Starting a Hedge Fund in Nevada

While Nevada may be the favorite place for hedge fund managers to spend their money, it is not necessarily a place where hedge fund managers want to be located.  The reason is that Nevada requires hedge fund managers with a place of business in Nevada to be registered as an investment advisor with Nevada.  If a start up hedge fund manager does not want to register as an investment advisor, they should not establish a place of business within Nevada.

Nevada Investment Advisory Issues

Like many states Nevada requires all of the owners and employees (except for ministerial employees) of a firm to have a Series 65 exam license (or acceptable designation such as the CFA designation).  Nevada also requires investment advisory firms (which have hedge funds as clients) to maintain a positive net capital of at least $20,000.  This means that the management company, and not the hedge fund, must have at least a $20,000 net worth.  This is often accomplished by the management company maintaining a bank account with an appropriate amount of cash to meet the net worth requirement after liabilities.  Some states have allowed management companies to hold their net worth in the hedge fund – I have not personally asked Nevada about this issue, but it could be done either through an informal conversation with a staff attorney or through more formal means (no action letter or request for opinion from the state securities division).

Below I have posted a question and answer section from the Nevada Securities Division website.  If you are thinking of starting a hedge fund in Nevada, please contact us for a quote on our fund formation services.  We can also provide investment advisory set up services at competitive rates.  Related hedge fund law articles include:

• New Mexico Hedge Fund Law
• How to register as an Investment Advisor
• Important Information for Registered Investment Advisors

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Frequently asked questions with answers regarding investment adviser and representative of investment adviser disclosure and reporting requirements through IARD.

What is IARD?
The Investment Adviser Registration Depository (IARD) is an electronic filing system for Investment Advisers sponsored by the Securities and Exchange Commission (SEC) and North American Securities Administrators Association (NASAA), with FINRA serving as the developer and operator of the system. The IARD system collects and maintains the registration and disclosure information for Investment Advisers and their associated persons. The new IARD system supports electronic filing of the revised Forms ADV and ADV-W, centralized fee and form processing, regulatory review, the annual registration renewal process, and public disclosure of Investment Adviser information.

I want to file as a Nevada based investment adviser. How do I file an application for an investment adviser to license in Nevada?
Forms and instructions for IARD filings can be found at the website www.iard.com.

Nevada has agreed to accept Forms ADV and ADV-W filed electronically through the IARD system. By printing the contents of the State Entitlement Form (www.iard.com/pdf/state_packet.pdf) State Registrant Entitlement Packet and completing the required Entitlement Forms, your firm is requesting access to the IARD System for electronic filing. Once your firm has completed and submitted your Entitlement Forms, FINRA will send your firm a Confirmation Packet.

The State Registrant Entitlement Packet includes:

* An introduction letter from the North American Securities Administrators Association (NASAA)
* General information and instructions from FINRA Regulation
* IARD User Account Acknowledgment Form (IARD UAAF)
* IARD Account Administrator Entitlement Form (IARD AAEF)
* Participant Acknowledgment Form (PA)

Where and when is the IARD available?
The IARD System can be found at www.iard.com and is available Monday through Friday from 7 a.m., ET, until 11p.m., ET.

I am currently licensed as an investment adviser in Nevada. Am I required to file through the IARD?
Each adviser licensed with Nevada must re-file its Form ADV through IARD. To assist state licensed investment advisers make the transition to electronic filing, the Division will accept paper filing as needed, however, you should visit the website www.iard.com as soon as possible to set up your IARD account and receive your user information and password.

All initial application filings for licensing as an investment adviser in Nevada must be submitted through IARD after October 1, 2002

How much are the application fees and how do I pay them?
The fee for investment adviser firms is $300.00 annually. (NRS 90.360) A financial account for billing and payment of fees will be established for your firm through IARD and will be paid from this account to Nevada Securities Division. You will no longer need to send fees to the Nevada Securities Division for the licensing of the firm. There is a one-time set-up fee of $150 and an annual maintenance fee for IARD processing fees, which is paid to the system vendor, in addition to the state licensing fees.

The fee for representatives of investment advisers is $110.00 annually. There is a one-time set up fee and annual maintenance fee for each representative of investment advisers payable to the system vendor.

How will renewal fees be paid?
In November of each year you will receive a renewal notice from the IARD advising how much you must remit for renewal of the investment adviser and representatives of investment advisers. All renewal fees will be paid through the IARD system

The IARD system only allows for Part 1 of the new Form ADV to be filed. Do I still have to file Part II of the Form ADV?
Yes, state licensed investment advisers must submit a copy of Part II of the Form ADV to the Division prior to your license becoming effective. Federal Covered Advisers do not need to submit a copy of Part II to the Division unless requested to do so.

The Form ADV filed through IARD is not the same Form ADV that I have filed with the Nevada Securities Division. What do I need to re-file through the IARD system?
You will need to re-file Part 1 of the amended Form ADV, available through the IARD system. The amended Form ADV still consists of two parts. Part 1 asks for information about the adviser and persons associated with the adviser. Part 2 contains the requirements for a written statement that advisers must provide to prospective clients and annually offer to clients.

Substantial revisions have been made to Part 1 to accommodate electronic filing and to reflect changes in the advisory industry and the laws regulating investment advisers. Part 1A must be completed by all advisers and Part 1B must be completed by state licensed advisers.

Part 2 is currently under review by the SEC. Part II (old form) must still be filed with Nevada Securities Division upon application and must be updated as required.

Do I have to file amendments to Form ADV?
Yes, amendments must be done through IARD. Nevada has adopted the SEC Form ADV and its instructions which require you amend your Form ADV each year by filing an annual updating amendment. In addition, amendments to the Form ADV should be filed promptly for any changes in Part 1A, Items 1, 3, 4, 9, or 11 or Part 1B, items 1,2A through 2F or 2I If information provided in Part II becomes materially inaccurate an amendment must be filed directly with the Nevada Securities Division.

How are licensing of representatives of investment advisers going to change?
The IARD can accept U-4s and payment for licensing of representatives of investment advisers. All applications and fees will be required to be electronically submitted to the IARD as of October 1, 2002. Transition filings will only be accepted for representatives of investment advisers if the Division has a record of their current licensing as a representative of an investment adviser. If a representative of an investment adviser had been relying upon an exemption from licensing in Nevada and now wishes to license through IARD the filing must be submitted as a new filing not a transition filing.