The Securities Exchange Commission (SEC) adopted final rules on 22 June 2011 implementing provisions of the Dodd-Frank Act (“the Act”) and clarifying the proposed exemptions issued on 19 November 2010. There are some amendments, particularly in relation to the exemption for Venture Capital Advisers.
Perhaps most importantly, the Rules have also confirmed that the deadline for SEC registration and filings has been extended until 30 March 2012, giving firms more time to prepare.
Foreign Private Advisers
The definition of Foreign Private Advisers has not changed from the original exemption stated in the Act. Such an Adviser is exempt from the SEC’s registration and reporting requirements if it meets the following criteria:
- has no place of business in the US;
- has fewer than 15 clients and private fund investors in the US;
- manages less than $25m aggregate assets under management attributable to those clients; and
- does not hold itself out to the public in the US as an investment adviser or act as an adviser to a US-registered investment company.
Venture Capital Advisers
Venture Capital Advisers are exempt from SEC registration but will have filing requirements. A non-US adviser may rely on this exemption if all of its clients, US or non-US, are venture capital funds. The most significant change made is that a private fund may still qualify as a venture capital fund while holding as much as 20% of its capital in non-qualifying investments.
In addition, a venture capital fund is a private fund that:
- represents itself as pursuing a venture capital strategy to its investors
- does not borrow or otherwise incur leverage
- does not offer its investors redemption except in extraordinary circumstances
- is not registered under the Investment Company Act
- has not elected to be treated as a business development company (BDC)
There are also grandfathering provisions for venture capital funds allowing an existing fund not meeting the definition above to be treated as such a fund if it:
- held itself out as a venture capital fund to investors at the time the fund offered its securities
- sold securities to investors prior to 31 December 2010
- does not sell any securities to, or accept any capital commitments from any person after 21 July 2011
Private Fund Advisers
Similarly, a private fund adviser does not have to become registered with the SEC but does have to submit annual filings. An adviser can be treated as a private fund adviser if it has its principal office and place of business outside of the US and:
- it has no client that is a US Person except for one or more qualifying private funds; and
- all assets managed by the adviser from a place of business in the US are solely attributable to private fund assets, the total value of which is less than $150 million.
The proposed rules required firms to calculate assets under management on a quarterly basis to check the $150m threshold, but the final rules have relaxed this to an annual calculation.
SEC requirements for exempt reporting firms
Both venture capital advisers and private fund advisers will have to report to the SEC on an annual basis. Form ADV1 has been revised and needs to be submitted by exempt reporting advisers to the SEC between 1 January and 14 February, to allow for processing by 30 March 2012. Reporting is due annually thereafter, subject to interim amendments requirements. The information then becomes publicly available. SEC retains the right to visit exempt reporting firms, but is unlikely to do so unless they have cause.
SEC application process
Firms which need to become SEC registered will have to:
- appoint a Chief Compliance Officer;
- undertake a gap analysis between existing procedures and those required once SEC registered;
- develop and implement a compliance infrastructure to meet SEC requirements;
- undertake the SEC registration process, completing both ADV 1 and ADV 2a forms.
You need to carefully assess whether any of the above exemptions apply to your business. Firms not falling under any of the exemptions will have to be registered with the SEC by 30 March 2012, making the last possible date for submitting their application 14 February 2012. We recommend that you start your preparations in September or October 2011 and submit your SEC application early in the new year at the latest to beat the rush.
How we can help
For those firms caught by the SEC regime, we can guide you through all aspects of the application process and provide SEC compliance training. We can also assist exempt reporting firms to complete their first and ongoing annual SEC filings.
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