SEC Issues Guidance Expanding the Private Fund and Venture Capital Fund Adviser Exemptions
President Obama signed into law the SBIC Advisers Relief Act (as part of the Fixing America’s Surface Transportation Act of 2015—the FAST Act) on December 4, 2015. (See also our Annual Compliance Alert) After the enactment of the Dodd-Frank Act, advisers to Small Business Investment Companies (SBICs) were limited in their choice to one of the available exemptions from registration under the Investment Advisers Act of 1940. The SBIC Advisers Relief Act provides certain additional relief for investment advisers that advise private funds and SBICs, and for those that advise venture funds and SBICs. The SEC’s Investment Management Guidance update interprets the SBIC Advisers Relief Act and its implications.
What is an SBIC?
An SBIC is a privately owned and operated investment company making long term investments specifically in U.S. businesses and is licensed by the Small Business Administration (SBA). The primary reason firms choose to become licensed with the SBA is to secure SBA financing.
What is the SBIC Adviser Exemption?
As originally implemented by the Dodd-Frank Act, the SBIC adviser exemption provided relief from SEC registration to those advisers whose only clients consisted of one or more SBICs, irrespective of assets under management. However, the SBIC adviser exemption did not allow advisers to combine multiple exemptions such as the private fund or venture capital fund adviser exemptions in order to avoid SEC registration.
For example, an Adviser to both a venture fund and an SBIC (that does not qualify as a venture fund) would not be able to rely on either the venture capital fund adviser exemption or the SBIC adviser exemption. Instead, the adviser would have had to rely on the private fund adviser exemption which would only be available to it if it had less than $150 million in regulatory assets under management.
Impact of the SBIC Advisers Relief Act on the use of the Venture Capital Fund and Private Fund Adviser Exemptions
The SBIC Advisers Relief Act amends Investment Advisers Act by:
- including in the definition of a venture capital fund SBIC funds (other than business development companies).
- excluding from the private fund adviser exemption the $150 million asset limitation with respect to a private fund that is a SBIC fund (other than a business development company).
As a result, an adviser:
- may rely on the venture capital fund adviser exemption and advise both SBICs and venture capital funds; or
- may rely on the private fund adviser exemption and advise both SBICs and non-SBIC private funds as long as the non-SBIC private funds account for less than $150 million in assets under management.
- that is registered and advises SBICs may be eligible to withdraw its registration and begin reporting to the SEC as an exempt reporting adviser under either the venture capital fund adviser exemption or the private fund adviser exemption.
In contrast to an adviser relying solely on the SBIC Adviser Exemption, the SEC staff believes that when an SBIC adviser choses to rely on the private fund or venture capital fund exemption, the adviser is required to submit reports to the SEC as an exempt reporting adviser.
Additionally, the SEC staff notes that (i) advisers currently relying on the private fund or venture capital adviser exemption may advise SBIC clients following the revised exemptions and (ii) certain registered advisers of SBICs may be eligible to withdraw their current registration and rely upon the private fund adviser or the venture capital fund exemption as exempt reporting advisers.
It is important to note that the Investment Advisers Act, as amended by the SBIC Advisers Relief Act, now preempts states from requiring advisers that rely on the SBIC fund exemption to register, be licensed or qualify as an investment adviser in the state. As a result of the federal preemption, advisers that manage only SBIC funds will be relieved from having to register (or may withdraw if registered) in states that have not adopted exemptions to investment adviser registration analogous to the Investment Advisers Act.
Please contact an Investment Funds and Investment Management group attorney for further detail and with your questions.