The Private Fund Adviser Exemption, something to consider if you are a start up hedge fund manager or thinking about starting a hedge fund.
New hedge fund startup managers and persons thinking about starting a hedge fund need to consider the new SEC rules implementing changes to the Investment Advisers Act of 1940, which may require registration for many previously unregistered advisers, such as advisers to private funds, who may have to register with the SEC or one or more state regulators absent an exemption from registration.
Many start up hedge fund managers will still be able to qualify for an exemption from registration at the SEC and the state level. New SEC regulations provide an exemption from registration to any investment adviser that acts solely as an adviser to private funds and that has assets under management in the United States of less than $150 million; the so called “private fund adviser exemption.” Advisers with assets between $100 million and $150 million (“exempt reporting advisers”) although exempt from registration, are required to report to the SEC on Form ADV which serves as both a registration and reporting form for registered advisers and as a reporting form for exempt reporting advisers.
Section 202(a)(29) of the Advisers Act, as amended, defines a “private fund” as an issuer that would be an investment company under Section 3 of the Investment Company Act of 1940 (1940 Act) but for the exclusions from the definition of “investment company” under Section 3(c)(1) or 3(c)(7) of the 1940 Act. A private fund adviser may advise an unlimited number of private funds and qualify for the exemption from registration so long as that the adviser’s U.S. assets under management are less than $150 million. A private fund adviser is required to determine its assets under management annually within 90 days. Advisers to private funds with less than $150 million of U.S. assets under management will still need to comply with applicable state investment adviser registration requirements.
Subadvisers to private funds that satisfy the requirements of Rule 203(m)-1 may rely on the exemption from registration, despite technically having contractual privity with the adviser and not with the private funds themselves (and thereby having a non-private fund client in the form of the adviser).
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