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⚖️ How to Comply with State Investment Advisers Laws (2025 Update)

With Summary of 50 State Exemptions

🎉 Happy Friday, Funds Family!

Laws change! As a result, we just updated each of the four core regulatory articles.

This is an often-ignored area of law by both investment managers and their lawyers.

But first, a quick announcement! 🗣️ 

This September 16-18, I’m (Michael Huseby) heading to Los Angeles for Reconvene – the best real estate conference there is. I generally don’t like conferences, but Reconvene is better. It will be my second year speaking and my third year attending. 

This year, I’ll be speaking about how to raise capital…the legal way. We’ll cover tantalizing topics like (i) how to raise money publicly, (ii) what to do if you want to raise money from non-US investors, and (iii) whether (and how) you can pay people to help you fundraise.

It’s no exaggeration (even if it sounds like it) to say the relationships made through Re-Convene changed my life. I’ve found business partners, investors, and friends. And it was my first year at Reconvene that encouraged me to start TIL (our law firm). 

If you’re going this year, let me know. If you’re not going yet, here’s a link where you can 🔗 buy your ticket. If you use the “TIL2025” discount code (valid through June 30), you get $1,250 off. I’m not being paid to post this, and I don’t get any cash if you sign up.

Hope to see you there! 

Alright, get back to the fun(d)! 😃

🤔 What are state investment adviser laws?

Each state has laws and regulations governing investment advisers. They’re essentially state versions of the federal ⚖️Investment Advisers Act that we discussed last week.

⏳️ When do fund managers need to comply with state investment adviser laws?

Pursuant to the National Securities Markets Improvements Act of 1996, federal investment adviser law “preempts” state law 🏦 once an investment adviser registers with the SEC as a Registered Investment Adviser.

In other words, once a fund manager is a full-blown RIA, the manager generally no longer needs to deal with state investment adviser laws.

Note: Despite this preemption, 🔗 15 U.S. Code § 80b–3a confirms that state authorities can still go after fund managers for fraud:

Nothing in this subsection shall prohibit the securities commission (or any agency or office performing like functions) of any State from investigating and bringing enforcement actions with respect to fraud or deceit against an investment adviser or person associated with an investment adviser.

Therefore, we would advise not committing fraud. 😀 

In practice, this means fund managers are subject to state investment adviser laws unless and until they are registered investment advisers.

This includes fund managers relying on the ⚖️exemptions from registration we discussed last week, including the private fund exemption (less than $150 million in assets under management) and the exemption for venture capital fund managers.

If you’re an emerging fund manager (outside of certain asset classes like real estate 🏠️), you likely need to comply with state investment adviser laws.

⚖️ How to comply with state investment adviser laws

This is where things get a little tricky. 🫠 

As mentioned before, each state has its own laws. And the states vary wildly on how strict their rules are.

The NASAA Model Rule

Many states have adopted a 🔗 model investment advisers rule (or a variation thereof) provided by the North American Securities Administrators Association (NASAA…but not the one with rockets 🚀 ).

Let’s examine the key components of NASAA’s model rule exemptions for investment advisers.

General Requirements

First, to have a good exemption, there are some generally applicable requirements:

(1) neither the private fund adviser nor any of its advisory affiliates are subject to an event that would disqualify an issuer under Rule 506(d)(1) of SEC Regulation D, 17 C.F.R. §230.506(d)(1);

(2) the private fund adviser files with the state each report and amendment thereto that an exempt reporting adviser is required to file with the Securities and Exchange Commission pursuant to SEC Rule 204-4, 17 C.F.R. § 275.204-4; and

(3) the private fund adviser pays the fees specified in Section XXX [410 of USA 2002].

In short:

  1. Bad Actor. The adviser cannot be subject to a “bad actor disqualification” - we discussed this in ⚖️this article on the Securities Act.

  2. ERA Filing. The adviser must make an ERA filing with their home state - we discussed this in ⚖️this article on the Investment Advisers Act.

  3. Fee. You gotta pay the toll troll.

Additional requirements for 3(c)(1) funds that are not venture capital funds

If the adviser has even one fund that relies on Section 3(c)(1) of the Investment Company Act and is not a venture capital fund, there are a few additional requirements. 📜 

Just to be clear, if all of the adviser’s funds are 3(c)(7) funds, all of the adviser’s funds are venture capital funds, or all of the adviser’s funds are outside of the Investment Company Act’s purview altogether, the adviser would not typically need to comply with these extra rules. Check out ⚖️this article on the Investment Company Act for more information.

Here are the extra requirements:

(1) The private fund adviser shall advise only those 3(c)(1) funds (other than venture capital funds) whose outstanding securities (other than short-term paper) are beneficially owned entirely by persons who, after deducting the value of the primary residence from the person’s net worth, would each meet the definition of a qualified client in SEC Rule 205-3, 17 C.F.R. § 275.205-3, at the time the securities are purchased from the issuer;

(2) At the time of purchase, the private fund adviser shall disclose the following in writing to each beneficial owner of a 3(c)(1) fund that is not a venture capital fund:

(A) all services, if any, to be provided to individual beneficial owners;

(B) all duties, if any, the investment adviser owes to the beneficial owners; and

(C) any other material information affecting the rights or responsibilities of the beneficial owners.

(3) The private fund adviser shall obtain on an annual basis audited financial statements of each 3(c)(1) fund that is not a venture capital fund, and shall deliver a copy of such audited financial statements to each beneficial owner of the fund.

In short:

  1. Qualified Clients. The adviser cannot accept investors in any non-venture capital 3(c)(1) fund unless the investors are qualified clients - generally people who (i) have a net worth of $2.2 million or (ii) invest at least $1.1 million with the applicable adviser.

  2. Information. The adviser must provide certain information to investors at the time of investment.

  3. Audit. Each non-venture capital 3(c)(1) fund must have an annual audit, with the results presented to investors.

💲 Burdens for smaller managers

These requirements - especially the “qualified client” and the “audit” provisions - can be quite burdensome for small funds.

In fact, small managers seeking to raise a few million dollars may ultimately decline to raise a fund because (i) the audit requirement is too burdensome or (ii) their investor base wouldn’t all be qualified clients.

The bottom line is that the NASAA model rule isn’t that bad for VC managers or managers who can use 3(c)(7). However, for those non-VC managers who do need 3(c)(1), the model rule can be a serious roadblock.

🗺️ Summary of 50 State Investment Adviser Laws

Now that we understand the NASAA model rule, let’s categorize each of the 50 states into a few buckets. 🪣 

Ultimately, you are 100% going to want to work with a lawyer. This list is just a starting point. The laws may have changed since this article was posted.

For many states, we’ve linked to the applicable statute so you (and your lawyer!) can check it out for yourself. 🔎 

✅ Category 1: Permissive

These states are generally quite user-friendly for advisers. Much easier than the NASAA Model Rule. These states have easy exemptions so long as the total number of “clients” (typically, each fund or SPV is a client) stays below a certain threshold.

  • Connecticut (Unlike the NASAA model rule, Connecticut has a “private fund” exemption for managers with less than $150 million in AUM)

  • D.C. (Unlike the NASAA model rule, Washington D.C. has a “private fund” exemption for managers with less than $150 million in AUM)

  • Florida (Exempt if the manager has less than 6 funds/SPVs within a 12-month period; they also recently added a new, separate private funds exemption)

  • Georgia (Exempt if the manager has less than 6 funds/SPVs within a 12-month period)

  • Illinois (Exempt if the manager has less than 5 funds/SPVs within a 12-month period)

  • Indiana (Exempt if the manager has less than 5 funds/SPVs within a 12-month period, but with a few extra requirements)

  • Kansas (Exempt if the manager has less than 15 funds/SPVs)

  • Louisiana (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

  • New Jersey (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

  • New York (Exempt if the manager has less than 6 funds/SPVs within a 12-month period)

  • North Carolina (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

  • Ohio (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

  • Pennsylvania (Exempt if the manager has less than 5 funds/SPVs within a 12-month period)

  • South Dakota (Exemptions mirror the federal SEC exemptions)

  • Tennessee (Exempt if the manager has less than 15 funds/SPVs within a 12-month period)

🟡 Category 2: NASAA Model Rule

These states follow the NASAA Model Rule

⚠️ Category 3: NASAA Model Rule With Modifications

These states started with the NASAA Model Rule but tweaked things a bit. You’ll definitely want to check the particulars with your attorney.

  • Arizona (A few modifications making it slightly more permissive than the NASAA model rule)

  • California (California has a broader venture capital exemption than the NASAA model rule)

  • Maine (Only minor modifications)

  • Maryland (Only minor modifications)

  • Michigan (Audit not required if all investors are qualified clients)

  • Missouri (Certain types of accredited investors can be admitted in non-venture capital 3(c)(1) funds, even if not qualified clients)

  • Nebraska (A few modifications making it slightly more permissive than the NASAA model rule)

  • Oklahoma (Added the $150 million private fund exemption but removed the venture capital exemption)

  • South Carolina (Various modifications, some more restrictive and some less restrictive)

  • Texas (A few modifications making it slightly more permissive than the NASAA model rule)

  • Vermont (Only minor modifications)

  • Wisconsin (In addition to the model rule, Wis. Stat. § 551.403(2)(a)(2m) provides another exemption for advisers whose only clients in Wisconsin are certain categories of accredited investors under federal Regulation D (including entities with total assets in excess of $5,000,000)

🚨 Category 4: Bad News

These states are more restrictive than the NASAA model rule. In many cases, there are no exemptions whatsoever, meaning that an investment adviser must formally register with the state (similar to registering with the SEC as a Registered Investment Adviser).

  • Alaska (No exemption)

  • Delaware (Exemption only applies to 3(c)(7) funds)

  • Hawaii (No exemption)

  • Idaho (No exemption)

  • Kentucky (Exemption only applies to 3(c)(7) funds)

  • Montana (No exemption)

  • North Dakota (Exemption only applies to venture capital funds)

  • Utah (Complex provision that is more restrictive than the model rule)

  • Washington (Exemption only applies to 3(c)(7) funds and venture capital funds - not other 3(c)(1) funds).

  • West Virginia (No exemption)

🤷‍♂️ Category 5: Oregon

Oregon exempts “any person who conducts no public advertising or general solicitation in this state and whose only clients in this state are accredited investors.”

The question is whether using 506(c) (discussed in this ⚖️article on the Securities Act) would blow this exemption. I haven’t seen any guidance on this yet. 506(b) appears to be safe.

Stay weird, my friends.

📆 Reminder: ERA Filings

As a reminder, when you hit $25 million in assets under management, you generally need to make an Exempt Reporting Adviser (ERA) filing with the SEC. For more on this, review this ⚖️article on the Investment Advisers Act at the federal level.

As mentioned above, this ERA filing with the SEC does not preempt state law! State law is only preempted once you are a full-blown Registered Investment Adviser.

Thanks for reading, everyone.

Have a great weekend! 🙌 

/ WRAPPING THE CASE

  1. Don’t forget state law. Until your ManCo is a registered investment adviser, it is likely subject to state investment advisers laws.

  2. NASAA Model Rule. Many states have adopted the NASAA model rule exemptions for certain private fund managers.

  3. Everyone is different. Work with an attorney to learn the requirements in your state. The states are all over the place!

Thanks for reading, everyone.

Have a great weekend! 🙌 

/ JURY TRIAL

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