Q: I would like to create and manage a fund for investments in various securities of public and private companies in Massachusetts. Do I need to register as an investment adviser with the Securities and Exchange Commission (“SEC”) and the Massachusetts Securities Division?
A: The SEC and the Massachusetts Securities Division considers an investment adviser to be any person who, for compensation, renders investment advice or provides financial planning services that includes investment advice about the advisability of investing in, purchasing, or selling securities. All investment advisers who fit this definition are expected to register with the SEC and Massachusetts Securities Division as an investment adviser, unless that person is specifically excluded from the definition or can otherwise take advantage of certain exemptions from registration.
There are several exemptions from the formal investment adviser registration requirement at both the federal and state level. At the federal level, investment advisers to private funds with assets under management in the United States of less than $150 million are exempt from registration with the SEC. However, an investment adviser to a private fund will still need to register with the Massachusetts Securities Division, unless the requirements of a state exemption are satisfied.
One key exemption in Massachusetts is the Private Fund Adviser exemption. Investment Advisers in Massachusetts who advise only qualifying private fund clients may qualify for the Private Fund Adviser exemption. Qualifying private funds are those not making a public offering of securities and are not presently planning to make a public offering of securities in the future. In addition, a qualifying private fund must have no more than 100 beneficial owners or all investors in the fund must be “qualified purchasers” that meet certain requirements. Determining whether an investor satisfies the “qualified purchaser” conditions requires an individualized analysis by legal counsel.
Massachusetts investment advisers to only these qualifying private funds will likely be eligible for the Private Fund Adviser exemption. The primary benefit of this exemption is the corresponding qualification as an Exempt Reporting Adviser. An Exempt Reporting Adviser may forego formal registration with the SEC and the Massachusetts Securities Division, but is required to file an annual report using a truncated Form ADV and to pay a $300 reporting fee.
While there are several available exemptions to qualify as an Exempt Reporting Adviser, it is rare that an investment adviser may forego filing a Form ADV altogether. Determining whether you must register as an investment adviser, or can rely on an exemption from such registration involves complex analysis and a thorough understanding of laws applicable to investment advisers. Consult an experienced attorney or other adviser who specialized in such matters to ensure you will be in proper compliance.
Know the Law is a bi-weekly column sponsored by McLane Middleton. Questions and ideas for future columns should be emailed to [email protected]. Know the Law provides general legal information, not legal advice. We recommend that you consult a lawyer for guidance specific to your particular situation.