This past Wednesday, the Securities and Exchange Commission ("SEC") held an open meeting in which it considered adopting, and ultimately did adopt, several new rules and amendments to rules under the Investment Advisers Act of 1940 ("Advisers Act") to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank Act"). As was expected based on earlier comments by the SEC, the deadline for investment advisers who had previously relied on the exemption from registration under Section 203(b)(3) of the Advisers Act was postponed until March 30, 2012.
In addition to postponing the date for registration for such investment advisers, the SEC also approved substantive amendments to provisions implementing the Dodd-Frank Act. Specifically, among other items, the SEC approved a new exemption from registration and expanded the venture capital exemption under the Dodd-Frank Act. The newly added exemption from registration exempts advisers from registration who act solely as advisers to private funds and have assets under management of less than $150 million.
The SEC also amended the definition of "venture capital fund" in an effort to better reflect Congress's intent in providing this exemption in the Dodd-Frank Act. Under this amendment, a venture capital fund is one that invests primarily in qualifying investments (generally, any equity security issued by a qualifying portfolio company that is directly acquired by a qualifying fund and certain equity securities exchanged for the directly acquired securities) and also may hold "non-qualifying" investments, so long as they do not exceed 20 percent of the fund's committed capital. The amendment imposes certain other restrictions on funds in order to qualify for the venture capital exemption, as well as a grandfathering provision for funds that had begun raising capital by the end of 2010 under the representation that they were pursuing a venture capital strategy.
These amendments create a new class of advisers, "exempt reporting advisers." Advisers relying on the new "private fund exemption" and the venture capital fund exemption are not required to register as investment advisers with the SEC; however, they must periodically provide information to the SEC. Such exempt reporting advisers provide this information by responding to certain items on the Form ADV (which also was amended pursuant to the June 22 meeting), filed with the SEC through the electronic Investment Adviser Registration Depository ("IARD") system. An exempt reporting adviser must submit a Form ADV within 60 days of relying on either exemption from registration. Such exempt reporting advisers must comply with the March 30, 2012 deadline.
Commissioners Paredes and Casey expressed their objections to the amendments enacted by the SEC on June 22, both voicing concerns that, while they supported the expanded definition of venture capital funds, the imposition of reporting requirements on unregistered investment advisers may, as Commissioner Paredes stated, "come at the expense of capital formation, innovation, entrepreneurism, and jobs." Commissioner Casey also expressed concern over the potential regulatory regime imposed on exempt reporting advisers, emphasizing that the SEC's amended rules may stunt capital formation and economic growth through the imposition of increased compliance costs. Commissioner Casey concluded her remarks by articulating her fear that the SEC has "lost sight of the fact that its mission includes the mandate to facilitate capital formation."