As mentioned in last week’s post, the SEC on November 19, 2010, released proposed rules and rule amendments implementing various provisions of Title IV of the Dodd-Frank Act. The first release includes proposed amendments to various rules and forms in order to implement amendments to the Investment Advisers Act of 1940 (“Implementing Release”) and was discussed in last week’s posting. The other release proposes new rules defining the scope of certain exemptions from the registration requirements under the Advisers Act including exemptions for advisers to “venture capital funds” and advisers solely to private funds with less than $150 million in assets under management (“Exemptions Release”). The Exemptions Release is discussed below.
The Exemptions Release provides a definition of “venture capital fund” for purposes of the new exemption for investment advisers that advise solely on venture capital funds. In an effort to distinguish advisers to “venture capital funds” from the larger category of advisers to “private equity funds” (which are not exempt and therefore must register), the SEC defines “venture capital fund” as a private fund that: (i) invests in equity securities of private companies in order to provide operating and business expansion capital (referred to in the release as “qualifying portfolio companies”) and at least 80 percent of each company’s securities owned by the fund were acquired directly from the qualifying portfolio company; (ii) directly, or through its investment advisers, offers or provides significant managerial assistance to, or controls, the qualifying portfolio company; (iii) does not borrow or otherwise incur leverage (other than limited short-term borrowing); (iv) does not offer its investors redemption or other similar liquidity rights except in extraordinary circumstances; (v) represents itself as a venture capital fund to investors; and (vi) is not registered under the Investment Company Act and has not elected to be treated as a business development company.
Proposed Rule 203(m)-1 of the Exemptions Release would provide an exemption from registration for investment advisers solely to private funds that has less than $150 million in assets under management in the United States. The Exemptions Release specifies that the exemption is limited to advisers to private funds and once an adviser acquires a different type of client, it would have to register under the Advisers Act. There is no limit on the number of private funds an adviser relying on this exemption advises, provided that the aggregate value of the adviser’s private fund assets is less than $150 million. Under the proposed rule, advisers would be required to include any uncalled capital commitments in the calculation and each adviser would have to determine the number of its private fund assets quarterly, based on the fair value of the assets at the end of the quarter.
Comments on the proposed rules and rule amendments contained in the Exemptions Release may be submitted to the SEC using this online form. For additional information about the implications of the Exemptions Release, contact us at 619-278-0020 to schedule your consultation.