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Asher Bearman




Many of my fund clients are anxiously awaiting an update regarding whether they are going to become subject to regulation under the U.S. Investment Advisor’s Act of 1940 (the “Advisor’s Act”) as a result of the Dodd-Frank regime passed this summer. I just spoke on Thursday at the 7th Annual Private Equity Conference about federal law changes in the past year. They key takaway from the conference regarding Advisor’s Act registration? Stay Tuned. Much of the uncertainty should be clarified in the next two months, and finalized by Summer 2011…just in time, since firms within the scope of the new Advisor’s Act rules will be required to comply with its registration requirements as of July 21, 2011.

Historically, most venture capital and private equity funds have been able to qualify for an exemption from the Advisor’s Act. With the comprehensive Dodd-Frank legislation passed this year, those exemptions have been narrowed substantially. Now, many local fund managers are hoping that they will qualify as managers of “venture capital funds” so that they are excluded from registration.

Specifically, the Dodd-Frank Act provides the following:

EXEMPTION OF VENTURE CAPITAL FUND ADVISERS.—No investment adviser that acts as an investment adviser solely to 1 or more venture capital funds shall be subject to the registration requirements of this title with respect to the provision of investment advice relating to a venture capital fund.

The Fund Registration Act does not, however, define “venture capital fund.” Instead, it simply provides that the SEC must adopt final regulations by no later than July 21, 2011 to clarify the rule and provide reduced record-keeping requirements for qualifying fund managers:

Not later than 1 year after the date of enactment of this subsection, the Commission shall issue final rules to define the term ‘venture capital fund’ for purposes of this subsection. The Commission shall require such advisers to maintain such records and provide to the Commission such annual or other reports as the Commission determines necessary or appropriate in the public interest or for the protection of investors.

This definition will be critical for many fund managers, as it appears that a fund manager that has even one non-qualifying fund or client will not qualify for exemption (and will be required to register under the Adviser Act). I won’t go into the implications of registration in this post – suffice it to say that there are onerous record-keeping and reporting requirements in addition to unannounced SEC inspections…in short, compliance will be painful and expensive for fund managers currently operating without significant regulatory oversight/restriction.

Some have speculated that “venture capital fund” will be defined similarly to ERISA’s venture capital operating company (“VCOC”) definition, but, based on what I’ve heard, that seems like mere speculation at this point. The most recent update I have heard on this issue is that the NVCA is actively negotiating the definition of venture capital funds. A proposed definition is due by the end of the year.

Stay tuned as we will be following this closely over the next few months.