On February 14, 2012, the Virginia Division of Securities and Retail Franchising proposed revised regulations exempting certain private fund managers from investment adviser registration with the Commonwealth of Virginia.
Prior to the repeal of the federal 15 client exemption, Virginia had an exemption for fund managers that met the federal 15 client exemption and who advised only “corporation[s], general partnership[s], limited partnership[s], limited liability compan[ies], trust[s] or other legal organization[s]” with assets of $5 million or more. This of course means that this exemption, left untouched, would no longer be available because of the repeal of the federal 15 client exemption. Pursuant to a Statement of Policy Regarding Regulation of Certain Investment Advisors Managing Private Equity and Venture Capital Funds (“Private Advisors”) dated July 19, 2011, the Virginia Division of Securities & Retail Franchising extended this exemption to advisers who previously were exempt from registration under the federal 15 client exemption, until such time as a more permanent approach could be adopted. Now, the Division has proposed new regulations for comment, which have a target effective date of May 1, 2012.
The New Proposed Regulations
The new proposed regulations are based upon the NASAA model rule exemption for investment advisers to private funds. They provide for an exemption from registration for “private fund advisers.” A private fund adviser is any investment adviser who provides advice solely to one or more private funds (i.e. a 3(c)(1) fund or a 3(c)(7) fund). A private fund adviser must not be subject to disqualification from prior bad acts such as fraud or other securities law violations. The private fund adviser must also make the same Form ADV filings as an exempt reporting adviser would. In addition, the private fund adviser must pay a filing fee to the Virginia State Corporation Commission.
Any private fund adviser that advises one or more 3(c)(1) funds (other than venture capital funds, as defined under federal regulations) must also comply with additional restrictions. All investors in these funds must be “qualified clients.”  If the adviser is relying on the net worth requirement to qualify an individual investor as a qualified client, then the value of an investor’s primary residence must be subtracted from his or her net worth. The fund manager must also disclose in writing all services that are provided to individual owners (if any), all duties owed to individual owners (if any), and any other material information affecting the rights or responsibilities of owners. Finally, the fund manager must provide audited financial statements to each investor.
Fund managers registered with the SEC will be required to make applicable notice filings to the Virginia State Corporation Commission even if they would otherwise qualify for the private fund adviser exemption.
The new rule also provides grandfathering provisions for fund managers of 3(c)(1) funds that existed before the effective date of the new regulations (May 1, 2012) but cease accepting non-qualified clients after the date, as long as the fund manager does comply with the disclosure and audit requirements of the new exemption.
Interested parties may submit comments by April 12, 2012.
 A 3(c)(1) fund is a fund which has under 100 investors. A 3(c)(7) fund is a fund which is limited to qualified purchasers, which are defined roughly as a person with at least $5 Million in investment assets or a company with at least $25 Million in investment assets.
 A “qualified client” is defined as an individual or company that has at least $1 Million under the management with the investment adviser or has a net worth (together with assets held jointly with a spouse) of more than $2 Million.
© 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.