What you need to know
The SEC adopted several final rules to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act governing the registration of private funds.
What you need to do
If you advise one or more private funds (other than venture capital funds) with assets under management of $150 million or more, you will need to file a Form ADV to register with the SEC as an investment adviser on or before February 14, 2012.
If you advise one or more private funds with assets under management of less than $150 million or that is a venture capital fund, you will not need to register with the SEC; however, you will be required to respond to certain items of Form ADV during the first calendar quarter of 2012.
Registration Requirements for Private Fund Advisers
The Dodd-Frank Wall Street Reform and Consumer Protection Act eliminated the “private adviser” exemption to the requirement to register under the Investment Advisers Act of 1940. Many private fund advisers who relied on this exemption will now be required to register with the SEC as investment advisors. The requirement to register is not, however, applicable to certain foreign private advisers, advisers to SBICs, venture capital funds, family offices and advisers to funds with less than $150 million under management.
In June, the SEC adopted rules defining a “venture capital fund,” clarifying the exemption from registration related to funds with less than $150 million in assets under management and amending Form ADV to expand the information required to be disclosed with respect to private funds.
Venture Capital Funds
Private fund advisers solely to venture capital funds are exempt from registration. For purposes of the SEC rule, a “venture capital fund” is a private fund that:
- represents to investors that it pursues a venture capital strategy;
- holds at least 80% of the amount of the fund’s aggregate capital contributions and uncalled committed capital (other than cash and equivalents) in assets that are “qualifying investments;”
- does not incur leverage in excess of 15% of the fund’s aggregate capital contributions and uncalled committed capital, with such leverage being non-renewable and maturing in under 120 days (other than certain permitted guarantees);
- does not generally offer its investors redemption rights; and
- is not registered under the Investment Company Act and has not elected to be treated as a business development company.
“Qualifying investments” include:
- any equity security issued by a qualifying portfolio company (“QPC”) that has been acquired by the fund directly from the QPC (specifically excluding secondary transactions with existing shareholders);
- any equity security issued by a QPC in exchange for an equity security described in clause (i); or
- any equity security issued by a company of which a QPC is a majority-owned subsidiary (or predecessor), and is acquired by the fund in exchange for an equity security described in clause (i) or (ii). This would generally include securities issued by an acquiring company in an M&A transaction (whether the acquiring company is a QPC or not).
A QPC, at the time of the investment, must not be a public company (or control or be controlled by or be under common control with a public company); may not borrow in connection with the investment and distribute to the private fund the proceeds of such borrowing in exchange for the investment; and may not be an investment company or a commodity pool. A QPC going public after investment by a venture capital fund will not disqualify it as a QPC for purposes of the prior investment.
These definitions would expressly exclude leveraged investments, investments in public companies and purchases of shares from existing shareholders; however, a venture capital fund could undertake such transactions and remain exempt, so long as such non-qualifying investments make up no more than 20% of its aggregate capital contributions and uncalled committed capital.
Notwithstanding the foregoing, a private fund that represented to investors at the time the fund offered its securities that it pursues a venture capital strategy; has sold securities prior to Dec. 31, 2010; and does not sell securities after July 21, 2011 (including accepting additional capital commitments) will also be treated as a venture capital fund. This “grandfathering” provision will allow many current venture capital funds that make non-qualifying investments to take advantage of the exemption.
Private Funds with Less Than $150 Million in Assets
For purposes of this exemption, a private fund adviser is required to aggregate the value of all assets of private funds it manages in the United States. An adviser with its principal office and place of business in the United States will have all of its assets counted as assets of private funds it manages in the United States, regardless of the source of the funds or other office locations of the adviser. Assets must be valued on an annual basis at fair value in accordance with Form ADV. An adviser that has complied with its reporting obligations under the exemption may continue advising private fund clients for up to 90 days following its filing of an annual updating amendment to Form ADV indicating that it has aggregate assets of $150 million or more (during which period it will need to register).
The SEC also amended Form ADV to expand disclosures required of advisers to private funds. Even an exempt adviser will need to report a variety of information about each private fund it advises, along with conflicts of interest and disciplinary history, on Part 1A of Form ADV. As with registered investment advisers, an exempt adviser is required to amend its report on Form ADV at least annually within 90 days after the end of its fiscal year and more frequently for certain material occurrences as required by the form. All reports filed on Form ADV will continue to be publicly available.
Advisers to private funds that were previously exempt but now are required to register under the Investment Advisers Act must be registered by March 30, 2012. As a practical matter, this will require filing a complete Form ADV by February 14, 2012, as the SEC noted that initial applications for registration may take as long as 45 days to approve.
Advisers to private funds that will remain exempt from registration must file initial reports on Form ADV between January 1 and March 30, 2012.
Advisers to private funds that close after July 20, 2012 and are not currently relying on the private adviser exemption will be required to register with the SEC immediately.