The Private Fund Adviser Exemption

The Investment Advisers Act of 1940 (the “Advisers Act”) requires that a person or firm meeting the definition of “investment adviser” under the Advisers Act, register with the Commission, unless exempt or prohibited from registration.

Section 202(a)(11) of the Advisers Act defines an investment adviser as any person or firm that for compensation is engaged in the business of providing advice to others or issuing reports or analyses regarding securities.

One exemption to the registration requirement is the private fund adviser exemption under 203(m) of the Advisers Act.  Pursuant to the private fund adviser exemption, any adviser that has less than $150 million in assets under management and that is an adviser solely to private funds is exempt from the Advisers Act’s registration requirements.

Under 202(a)(29) of the Advisers Act, a “private fund” is an issuer that would be an “investment company” but for Section 3(c)(1) or 3(c)(7) of the Investment Company Act of 1940.

Under the Investment Company Act of 1940, an “investment company” is defined as an issuer that “… is or holds itself out as being engaged primarily … in the business of investing, reinvesting, or trading in securities.”  The “3(c)(1) exception” excludes from the definition of an “investment company” any issuer whose outstanding securities are beneficially owned by no more than one hundred (100) persons and whose securities are not publicly offered.  The “3(c)(7) exception” excludes from the definition of an “investment company” any issuer, the outstanding securities of which are owned exclusively by persons who, at the time of acquisition of such securities, are qualified purchasers – and whose securities are not publicly offered.

Thus, a “private fund” can generally be summarized as a fund that invests, reinvests and trades in securities and that is relying on the 3(c)(1) or 3(c)(7) exclusion from the definition of an “investment company” by virtue of either having less than 100 persons owning or beneficially owning an interest in the fund, or by virtue of only allowing qualified purchasers to acquire an interest in the fund.

Many fund managers rely on the private fund adviser exemption from registration under the Investment Advisers Act of 1940.  However, even if an exemption applies from registration under the Advisers Act, the adviser may nevertheless be considered an “exempt reporting adviser” (“ERA”) and be thereby required to maintain records and submit such reports as the Commission may require.

Fund formation and structuring is a complex legal area that involves various legal and regulatory considerations. Contact our firm today for a consultation on what type of fund works best for your desired structure.