California narrowed its exemption from state registration to investment advisers of “qualifying” private funds.1

The new rules, adopted on August 27, 2012 by the California Department of Corporations (the “Department”), require that private fund advisers that wish to rely on this new exemption file a notice with the Department and pay a filing fee by October 26, 2012. Additional requirements for certain private fund advisers (depending on the type of private funds advised as well as the qualifications of the investors in those private funds) apply under this new exemption and are summarized below.  

The new exemption is only available to investment advisers that advise solely “qualifying private funds.” A “qualifying private fund” is any fund relying on the exemptions from registration found in Sections 3(c)(1), 3(c)(5) and/or 3(c)(7) of the Investment Company Act of 1940, as amended (the “1940 Act”). In addition, a private fund adviser can only rely on the new exemption if: (1) neither the private fund adviser nor its advisory affiliates are subject to certain “bad actor” disqualifica-tions; (2) the private fund adviser files a truncated version of Form ADV with the Department online and provides amendments to Form ADV on an ongoing basis; and (3) the private fund adviser pays the Department’s initial and annual filing fees.

If a private fund adviser manages at least one 3(c)(1) and/or 3(c)(5) fund that is not a “venture capital fund” (a “Retail Buyer Fund”), however, it must comply with certain additional requirements for each of the Retail Buyer Funds it advises2 (unless the Retail Buyer Fund qualifies for the grandfathering provision described below). If the private fund adviser advised an existing Retail Buyer Fund prior to August 27, 2012 with respect to which all the beneficial owners are not “accredited investors,” and/or that charges a performance fee (e.g., carried interest) to any beneficial owners that are not “qualified clients,” the new exemption provides “grandfathering” relief on existing funds so that the private fund adviser can still rely on the new exemption.

A more complete discussion of the new Rule 260.240.9 and its requirements can be found here.