Private fund managers who are registered with the SEC are required to follow federal regulations on performance compensation. Generally, if a registered fund manager desires to collect fees based on fund performance (such at the typical 20% carried interest), then each investor in the fund must be a “qualified client.” Prior to the passage of the Dodd-Frank Act, a qualified client was defined as either (i) an individual or company that immediately after investing into the fund has at least $ 750,000 under the management of the fund manager or (ii) an individual or company that has a new worth of $1.5 Million or more or qualifies as a “qualified purchaser.” The Dodd-Frank Act required that the SEC update these two thresholds for inflation, which it did, effective September 19, 2011. It updated the thresholds to $1 Million and $2 Million respectively. [Read more…]
Private Equity Archives
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. [Read more…]
On December 15, 2011, the California Department of Corporations proposed revised regulations exempting certain private fund managers from investment adviser registration with the state of California.
Previously, under Cal. Code Regs. tit. 10, § 260.204.9, private fund managers in California were exempt from investment adviser registration if they met the federal 15 client exemption, and they had assets under management of $25 million or more or they provided investment advice solely to “venture capital companies.” On June 13, 2011, the California Department of Corporations amended this rule to remove the reference to the federal 15 client exemption. Under this change, a private fund manager is exempt if it “(1) does not hold itself out generally to the public as an investment adviser, (2) during the course of the preceding twelve months has had fewer than 15 clients, (3) does not act as an investment adviser to any investment company registered under… the Investment Company Act of 1940…, and (4) either (i) has assets under management… of not less than $25,000,000 or (ii) provides investment advice to only venture capital companies…” [Read more…]
The Managed Funds Association recently submitted a comment letter to the Securities and Exchange Commission dated January 6, 2012 requesting the SEC to amend Rule 502(c) of Regulation D to exempt private funds, such as hedge funds, private equity funds, and venture capital funds, from the ban on general solicitation and advertising under Regulation D.
Currently under existing law, private funds cannot engage in any “general solicitation” or “general advertising” in connection with offers and sales of interests in their funds. This prohibits funds from engaging in any public advertising and communications about their securities offerings and requires a “substantial pre-existing relationship” between the issuer and any offeree. In its letter, the MFA makes the case that changes in the securities markets and technology have rendered the general solicitation restrictions of Regulation D, enacted 30 years ago, outdated. In addition, the MFA argues that the vagueness over what constitutes a general solicitation, combined with the severe penalties for even an inadvertent violation creates legal uncertainly for private funds, which inhibits capital formation. It also makes the argument that allowing general solicitations for private fund offerings will increase transparency of funds, because they will be able to publicly publish their returns. [Read more…]
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. [Read more…]