An Overview of Exemptions for Hedge Fund Advisors: Exemptions for Advisors to Venture Capital Funds, Private Fund Advisers with Less Than $150 Million in Assets Under Management, and Foreign Private Advisers – Part III
As the rules that will allow general solicitation and advertising for Rule 506(c) and 144A offerings near effectiveness, our firm has noticed a spike in inquiries related to small hedge funds and feeder funds. The JOBS Act is not the only recent congressional act to change the landscape of hedge funds; the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) made significant changes as well.
In particular, the Dodd-Frank Act eliminated the oft relied upon exemption from registration for private hedge fund advisors for those advisors with fewer than 15 clients. While eliminating the private advisor exemption, Dodd-Frank created three new exemptions, which are the operable hedge fund advisor exemptions today. These exemptions are for:
(1) Advisors solely to venture capital funds;
(2) Advisors solely to private funds with less than $150 million in assets under management in the U.S.; and
(3) Certain foreign advisers without a place of business in the U.S.
Moreover, the Dodd-Frank Private Fund Investment Advisers Registration Act of 2010 (the “Advisers Act”) imposed certain limited filing requirements for those advisers claiming one of the 3 new exemptions.
In this series of blogs, I am providing an overview of each of these exemptions and of the form filing and limited reporting requirements for exempt advisors. This is Part III in the series and discusses the exemption for advisors to private funds with less than $150 million in assets under management in the U.S. Part I in the series was initially published on May 16, 2013 and Part II on May 21, 2013. Both can be reviewed at my blog site: www.securities-law-blog.com.
Exemption for Advisers to Funds with Less Than $150 Million in Assets Under Management in the U.S. Section 203(m) of the Advisors Act exempts from registration advisors solely to private funds that have less than $150 million in assets under management in the U.S. The advisor may advise an unlimited number of private funds as long as the aggregate value of all assets of all the private funds is less than $150 million. The enacted exemption is commonly referred to as the “private fund adviser exemption.”
In the case of an advisor located outside the U.S., the exemption will apply as long as all of the advisor’s clients that are in the U.S. are private and the aggregate amount of funds under management is below $150 million. For purposes of the exemption it is irrelevant how many, the type of, or dollar value of funds under management outside the U.S.—provided, however, that the adviser and its principal offices must be located outside the U.S. For advisers that are located in the U.S. and whose principal offices are in the U.S., all funds under management are considered U.S. funds.
Private funds include hedge funds, private equity funds and other types of pooled investment vehicles that are excluded from the definition of “investment company” under the Investment Company Act of 1940 under either section 3(c)(1) or 3(c)(7). Section 3(c)(1) is available to a fund that does not publicly offer its securities and has 100 or fewer beneficial owners of its securities. Section 3(c)(7) is available to a fund that does not publicly offer its securities and limits the owners of its securities to qualified investors. In addition, for purposes of this exemption a private fund is one that qualifies for an exclusion under any other provisions of the Investment Company Act, in addition to section 3(c)(1) or 3(c)(7).
Method and Frequency of Calculation of Assets
An adviser must aggregate the value of all assets of private funds it manages to determine if it is below the $150 million threshold. Instruction Form ADV provides a required and uniform method of calculating assets under management. Although an in-depth review of such calculations is beyond the scope of this blog, in summary, advisers must include proprietary assets and assets managed without compensation as well as uncalled capital commitments. In addition, asset value must be based on gross market value or gross fair value if market value cannot be determined. Deductions may not be made for liabilities, accrued fees or expenses.
An analyst relying on this exemption must annually calculate the amount of the private fund assets it manages and report the amount on its annual updated Form ADV. Accordingly, if the value of assets increases to over $150 million in a year, the adviser would be required to register, unless another exemption is available. If no other exemption is available, and as long as the adviser is current with its ADV reporting requirements, the adviser has up to 90 days to register with the SEC and may continue to act as an adviser during the transition period. Moreover, as the annual ADV which calculates assets under management is not due until 90 days after the end of the fiscal year, the adviser would in effect have 180 days from the end of the fiscal year to register.
Filing Requirements for Exempt Advisers
Exempt advisers are still required to file a Form ADV and to update such form annually. The Form ADV will require basic organizational and operational information about each fund such adviser manages, such as the type of fund (hedge fund, private equity fund, etc.), general information about the size and ownership of the fund, general fund data and information about the adviser’s services to the fund. In addition, the Form ADV must identify the five gatekeepers to the fund (auditor, prime brokers, custodians, administrators and marketers). Finally, the Form ADV requires information regarding the business practices (subcontracting, affiliations, etc.), types of clients the adviser advises in general, number of employees and types of services provided.
Securities attorney Laura Anthony and her experienced legal team provides ongoing corporate counsel to small and mid-size private companies, OTC and exchange traded issuers as well as private companies going public on the NASDAQ, NYSE MKT or over-the-counter market, such as the OTCQB and OTCQX. For nearly two decades Legal & Compliance, LLC has served clients providing fast, personalized, cutting-edge legal service. The firm’s reputation and relationships provide invaluable resources to clients including introductions to investment bankers, broker dealers, institutional investors and other strategic alliances. The firm’s focus includes, but is not limited to, compliance with the Securities Act of 1933 offer sale and registration requirements, including private placement transactions under Regulation D and Regulation S and PIPE Transactions as well as registration statements on Forms S-1, S-8 and S-4; compliance with the reporting requirements of the Securities Exchange Act of 1934, including registration on Form 10, reporting on Forms 10-Q, 10-K and 8-K, and 14C Information and 14A Proxy Statements; Regulation A/A+ offerings; all forms of going public transactions; mergers and acquisitions including both reverse mergers and forward mergers, ; applications to and compliance with the corporate governance requirements of securities exchanges including NASDAQ and NYSE MKT; crowdfunding; corporate; and general contract and business transactions. Moreover, Ms. Anthony and her firm represents both target and acquiring companies in reverse mergers and forward mergers, including the preparation of transaction documents such as merger agreements, share exchange agreements, stock purchase agreements, asset purchase agreements and reorganization agreements. Ms. Anthony’s legal team prepares the necessary documentation and assists in completing the requirements of federal and state securities laws and SROs such as FINRA and DTC for 15c2-11 applications, corporate name changes, reverse and forward splits and changes of domicile. Ms. Anthony is also the author of SecuritiesLawBlog.com, the OTC Market’s top source for industry news, and the producer and host of LawCast.com, the securities law network. In addition to many other major metropolitan areas, the firm currently represents clients in New York, Las Vegas, Los Angeles, Miami, Boca Raton, West Palm Beach, Atlanta, Phoenix, Scottsdale, Charlotte, Cincinnati, Cleveland, Washington, D.C., Denver, Tampa, Detroit and Dallas.
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