The SEC has proposed amendments to the definition of a venture capital fund and to the private fund adviser exemption under the Investment Advisers Act to implement changes in the FAST Act. The FAST Act amended the exemption from investment adviser registration for any advisers to venture capital funds by deeming small business investment companies to be venture capital funds. The FAST Act also amended the exemption from investment adviser registration for any advisers to private funds with less than $150 million in assets under management by excluding the assets of small business investment companies (SBICs) when calculating private fund assets toward the registration threshold of $150 million. The comment period will be open for 30 days (Release No. IA-4697).
Amended definition. Under the proposal, the definition of assets under management in Investment Advisers Act Rule 203(m)-1 will be amended to exclude the assets of SBICs. The SEC noted that prior to the enactment of the FAST Act, it believes that the exemption from registration for advisers solely to SBICs was the primary exemption from registration available to SBIC advisers. The FAST Act expanded the venture capital fund adviser exemption and the private fund adviser exemption to specifically include advisers to SBICs. Advisers that rely on the SBIC exemption are not subject to the reporting or recordkeeping provisions of the Investment Advisers Act or to examination by SEC staff.
Advisers that rely on the venture capital fund and private fund adviser exemptions, while exempt from registration, are considered exempt reporting advisers and must maintain records and submit reports that the SEC deems necessary for the protection of investors. Exempt advisers are required to file a subset of the information required by Form ADV but are not subject to many of the other requirements to which registered investment advisers are subject.
Three exemptions. Advisers to SBICs can now rely on three exemptions from registration—the SBIC adviser exemption and advise only SBICs; the venture capital fund adviser exemption and advise both SBICs and venture capital funds; or the private fund adviser exemption and advise both SBICs and non-SBIC private funds, provided that the non-SBIC private funds account for less than $150 million in assets under management in the U.S. The SEC explained that most, if not all, SBICs meet the definition of a private fund but may not meet the definition of a venture capital fund, so the amendment would include SBICs in the definition of venture capital funds for the purposes of the venture capital fund exemption.
Specific questions. The SEC is seeking comments in response to a number of specific questions, including whether, prior to the enactment of the FAST Act, the SBIC adviser exemption was their primary exemption from registration or whether advisers to SBICs relied on other exemptions. Comments are also sought on whether additional changes should be proposed to better reflect the FAST Act’s amendment to Section 203(l) of the Advisers Act and whether there are alternative methods to make the amendment clearer.
In addition, the SEC also asks whether it should revise Form ADV to require SBICs to report more information than is currently required, such as the provision of an identifier similar to the license number required by the Small Business Administration. Alternatively, the SEC asks whether to revise Form ADV to require advisers to report less information than is currently required for private funds.
The SEC noted that the FAST Act does not require it to amend the Advisers Act rules, but the proposed amendments would eliminate any confusion that may arise without the proposed revisions.
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