Tag Archives: investment adviser exemption

California Private Fund Adviser Exemption Approved

California Hedge Fund Managers Relieved of IA Registration Requirement

On August 27, 2012 (“Effective Date”), the California Office of Administrative Law approved the long awaited private fund adviser exemption (“Private Fund Exemption”). The immediately effective exemption is only available to advisers who provide advice solely to “qualifying private funds,” which include venture capital funds, Section 3(c)(1), and Section 3(c)(7) funds. The Private Fund Exemption is not available to advisers who also manage separate accounts.

Currently, a California based adviser who manages less than $100,000,000 must either register as an investment adviser with the California Department of Corporations (“Department”), or rely on an exemption from registration. Under the new Private Fund Exemption advisers can file as “exempt reporting advisers” (“ERAs”) and thereby avoid the burdensome registration process.

Requirements Generally

To qualify for the Private Fund Exemption, the adviser must

  1. have not violated any securities laws;
  2. file and periodically update certain items on Part 1 of the Form ADV;
  3. pay California’s investment adviser registration and renewal fees; and
  4. fulfill any additional requirements when advising funds organized under Section 3(c)(1).

Additional Requirements for 3(c)(1) Fund Managers

The additional requirements for advisers advising 3(c)(1) funds include:

1. All investors in the fund must either (i) be accredited investors; (ii) be managers, directors, officers or employees of the adviser; or (ii) have received the fund interest via a transfer not involving a sale.

2. Advisers may only charge performance fees to qualified clients; and

3. Advisers shall provide each investor with annual audited financial statement of the fund within 120 days after the end of each fiscal year; provided, however, advisers who begin operations more than 180 days into a fiscal year may include the audit of the initial fiscal year in the fiscal year immediately succeeding the initial fiscal year.

Other Information

An adviser to 3(c)(1) funds that existed prior to Effective Date may take advantage of the Private Adviser Exemption if, as of the Effective Date, it complies with the requirements enumerated above. Any investors in funds existing prior to the Effective Date who do not meet the standards outlined in Item 1 above, will be allowed to remain in the funds provided that they do not make any additional capital contributions. Furthermore, as of the Effective Date, advisers must cease charging performance fees to any investors who do not meet the “qualified client” definition.

To take advantage of the Private Fund Exemption, an adviser must file a partial Form ADV with the Department via the IARD system no later than 60 days from the Effective Date. Advisers currently registered with the Department may choose to withdraw their registration and make a filing under the Private Fund Exemption.

For information on whether your firm may be able to claim an exemption from registration, please see the California Private Fund Adviser Exemption Chart.

If you would like help to utilize the California exemption, please contact us directly.


Bart Mallon is a partner with Cole-Frieman Mallon & Hunt LLP, an investment management law firm which provides legal services to the hedge fund industry. Bart can be reached directly at 415-868-5345.

California Requests Input on IA Exemption Changes

Seeks to Raise IA Exemption Threshold to $100MM AUM

In an Invitation for Comments released today, California officially seeks comments to change its rules with respect to hedge fund managers and a certain exemption from investment adviser registration.  California currently exempts from registration those investment advisers with a place of business in California and more than $25MM of AUM (please see our post on the California IA exemption).  California may, however, increase the asset threshold for the exemption because of the changes under the Dodd-Frank Act.

Prior to Dodd-Frank, hedge fund managers could not register with the SEC unless they had $25MM of AUM.  Now, the threshold will be $100MM of AUM.  Accordingly, some states are proposing to amend current laws so they reflect the changes at the federal level.  The invitation for comments seems to be based on a recent NASAA proposed hedge fund model rule which would require all non-SEC registered hedge fund managers (to Section 3(c)(1) funds) to register with the state securities commission.   The proposed model rule was a natural step for NASAA to take considering that the Dodd-Frank Act did, with respect to some states, leave a regulatory gap.  Connecticut is another state which has an exemption for managers with more than $25MM of AUM (please see our post on the Connecticut IA exemption).

California Invitation

California provided the following as a reason for the invitation:

As a result of Dodd-Frank, on July  21, 2011, Section  260.204.9 will no longer provide an exemption from California licensing requirements.  In anticipation of these changes, the California Corporations Commissioner will be amending Section 260.204.9 to reflect the changes in the corresponding federal rules.  The Commissioner seeks input on the issue of how best to regulate advisers to alternative investment vehicles, while balancing the regulatory burden on such advisers, with any corresponding investor protections issues.

The following are the items which California asks interested parties to discuss:

1.  To avoid the “retailization” of private alternative investment funds, should the exemption apply exclusively to advisers to Section 3(c)(7) funds (i.e., not to Section 3(c)(1) funds)?
2.  Should all persons investing in a Section 3(c)(1) fund be required to be qualified clients? If so, should the Department issue an order that “grandfathers” Section 3(c)(1) funds organized prior to July 21, 2010?
3. Should the proposed statutory disqualification provisions be expanded to include additional factors?
4.  Should the proposed asset under management threshold (AUM) be a different amount than that set forth in the proposed rule (i.e. $100 million)?  If so, what is the basis for a different threshold?
5.  Are there criteria other than AUM that the Commissioner should consider to determine whether an adviser should be exempt (e.g., the fund is subject to an annual audit)?
6.  Should the Department’s definition of venture capital company/fund conform to the proposed SEC definition?
7.  Should the Department adopt the North American Securities Administrators Association (NASAA) proposed model rule for an exemption for Private Fund Advisers?

What this means

Right now this does not mean anything.  The division will take comments into consideration when they begin to draft the proposed amendment to the current hedge fund registration exemption.  After the proposed amendment is drafted, there will be a public comment period prior to any new regulation being officially adopted.  This means that interested parties will have the ability to have their comments heard now and after a proposed rule has been announced.  Comments on this particular release are due by March 28, 2011.


Bart Mallon is an attorney who works with both state and SEC registered fund managers.  His firm, Cole-Frieman & Mallon LLP, routinely provides regulatory and compliance services to registered investment advisers.  He can be reached directly at 415-868-5345.