December 1, 2021

Volume XI, Number 335

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November 30, 2021

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California’s Private Fund Adviser Exemption

Before the enactment of the Dodd-Frank Act in 2010, many advisers to alternative investment vehicles, such as hedge funds, private-equity funds, and venture capital funds relied on the Section 203(b)(3) exemption from registration under the federal Investment Advisers Act. In California, investment advisers exempt under Section 203(b)(3) had a corollary temporary exemption from California investment adviser licensing requirements if they met the requirements of Rule 260.204.9. The elimination of the Section 203(b)(3) exemption caused the Department of Business Oversight to adopt a successor exemption in 2012.

California’s current rule exempts a “private fund adviser” from California’s investment adviser registration requirement (Corp. Code § 25230(a)).  A “private fund adviser” is an investment adviser who provides advice solely to one or more qualifying private funds.  A “qualifying private fund” is an issuer that qualifies for the exclusion from the definition of an investment company under one or more of Sections 3(c)(1), 3(c)(5) and 3(c)(7) of the Investment Company Act of 1940.  To qualify for this exemption, a private fund adviser must:

  • Not be subject to statutory disqualifications (frequently referred to as “bad boy” provisions);

  • File periodic informational notices regarding the characteristics of the adviser and associated private funds; and

  • Pay the standard investment adviser annual registration fee.

Additional requirements pertain to advisers to “retail buyer funds”.  A “retail buyer fund” is a qualifying private fund that is (i) not a “venture capital company” (as defined in the rule), and (ii) that qualifies for the exclusion from the definition of an investment company under one or both of Sections 3(c)(1) and 3(c)(5) of the Investment Company Act.

Rule 260.204.9 is complicated and the foregoing description should not be relied upon as a complete description of the rule.  Application of the rule, moreover, requires an understanding of both the Investment Advisers Act and Investment Company Act.  Therefore, if you aren’t well versed in these laws, you should find, and employ, someone who is.

© 2010-2021 Allen Matkins Leck Gamble Mallory & Natsis LLP National Law Review, Volume VI, Number 335
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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Bishop works with privately held and publicly traded companies on federal and state corporate and securities transactions, compliance, and governance matters. He is highly-regarded for his in-depth knowledge of the distinctive corporate and regulatory requirements faced by corporations in the state of California.

While many law firms have a great deal of expertise in federal or Delaware corporate law, Keith’s specific focus on California corporate and securities law is uncommon. A former California state regulator of securities and financial institutions, Keith has decades of...

949-851-5428
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