Indiana Securities Division Updates Its Private Fund Exemption to Include Non-Venture Capital Funds

In August 2011, the Indiana Securities Division issued an Administrative Order updating its venture capital exemption from investment adviser registration under the Indiana Uniform Securities Act to harmonize its provisions with the new venture capital exemption in the Dodd-Frank Act.  Under the August 2011 order, a venture capital fund manager was exempt from investment adviser registration with the Indiana Securities Division if: (1) it maintains a place of business in Indiana, (2) during the preceding twelve months, it had no more than 5 clients that are residents of Indiana, (3) it does not hold itself out generally to the public as an investment adviser, and (4) it met the federal venture capital exemption from registration with the SEC.  The order included a qualifier stating that the order would be in effect “[u]ntil the Division can promulgate rules to address venture capital funds and investment adviser registration…”  Therefore, it was clear that the Indiana Securities Division viewed the order as temporary.

On January 9, 2012, the Indiana Securities Division issued an update to the Administrative Order that modifies the previous order.[1]  Conditions (1)-(3) described above still apply (relating to having a place of business in Indiana, having 5 clients or less, and not holding itself out as an investment adviser), but the exemption now applies to a much broader class of private fund managers.  Now any adviser that manages one or more private funds (and meets the first 3 requirements) qualifies for the exemption, so long as neither the fund manager nor any of its affiliates are subject to disqualification under the federal “bad actor” provisions.  Also, the order imposes three additional conditions on so-called “3(c)(1) funds”[2] that are not venture capital funds: (1) all of its owners must have been accredited investors at the time of their investment; (2) at the time of investment, the fund manager must have provided additional written disclosure which describes all services, if any, provided to the individual owners of the fund, all duties, if any, owed by the fund manager to the individual owners, and any other material information affecting the rights and responsibilities of the individual owners; and (3) the private fund must provide annual audited financial statement to each owner of the fund.  None of these three additional requirements apply either to venture capital funds (as defined in the federal regulations) or so-called “3(c)(7) funds.”[3]

As with the previous August 2011 order, the Indiana Securities Division has included language to indicate that this order is temporary, until the Securities Division decides on a more permanent approach.  It remains to be seen what that approach will be.


[1] Actually, nowhere does it mention on the face of the order that the new order replaces the previous one.  However, the previous order is no longer posted on the Indiana Securities Division website.  There is only one instance where a fund manager would be exempt under the August 2011 order but not under the January 2012 order.  A venture capital fund manager that is subject to disqualification under the federal “bad actor” exclusions would be exempt under the previous order but not the new one.

[2] 3(c)(1) funds are funds that are exempt from Investment Company Act registration because they have 100 or less beneficial owners.

[3] 3(c)(7) funds are funds that are exempt from Investment Company Act registration because they are sold exclusively to “qualified purchasers” which generally are individuals with $5 million or more in investments or companies with $25 million or more in investments.


© 2012 Alexander J. Davie — This article is for general information only. The information presented should not be construed to be formal legal advice nor the formation of a lawyer/client relationship.

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Alexander J. Davie

Alexander J. Davie

Alexander Davie is a corporate and securities attorney based in Nashville, Tennessee. Businesses of many varieties rely on his counsel and judgment throughout all stages of their growth. In particular, fund managers and investment management professionals seek the expertise Alex gained when he served as general counsel to a private investment fund. Alex also has significant experience and enjoys working with companies and entrepreneurial ventures, especially within the technology industry. As a believer in technology's ability to enrich people's lives and allowing people to connect with each other in new ways, he is passionate about helping tech startups achieve success. He is active in Nashville's startup community as a mentor at the Nashville Entrepreneur Center and participates in numerous other events geared towards making Nashville a nationally ranked location for starting a business.

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