The U.S. Securities and Exchange Commission has issued proposed rules for private fund advisers who are exempt from the Private Fund Investment Advisers Registration Act of 2010, enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act. It also issued proposed rules requiring exempt advisers to file annual reports, as authorized by the Act.

Comments on the proposed rules may be received by the SEC up to 45 days after the rules are published in the Federal Register.

Investment advisers to private funds are required to register under the Act. However, an exemption is given to those that act as investment advisers solely to venture capital funds and those that act as investment advisers solely to other private funds with less than $150 million in assets under management in the United States.

The proposed rules define “venture capital fund” as any private fund to which the following applies:

  • Represents to investors that it is a venture capital fun
  • Owns solely (i) equity securities issued by one or more qualifying portfolio companies (80 percent of such securities must have been acquired directly from the qualifying portfolio companies), (ii) cash and cash equivalents, and (iii) U.S. Treasuries with a remaining maturity of 60 days or les
  • Either controls each qualifying portfolio company or has an arrangement whereby the fund or the adviser offers to provide significant guidance and counsel concerning management of the qualifying portfolio compan
  • Does not borrow or otherwise incur leverage in excess of 15 percent of the fund’s aggregate capital contributions and committed capital, with any such borrowing or leverage being for a term of no longer than 120 day
  • Only issues securities that do not provide the holder with any right to withdraw or redeem the securities (except in extraordinary circumstances
  • Is not a registered investment company or a small business development company

For purposes of this definition, a “qualified portfolio company” is a company that (i) at the time of any investment is not publicly traded, and does not control and is not controlled by or under common control with a publicly traded company; (ii) does not borrow or issue debt obligations, or redeem, exchange, or repurchase any securities of the company in connection with the private fund’s investment in the company; and (iii) is not an investment company, private fund, or commodity pool. Advisers to certain pre-existing venture capital funds also have a grandfathered exemption from the registration requirement.

The private fund adviser exemption is available to U.S. investment advisers who act solely as investment advisers to one or more qualifying private funds and who manage private fund assets of less than $150 million. An investment adviser with its principal office and place of business outside the United States may rely on the exemption if the adviser has no client in the United States that is not a qualifying private fund and the total value of the adviser’s assets under management is less than $150 million. For these purposes, a qualifying private fund is any private fund that is not registered as an investment company and has not elected to be treated as a business development company under the Investment Company Act.

Assets under management must be calculated at the end of each calendar quarter and include the contractual amount of any uncalled capital commitments. Fund assets will be valued at current market value for purposes of the calculation. If an adviser exceeds the $150 million limit on assets under management on any calendar quarter end date, the adviser must register under the Advisers Act by the end of the following calendar quarter.

Private fund advisers who are exempt from registration under the Advisers Act will still have to file annual reports with the SEC. Under the SEC’s proposal, those reports will be filed electronically on Form ADV, through the Investment Advisers Registration Depository, and will be available to the public.

The annual reports will provide information about the adviser and include information about financial industry affiliations, controlling persons, and the disciplinary history of advisory personnel. The reports will also carry information about the private funds advised by the adviser, including identification of the type of fund, current asset values, number and type of private fund investors, and identification of auditors and other service providers.