There is a bill working its way through the Minnesota state legislature that amends chapter 80A of the Minnesota Statutes to, among other things, implement investment adviser registration for investment advisers whose only clients are private funds.
Minnesota law currently includes an exemption from registration as an investment adviser for investment advisers whose only clients are accredited investors. The proposed legislation removes this exemption and includes an additional category of advisers exempt from state registration – “private fund advisers.” Understanding this change requires knowledge of a number of new defined terms under Minnesota law, such as:
- 3(c)(1) fund: a qualifying private fund eligible for exclusion from the definition of an “investment company” under section 3(c)(1) of the Investment Company Act of 1940.
- Private fund: an issuer that would be an investment company as defined in Section 3 of the Investment Company Act of 1940 but for section 3(c)(1) or 3(c)(7) of that act.
- Private fund adviser: an investment adviser whose only clients are private funds that meet the “qualifying private fund” definition included in SEC Rule 203(m)-1.
- Venture capital fund: a private fund that meets the definition of a venture capital fund in SEC Rule 203(1)-1.
The new legislation contains additional requirements for a subset of private fund advisers – namely, those private fund advisers who advise at least one “3(c)(1) fund that is not a venture capital fund.” This subset of private fund advisers must:
- Besides venture capital funds, advise only 3(c)(1) funds whose outstanding securities (other than short-term paper) are owned only by persons who would meet the definition of a qualified client under SEC Rule 205-3 at the time the securities are purchased from the issuer;
- At the time of purchase, make additional disclosures in writing to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund; and
- Obtain annual audited financial statements of each 3(c)(1) fund that is not a venture capital fund and deliver a copy to each beneficial owner of the fund.
The new legislation also require state registered investment advisers to keep the same records that are required of exempt reporting advisers at the federal level, and to file that information with the state. In addition, the legislation spells minimum record keeping requirements with respect to private funds.