Dodd-Frank exempts from registration two types of advisers: (i) advisers to qualifying venture capital funds; and (ii) advisers solely to private funds (including hedge funds and private equity funds) and having less than $150 million of assets under management. These two categories of investors are known as exempt reporting advisers. Certain exempt reporting advisers are required to file exempt reporting adviser registrations, as will be discussed below.
Venture Capital Exemption
The requirements for satisfying the venture capital exemption include a number of factors relating to the fund's portfolio investments, investment terms and other matters. The factors for satisfying the venture capital exemption are beyond the scope of this article, but are laid out in detail in the SEC's final rules: https://www.sec.gov/rules/final/2011/ia-3222.pdf
Advisers Solely to Private Funds
Dodd Frank exempts from registration advisers with less than $150 million of assets under management that solely manage "private funds." Section 202(a)(29) of the Advisers Act defines the term ‘‘private fund’’ as:
[A]n issuer that would be an investment company, as defined in Section 3 of the Investment Company Act of 1940 (15 U.S.C. 80a-3), but for Section 3(c)(1) or 3(c)(7) of that Act. https://www.sec.gov/about/laws/iaa40.pdf
A hedge fund or private equity fund with less than $150 million in assets under management and having a principal office or place of business in a state not requiring state investment adviser registration are generally exempt from registering either with a state or the SEC. However, once a manager reaches $25 million in assets under management, it must make a truncated investment adviser filing, known as the exempt reporting adviser registration.
Investment Fund managers using this exemption must calculate the private fund assets annually and report the amounts in the investment adviser’s annual Form ADV amendments.
Who Must File as an Exempt Reporting Adviser?
There are three categories of exempt reporting advisers delineated in the Advisers Act, broken down by size of regulatory assets under management:
Small Advisers: Advisers with less than $25 million of assets under management. Small advisers are required to register with the appropriate state. In states where there is a state exemption from registration, small advisers generally have no registration requirements, either in the form of full investment adviser registration or as an exempt reporting adviser.
Mid-Size Advisers: Advisers with between $25 million and $100 million in assets under management. Note that for advisors to solely private funds, the effective threshold is $150 million before registration requirements are triggered. Mid-Size Advisers are not permitted to register with the SEC, but must look to the state law of the state in which the fund managers has its principal office or principal place of business to determine whether the manager needs to register in the state.
If a mid-sized adviser is exempt from state registration or is excluded by state law from the definition of "investment adviser," then the mid-sized adviser must register as an exempt reporting adviser. Once registered, the fund manager would be subject to annual reporting, in the form of the ADV annual renewal.
Large Advisers: Advisers with over $100 million under management are required to register with the SEC (there is a $10 million buffer that allows an adviser to reach $110 million under management prior to being required to register). Again, for private funds, including hedge funds, private equity funds, etc., that threshold is $150 million.
What Does an Exempt Reporting Adviser Registration Entail?
Filing as an exempt reporting adviser is a fairly straightforward process and requires the fund manager to answer certain portions of Form ADV Part 1. Unlike registering as an RIA with the state, neither the exempt reporting adviser registration nor full SEC registration requires a representative to take the Series 65 or other examination.
Most of the information requested is of a biographical nature and serves the purpose of putting the SEC on notice that the adviser is operating in the state. Among the required information is information about ownership of the fund, fees charged, description of the investment manager's business, form of organization and similar disclosures.
John Lore is the managing shareholder of Capital Fund Law Group, a boutique law firm focused on advising hedge funds, private equity funds and real estate funds with fund formation and operational matters. If you have any questions about forming a fund, please call 212-203-4300 to schedule a consultation with John Lore to discuss your fund.