🎉 Happy Friday, Funds Family!

Laws change! As a result, we’re going to update each of the four core regulatory articles.

1. ⚖️The Securities Act of 1933 (2025 update)

2. ⚖️The Investment Company Act of 1940 (2025 update)

3. ⚖️The Investment Advisers Act of 1940 (2024 version)

4. ⚖️ State Investment Adviser laws (2024 version - to be updated shortly)

This one (as the subtitle suggests) is an updated version of the Investment Advisers Act of 1940.

⚖️ Who does the Investment Advisers Act apply to?

The Investment Advisers Act applies to investment advisers. The 🔗 definition of an investment adviser is:

✅ In short, an investment adviser is a person engaged in the business of advising others as to the value of securities for compensation.

Let’s parse the definition a bit.

1. “Engaged in the business”

The SEC interprets this broadly. You're likely considered “engaged in the business” if you:

• Hold yourself out as an investment adviser, financial planner, or similar.

• Charge a fee for investment advice.

• Provide advice regularly.

2. “Advising others…as to the value of securities”

Examples of “advice” include recommendations regarding:

• Stocks, bonds, mutual funds, and limited partnerships.

• Market trends and asset allocation.

• Investment manager selection.

• Market valuations and security lists.

🗺️ Side Quest: What is a “Security”?

If you’re not advising clients on “securities” then you may not be an investment adviser.

In the context of investment fund managers, the following asset classes are generally considered to be subject to the Investment Advisers Act:

• Private Equity

• Venture Capital

• Hedge Funds

• Funds of Funds

• Debt Funds

🏠️ What about real estate?

Real estate isn’t a security, so if you’re investing in pure real estate (dirt and buildings), you typically would not be subject to the Investment Advisers Act.

For further discussion, please see ⚖️last week’s notes on real estate funds and debt funds

3. “For compensation”

Compensation includes any economic benefit from giving advice, such as:

• Advisory fees.

• Commissions.

• Fees for total services rendered.

Statutory Exclusions

Please note that there are several 🔗 statutory exceptions to the definition of investment adviser, including:

1. Banks: Regulated banks.

2. Professionals: Any lawyer, accountant, engineer, or teacher whose advice regarding securities is merely incidental to the practice of his/her professional services.

3. Brokers: Any broker or dealer whose advice regarding securities is merely incidental to the practice of his/her professional services and who receives no special compensation for the advice.

4. Publications: News publications with a general and regular circulation.

5. Treasuries: Advice regarding securities of the US government.

6. Credit Rating Agencies: Moody’s, Fitch, S&P, etc.

7. Family offices: Family offices (as defined by the SEC).

⚖️ Three key exemptions for investment fund managers

To avoid registering as a Registered Investment Adviser (discussed below), investment fund managers typically seek an exemption from registration.

Here, we’ll hit on the three main exemptions available to fund managers:

1. Private Fund Exemption (🔗 Rule 203(m)-1).

2. Venture Capital Exemption (🔗 Rule 203(l)-1).

3. Foreign Private Adviser Exemption (🔗 Rule 202(a)(30)-1).

1️⃣ Private Fund Exemption

The 🔗 private fund exemption exempts investment fund managers with less than $150 million of regulatory assets under management.

🧮 Calculating “Regulatory Assets Under Management”

Regulatory assets under management (RAUM) is calculated on a gross, fair market value basis across all of your securities portfolios, including:

1. Investment portfolios where at least 50% of the portfolio consists of securities

2. All private funds (funds exempt under ⚖️ 3(c)(1) or 3(c)(7) )

3. Family and proprietary accounts

4. Accounts for which you receive no compensation for your services

🔗 Form ADV has a helpful section on calculating regulatory assets under management, beginning on page 7. Below is a partial snippet.

Note that regulatory assets under management (RAUM) is your aggregate RAUM across all of these portfolios, not the RAUM of any particular fund. Time to break out your calculator.

2️⃣ Venture Capital Exemption

I suppose the VC lobby was doing its duty, because there’s a specific exemption for venture capital funds. 👀 

To be an exempt 🔗 venture capital fund, the fund must (among other conditions) comply with the following requirements:

Let’s dive in 🏊️ 

(1) Venture capital strategy

To satisfy this requirement, VC funds typically include a sentence saying they are pursuing a venture capital strategy in the PPM, LPA, and other governing documents. This is the easy part.

(2) No more than 20% non-qualifying investments

No more than 20% of the fund’s assets can be invested in assets that are not “qualifying investments.”

“Qualifying Investments” means an equity security acquired directly from a qualifying portfolio company, which is a company that:

1. No public companies: At the time of the fund’s investment, is a private company;

2. No leveraged buyouts: Does not borrow or issue debt in connection with the fund’s investment and distribute the borrowing proceeds to the fund; and

3. No fund investments: Is not an investment company, private fund, or commodity pool.

✅ In short, “qualifying investments” are directly acquired equity securities of operating businesses.

🤔 What about secondaries?

Secondaries are not “acquired directly” from a qualifying portfolio company, and therefore are not qualifying investments.

Therefore, for a fund to fall under the VC exemption, secondaries can sometimes be a risky business. The fund can invest in secondaries, but must ensure at least 80% of the fund’s assets are non-secondary qualifying investments.

🏦 Recently-proposed legislation might permit secondaries to count as “qualifying investments” under the venture capital exemption, but no such laws have passed yet. We’ll see if the current government pushes something through.

(3) 15% leverage limitation

The fund cannot have debt in excess of 15% of the total fund size. In addition, the debt cannot have a term of more than 120 days (subject to some exceptions).

In practice, the only debt VC funds incur are “subscription lines” enabling the fund to bridge short-term funding needs without calling capital from investors.

The fund may want to use a subscription line to (i) make an investment quickly, (ii) avoid annoying LPs with too many capital calls or, (iii) less virtuously, juice IRR.

💡 Note on VC fund managers who manage funds in other asset classes

Per the applicable 🔗 SEC release, “an adviser is eligible to rely on the venture capital exemption only if it solely advises venture capital funds.”

In other words, you can’t use the VC exemption if you manage VC funds alongside private equity funds, hedge funds, or secondaries funds.

More than once, I’ve seen a manager who thought they were exempt, but they actually had some secondaries funds, which blows their entire VC exemption. 💣️ This is bad news. To regain the exemption, managers sometimes divest their secondaries investments.

3️⃣ Foreign Private Adviser Exemption

A non-US adviser may be exempt if they satisfy the following criteria:

1. Limited US Nexus: No place of business in the United States and does not hold itself out to the US public as an investment adviser;

2. Limited US Clients: Has fewer than 15 clients and private fund investors in the United States; and

3. Limited US AUM: Has less than $25 million of regulatory assets under management attributable to such U.S. clients and investors (see “Calculating Regulatory Assets Under Management” above).

For #2 above, “counting” US private fund investors is similar to counting under Section 3(c)(1) of the Investment Company Act (here’s a link to ⚖️last week’s article where we discuss counting. 

📚️Selecting Exemptions

Emerging managers often rely on the private fund exception (less than $150 million in AUM) at first. However, GPs should always look to the future to determine what exemptions (if any) they can use once they cross the $150 million threshold. In some cases, managers might alter their investment strategy to avoid registration.

Here are a couple of examples:

• A venture capital fund could decline to purchase secondaries so it can stay within the VC exemption

• A real estate fund might avoid investing in other real estate funds or syndications to avoid subjecting itself to the Investment Advisers Act altogether.

🏦 Becoming a Registered Investment Adviser

If you cross the $150 million AUM threshold and you can’t find another exemption, you must register with the SEC as a Registered Investment Adviser (RIA).

📄 Form ADV

To register as an RIA, you’ll need to file 🔗 Form ADV electronically via the 🔗 Investment Adviser Registration Depository (IARD).

Form ADV, Part 1 contains basic information about the investment adviser, such as:

• Identifying information

• Number of employees

• Information about clients

• Regulatory assets under management

• Information on managed funds

• Information on key personnel (including criminal/disciplinary history)

Form ADV, Part 2 contains more specific disclosure about the investment adviser’s business, such as:

• Information on key personnel

• Fees and compensation arrangements

• Methods of analysis, strategy, and risks

• Code of ethics

• Financial industry affiliations

• Brokerage/custody arrangements

• Financial information

✍️ How do you prepare Form ADV?

You will want help from a lawyer or a compliance consultant to file your Form ADV. You’ll need input from your team to prepare the Form ADV. It’s a relatively large undertaking that should be taken seriously.

📆 Annual Form ADV Updates

Registered investment advisers must file an updated Form ADV within 90 days of the end of their fiscal year. There’s often a mad dash in early Spring to get ADVs filed. I would suggest preparing early. Your lawyer or compliance consultant will be grateful. 🙏 

💼 Additional requirements applicable to RIAs

In addition to filing and maintaining Form ADV, RIAs are subject to various additional compliance measures, including:

• 🔗 Custody Rule: RIAs must maintain client funds with a qualified custodian, provide various statements to clients, and submit to unannounced audits.

• 🔗 Marketing Rule: RIAs are subject to stricter rules regarding advertising and marketing, including disclosing performance results, testimonials, and endorsements.

• 🔗 Chief Compliance Officer: RIAs must appoint a Chief Compliance Officer responsible for the RIA’s compliance with regulations, including an annual review, training, education, monitoring, testing, and reporting.

Do investment managers want to become RIAs?

Due to the increased regulatory burden, most investment fund managers avoid registration for as long as possible.

However, a minority of managers submit to registration voluntarily. Their goal is to increase credibility with sophisticated investors and they are willing to juggle the increased compliance requirements. Investment managers may register as an RIA once they have $100 million in regulatory assets under management (or once they would be required to register with 15 or more states).

⚠️ Exempt Reporting Adviser (ERA) Filing

Investment fund managers with at least $25 million in assets under management, but who are exempt from registering as RIAs, are called Exempt Reporting Advisers (ERAs).

While ERAs aren’t subject to nearly the same regulatory burden as RIAs, ERAs still must file Part 1A of Form ADV with the SEC within 60 days of crossing the $25 million threshold. Like RIAs, ERAs must update their Form ADV each year.

🚨 State regulation of investment advisers

This whole article has been about federal regulation of investment advisers.

However, many managers (especially emerging managers) are also subject to ⚖️ state investment advisory laws (old post). We’ll publish an updated version of that article next week.

Thanks for reading, everyone.

Have a great weekend! 🙌

⚠️ Note: This newsletter is for informational purposes only and nothing should be considered legal advice. For that, hire a lawyer! I am a lawyer, but not your lawyer (unless I actually am your lawyer because you’ve signed an engagement letter and we’re working together). This newsletter may be considered attorney advertising.