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.
The replacement exemptions only pertain to private fund advisers. 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 (note that it is funds relying on this exemption which will reap the greatest benefit from the JOBS Act).
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 final part in the series, Part IV, discusses the exemption for advisors for certain foreign advisers without a place of business in the U.S. Part I in the series was initially published on May 16, 2013, Part II on May 21, 2013 and Part III on August 7, 2013. Moreover, Part III briefly discussed the limiting filing requirements for exempt advisors. All can be reviewed at my blog site: www.securities-law-blog.com.
Exemption for Foreign Private Advisors
Section 203(b)(3) of the Advisors Act exempts from registration certain foreign advisers without a place of business in the U.S. A foreign private advisor is defined as one that (i) has no place of business in the United States; (ii) has, in total, fewer than 15 clients in the U.S.; (iii) has aggregate assets under management attributable to the U.S. clients of less than $25 million; and (iv) does not hold itself out to the public in the U.S. as an investment adviser.
Calculation of Number of Clients
Rule 202(a)(30)-1 allows an adviser to treat as a single client, a natural person together with that person’s minor children (regardless of address); spouse, any relative or relative of the spouse or spouse equivalent that lives at the same address; and all accounts for which each of the above are beneficiaries. In addition, the adviser can treat a business entity and up to 2 additional business entities with the identical equity holders as a single client. Moreover, although beneficial owners of a private fund are each counted as a separate investor, as long as at least one investor of the private fund is counted, the private fund itself is not included in the count. If an adviser reasonably believes that an investor is not in the U.S., the adviser may treat the investor as not being in the U.S. This is an overview, as the rules contain nuances for calculations of beneficial owners, which is beyond the scope of this blog.
Determination of “In the United States”
A determination of what it means to be in the U.S. forms the foundation of this exemption in that each of the elements of the exemption requires such a determination. Rule 202(a)(30)-1 defines “in the United States” to mean (i) with respect to any place of business, any such place that is located in the U.S. as defined in Regulation S; (ii) with respect to any to any client or private investor in the U.S., any person who is a U.S. person as defined in Regulation S; and (iii) with respect to the public, in the U.S. as defined in Regulation S. In addition, deviating from Regulation S, in the United States includes any discretionary account owned by a U.S. person and managed by a non-U.S. affiliate of the adviser in order to discourage non-U.S. advisers from creating such discretionary accounts with the goal of circumventing the exemption’s limitation with respect to advising assets of persons in the United States.
Regulation S defines a “US Person” as:
(i) Any natural person resident in the United States (as defined below);
(ii) Any partnership or corporation organized or incorporated under the laws of the United States;
(iii) Any estate of which any executor or administrator is a US person;
(iv) Any trust of which any trustee is a US person;
(v) Any agency or branch of a foreign entity located in the United States;
(vi) Any non-discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary for the benefit or account of a US person;
(vii) Any discretionary account or similar account (other than an estate or trust) held by a dealer or other fiduciary organized, incorporated, or (if an individual) resident of the United States; and
(viii) Any partnership or corporation if (i) organized or incorporated under the laws of any foreign jurisdiction and (ii) formed by a US person principally for the purpose of investing in securities not registered under the Securities Act, unless it is organized or incorporated, and owned, by accredited investors (as defined in Rule 501(a) of Regulation D promulgated under the Securities Act) who are not natural persons, estates or trusts.
Regulation S defines “United States” as the United States of America, its territories and possessions, any State of the United States, and the District of Columbia.
Place of Business
Rule 202(a)(30)-1 defines “place of business” to mean any office where the investment adviser regularly provides advisory services, solicits, meets with, or otherwise communicates with clients, and any location held out to the public as a place with the adviser conducts any such activities.
Assets Under Management
Instructions to 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.
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