A permanent private fund adviser exemption has been adopted by the California Department of Corporations (the “Department”). The exemption was effective August 27, 2012, following public comments first received between February 20th and March 25th, 2012. Several amendments were made to the proposed rule and made available on June 18, 2012, for a 15-day comment period. While no substantive changes were made during the comment period, the amended proposal should be reviewed in its entirety.
The final rule includes changes that modify the definitions as well as the requirements for the exemption. For example, the new exemption provides a more limited exemption from California’s investment adviser registration requirements for advisers who advise only “qualifying private funds.” A “qualifying private fund” includes any fund that is excluded from the definition of an investment company based on Sections 3(c)(1), 3(c)(5) or 3(c)(7) of the Investment Company act of 1940, as amended. The private fund adviser can rely on the exemption if:
- Neither the private fund adviser nor any of its advisory affiliates have disqualifications for “bad acts” described in Rule 262 of Regulation A and various California Code sections;
- A modified Form ADV for exempt reporting advisers is filed, and appropriately amended, with the Department online through the Investment Adviser Registration Depository (IARD); and
- An annual filing fee is paid.
There are additional requirements that must be met if a private fund adviser advises at least one “Retail Buyer Fund.” A “Retail Buyer Fund” is a 3(c)(1) and/or 3(c)(5) fund that is not a “venture capital company.” The additional requirements include the private fund adviser:
- Only advising those who are “accredited investors” at the time the securities are purchased;
- Providing disclosure documents to prospective investors of all material information regarding the services to be provided;
- Obtaining annual audited financial statements for the Fund from an independent CPA and delivering to each beneficial owner of the Retail Buyer Fund within 120 days after the end of the fiscal year; and
- Not entering into, performing, renewing, or extending an investment advisory contract that provides for performance fees based on the investment profit attributable to a beneficial owner of a Retail Buyer Fund that is not a “qualified client” as defined in Rule 205-3 of the Investment Advisers Act of 1940.
Since the exemption has become so narrow, it is helpful to speak with counsel regarding whether you may qualify for the new California exemption. For additional guidance, contact us at (619) 278-0020 to schedule a consultation.