During the 2013 session, the Minnesota Legislature enacted legislation that likely will impact managers to small private funds, including hedge funds. Current Minnesota law exempts managers to "accredited investors" only (including managers to private funds that are offered exclusively to accredited investors) from needing to register as investment advisers. (State, rather than federal, registration requirements generally apply to managers who have less than $100 million as assets under management (AUM), or if only private funds are managed, less than $150 million in AUM.)

The new law generally removes the exemption for managers to accredited investors only, and creates a new exemption for "private fund advisers." A "private fund adviser" is a manager only to qualifying private funds, and has no other advisory clients. Under the new law, a private fund adviser will need to either register in Minnesota as an investment adviser or comply with the following requirements of the new exemption:

  • All investors coming into the fund on or after August 1, 2013, in addition to being "accredited investors" must also be "qualified clients" under SEC Rule 205-3. Generally, a qualified client is a natural person or company (other than another private fund) that has a net worth of at least $2 million (exclusive of the person's primary residence and mortgage thereon) or a private fund that has only qualified clients as investors. Unlike the accredited investor standard, there is no income-based test. The "qualified client" standard is narrower than the "accredited investor" standard, so some potential new investors may be excluded by this rule. Existing (pre-August 1, 2013) investors may add to their investments after August 1, 2013, even if they do not meet the "qualified client" standard.
  • The private fund offering materials must include certain disclosures required under the new law (we believe that offering materials prepared by this firm already include those disclosures).
  • The private fund adviser must have the private fund audited and deliver audited financial statements to fund investors. The first audited financials will need to be delivered following the first fiscal year end after August 1, 2013. No delivery deadline is yet specified, but we believe a deadline similar to the federal rules will likely be adopted (120 days after FYE for most funds; 180 days after FYE for funds-of-funds).
  • Private fund advisers must make an annual "exempt reporting adviser" filing with the Department of Commerce. The initial filing (on a portion of SEC Form ADV) must be made electronically within 60 days of your firm's reliance on the new exemption (by September 29, 2013, for firms relying on the exemption on August 1). Please let us know if you would like assistance in making this filing.

Action Item: We expect that most private fund advisers will choose to limit their funds to qualified clients only and rely on the new exemption. For these advisers, the only immediate action item should be to limit new investors to "qualified clients" and update your PPM and Subscription Agreement accordingly to include the new "qualified client" language, if it is not already included.