and report its assets under management to the SEC on
an annual basis on the Amended ADV Part 1 (as defined and discussed below in Section III).22
E. Transition to Registration. If a Private Fund Adviser were to exceed the AUM Limit for a
year, the adviser would have up to 180 days from the end of the year to register (an additional 90 days
after the date the Amended ADV Part 1 is due). This additional 90-day period is only available to a
Private Fund Adviser that is in compliance with applicable reporting requirements, as discussed below
in Section III.
F. Key Issues.
1. State Registration. A Private Fund Adviser is exempt from federal registration, but still could be
subject to registration in one or more states. Some states appear to be contemplating exempting
Private Fund Advisers from state registration, but it is unclear whether such an exemption will be
widely adopted. If a Private Fund Adviser were subject to registration in a state, it would be
subject to regulation and inspection by state authorities as well as the reporting obligations and
SEC inspections to which Exempt Reporting Advisers will be subject (discussed below in Section
III). The North American Securities Administrators Association (“NASAA”) proposed and has
since revised and re-proposed a model exemption from state registration for certain Private Fund
Advisers.23 It is unclear, however, how widely this model exemption will be adopted by the
states, if at all.
“Place of business” means (a) an office at which the investment adviser regularly provides investment advisory
services, solicits, meets with, or otherwise communicates with clients, and (b) any other location that is held out to the
general public as a location at which the investment adviser provides investment advisory services, solicits, meets with, or
otherwise communicates with clients. See Rule 222-1(a).
The original proposed rules provided for annual reporting of assets under management but required that this calculation
be conducted quarterly.
This model exemption is narrower than the exemption for Private Fund Advisers adopted by the SEC. The model
exemption imposes additional requirements upon advisers to funds that rely on the exemption from investment company
registration in Section 3(c)(1) of the 1940 Act. Such advisers would only qualify for the model exemption if the Section
3(c)(1) funds they manage accept only “qualified clients” as defined in Rule 205-3 of the Advisers Act (a more stringent
standard than the “accredited investor” requirement normally applied to Section 3(c)(1) fund investors), and the funds
would have to provide investors with certain additional disclosures.
2. Uncalled Commitments in Calculating Assets under Management. In calculating its assets
under management in the United States, a Private Fund Adviser must include the aggregate
amount of any uncalled capital commitments. The rule assumes that these commitments are fully
committed and that investors are contractually obligated to provide the funds upon request,
subject to the terms of the fund’s governing documents. The rule and the Release do not
definitively address commitments that are conditional or that are not immediately callable. The
Release also does not address commitments that are excused in whole or in part, although it would
make sense for these to be deducted from assets under management once excused, if the excuse is
legally binding and irrevocable. In addition, some funds give investors opt-out rights for certain
investments or may allow investors to determine individually whether to participate in a specific
investment, as in the case of pledge funds and similar flexible structures that are growing in
popularity, or may allow investors to opt out of an investment for regulatory or investor-specific
reasons (such as pension funds with socially responsible or other mandates or Sharia’a compliant
investors). Thus, it is unclear how or when these types of less than fully committed capital would
be included for purposes of the AUM Limit.
3. Single Member Funds. The SEC notes that an adviser could attempt to circumvent the
requirement that it advise only “private funds” by creating single-member funds for individual
clients that would be “tantamount to separately managed accounts.”24 The Release states that
whether such a fund would be treated as a qualifying private fund for purposes of the exemption
“depends on the facts and circumstances.” The SEC would not treat as a private fund an entity
that is “nominally a ‘private fund’ but that in fact operates as a means for providing individualized
investment advice directly to the investors in the ‘private fund.’”25 The Release recognizes that
there are circumstances where a single-investor fund could justifiably be treated as a private fund,
such as situations in which all but one investor in a fund have redeemed their investment or when
a fund is in its initial start-up period and has only one investor. But, it is unclear whether a singleinvestor vehicle created at the request of an investor for liability insulation or other legitimate
business purposes would be recognized by the SEC and its staff as a qualifying private fund for
purposes of the Private Fund Adviser exemption.
4. Integration of Separate Advisers’ AUM. The Release notes that the SEC could aggregate the
assets under management of two separate but affiliated legal entities each of which, individually,
falls within the AUM Limit. The SEC states that “[t]he determination of whether the advisory
businesses of two separately formed affiliates may be required to be integrated is based on the
facts and circumstances” and cites the SEC staff’s previous guidance in the Richard Ellis, Inc. noaction letter setting forth the staff’s criteria for determining whether two related entities will be
treated as operating independently.26
III. Exempt Reporting Adviser Reporting Requirements; SEC
Venture Capital Advisers and Private Fund Advisers, while exempt from Advisers Act registration,
are nevertheless subject to certain reporting requirements. Section 204 of the Advisers Act sets forth
Release at 79. The SEC notes that “Section 208(d) of the Advisers Act anticipates these and other artifices and thus
prohibits a person from doing, indirectly or through or by another person, any act or thing which it would be unlawful for
such person to do directly.”
See Release at n. 324.
See Release at n. 506. Richard Ellis, Inc., SEC No-Action Letter (pub. avail. Sept. 17, 1981).
the recordkeeping and reporting obligations of investment advisers and authorizes SEC inspections.
The only advisers that are exempted from Section 204 are those “specifically exempted from
registration pursuant to section 203(b) of [the Advisers Act.]”
Because the Dodd-Frank Act exempts Exempt Reporting Advisers from registration under new
Sections 203(m) and (l), the SEC takes the position that Exempt Reporting Advisers are subject to
(and Congress intended them to be subject to) the reporting obligations of Section 204 and the
provision authorizing SEC inspections.
This is the major change wrought by the Dodd-Frank Act for advisers to smaller private equity and
venture capital funds, the great majority of whom have not previously been subject to any such
A. Reporting Requirements. In the Reporting Release, the SEC adopts new Rule 204-4, which
requires Exempt Reporting Advisers to complete and periodically update a limited subset of the items
required on the Form ADV Part 1A, as it is amended by the Reporting Release (the “Amended ADV
Part 1”). Exempt Reporting Advisers are not required to complete a Form ADV Part 2A or 2B.
Exempt Reporting Advisers must file and update the relevant items on the Amended ADV Part 1
through the Investment Adviser Registration Depository (or “IARD”) system currently used to file and
amend the Form ADV Part 1. This filed information will be publicly available on the IARD system.
1. Overview. The designated Items on Amended ADV Part 1 require an Exempt Reporting Adviser
to provide information regarding:
• basic identifying information, form and state of organization, location of its records, websites it
maintains, and any non-U.S. registrations (Items 1 and 3);
• the basis for the adviser’s ability to file as an exempt reporting adviser (Item 2.B);
• the name of its executive officers, direct owners and indirect owners (Item 10 and Schedules A
and B);
• other business activities of the adviser and its affiliates (Items 6 and 7.A);
• disciplinary history of the adviser and its employees (Item 11, including criminal, civil and
administrative disclosures); and
• the funds the Exempt Reporting Adviser manages (Item 7.B and related Section 7.B of
Schedule D).
2. Fund Information. Under Rule 204-4, an Exempt Reporting Adviser must provide information
about each fund it advises,27 including:
• identifying and other basic information about the fund, including its name, private fund
identification number, entity type and jurisdiction of formation, any foreign registrations and
the 1940 Act exemption upon which it relies (i.e., Section 3(c)(1) or 3(c)(7) or another
exemption in Section 3 of the 1940 Act);
• whether the fund is part of a master-feeder structure or is a fund-of-funds;
• which of seven enumerated strategies best describes the fund (e.g., hedge fund, liquidity fund,
private equity fund, real estate fund, securitized asset fund, venture capital fund or other);
An adviser with its principal office and place of business outside the United States is not required to provide information
regarding any private fund that, during the adviser’s last fiscal year, was not a U.S. person, was not offered in the United
States and was not beneficially owned by any U.S. person. See Reporting Release at 58.
• the gross asset value of the fund;28
• certain limited information about the fund’s investors, including:
o total number of beneficial owners,
o percentage of the investors that are adviser related persons, fund of funds and non-United
States persons,29 and
o the minimum investment commitment required of investors; and
information about the five types of service providers to a fund deemed “gatekeepers” by the
SEC, including the fund’s auditor, prime broker, custodian, administrator and “marketers”
(including, among others, placement agents and solicitors).
3. Initial Filing Deadline and Updates. The Reporting Release provides that an Exempt Reporting
Adviser must file their first reports through IARD between January 1 and March 30, 2012.30 An
Exempt Reporting Adviser initially must file the sections of the Amended ADV Part 1 no later
than 60 days after the adviser begins to rely on the exemption.31 Thereafter, an adviser would
have to update the information within 90 days of the adviser’s fiscal year end or “promptly” if
responses to certain Items become inaccurate (or, in the case of information about an adviser’s
control persons, materially inaccurate).
B. Key Issues.
1. Disclosure Generally. As noted above, the information an Exempt Reporting Adviser files about
itself and its funds will be publicly available. These disclosures could bring public and perhaps
unwanted attention to an Exempt Reporting Adviser and its listed control persons. Importantly,
however, an Exempt Reporting Adviser will not need to disclose publicly the names or much
identifying information regarding any of its fund investors. In addition, two Commissioners
dissented from the SEC’s adoption of the disclosure rules based on concerns that the SEC’s
disclosure requirements might evolve over time such that the reporting regime would come to
resemble the regulatory regime for registered advisers. Time will tell whether the SEC will
administer the disclosure regime in a way that minimizes regulatory burdens on Exempt
Reporting Advisers and maintains the distinction between the registration and reporting regimes.
The rules as proposed would have required gross and net asset values, as well as a breakdown of a fund’s assets and
liabilities by class and categorization under the fair value hierarchy under GAAP. The SEC removed these requirements
in response to comments that stated that disclosure of this information could give away sensitive proprietary information
about funds’ use of leverage and, in the case of venture capital and similar funds, the value of underlying portfolio
companies. See Reporting Release at 61.
The amendments to the Form ADV Part 1A as proposed would have required a more detailed breakdown of the types
of investors in a fund. The SEC removed the obligation to report on many types of investors in response to comments
expressing concern that such information is proprietary and could be used in some cases to identify investors in a fund.
See Reporting Release at 61.
The SEC initially intended to require Exempt Reporting Advisers to make their initial filing by August 20, 2011. The
SEC chose to extend the deadline for registration of advisers from July 21, 2011 to March 30, 2012, and also determined
to extend the compliance date for Exempt Reporting Advisers filing obligations “to accommodate re-programming of the
IARD system on which these reports will be filed” and “to address concerns raised by commenters that advisers will not
have sufficient time to determine whether they qualify for the new exemptions, familiarize themselves with Form ADV and
IARD, collect the data necessary to file an initial report, and to file the report.” Reporting Release at 95-96.
Reporting Release at 42.
2. General Solicitation. Most advisers rely on Rule 506 of Regulation D under the 1933 Act in
selling interests or shares in private funds without registration of the offer and sale under the 1933
Act. In order to rely on Rule 506, an adviser or fund must not offer or sell interests through a
“general solicitation.” Because the detailed information filed by Exempt Reporting Advisers
regarding the private funds they manage would be publicly available, the SEC or state regulators
might deem responses to Items on the Form ADV a general solicitation in certain circumstances.
The SEC’s changes last year to the Form ADV Part 2 raised a similar issue; in the release
adopting those changes, the SEC stated that disclosures on the new Part 2A could constitute a
general solicitation if they went beyond what was required. However, the disclosure applicable to
Exempt Reporting Advisers may raise less of a “general solicitation” concern than the Part 2A
because the responses to Amended ADV Part 1 are not in narrative form and provide less of an
opportunity to exceed the scope of the questions.
3. Limited SEC Inspections – Exempt Reporting Advisers Examined for Cause. As noted
above, Exempt Reporting Advisers are subject to inspection by the SEC staff. The SEC stated in
the Reporting Release, however, that it will not routinely inspect Exempt Reporting Advisers, but
instead will inspect these advisers only for cause, such as when prompted based on a tip, a
complaint or a referral from another agency or self-regulatory organization.32
Cary J. Meer
John W. Kaufmann
Jarrod R. Melson
Id. at 48.