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Proposed Rule: Exemptions for Advisers to Venture Capital Funds

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Proposed Rule: Exemptions for Advisers to Venture Capital Funds 77190 Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Proposed Rules [FR Doc. 2010–29956 Filed 12–9–10; 8:45 am] Securities and Exchange Commission, 1. Advises Solely Private Funds BILLING CODE C 100 F Street, NE., Washington, DC 2. Private Fund Assets 20549–1090. 3. Assets Managed in the United States 4. United States Person All submissions should refer to File 5. Transition Rule SECURITIES AND EXCHANGE Number S7–37–10. This file number COMMISSION C. Foreign Private Advisers should be included on the subject line 1. Clients 17 CFR Part 275 if e-mail is used. To help us process and 2. Private Fund Investor review your comments more efficiently, 3. In the United States [Release No. IA–3111; File No. S7–37–10] please use only one method. The 4. Place of Business 5. Assets Under Management RIN 3235–AK81 Commission will post all comments on the Commission’s Internet Web site D. Subadvisory Relationships and Advisory Affiliates Exemptions for Advisers to Venture (http://www.sec.gov/rules/ III. Request for Comment Capital Funds, Private Fund Advisers proposed.shtml). Comments are also IV. Paperwork Reduction Act Analysis With Less Than $150 Million in Assets available for Web site viewing and V. Cost-Benefit Analysis Under Management, and Foreign printing in the Commission’s Public VI. Regulatory Flexibility Act Certification Private Advisers Reference Room, 100 F Street, NE., VII. Statutory Authority Washington, DC 20549, on official Text of Proposed Rules AGENCY: Securities and Exchange business days between the hours of 10 I. Background Commission. a.m. and 3 p.m. All comments received ACTION: Proposed rule. will be posted without change; we do On July 21, 2010, President Obama signed into law the Dodd-Frank Act,2 SUMMARY: The Securities and Exchange not edit personal identifying which amends various provisions of the Commission (the ‘‘Commission’’) is information from submissions. You Advisers Act and requires or authorizes proposing rules that would implement should submit only information that the Commission to adopt several new new exemptions from the registration you wish to make available publicly. rules and revise existing rules.3 Unless requirements of the Investment Advisers FOR FURTHER INFORMATION CONTACT: otherwise provided for in the Dodd- Act of 1940 for advisers to certain Tram N. Nguyen, Daniele Marchesani, Frank Act, the amendments become privately offered investment funds that or David A. Vaughan, at (202) 551–6787 effective on July 21, 2011.4 were enacted as part of the Dodd-Frank or ([email protected]), Division of The amendments include the repeal Wall Street Reform and Consumer Investment Management, U.S. Securities of section 203(b)(3) of the Advisers Act, Protection Act (the ‘‘Dodd-Frank Act’’). and Exchange Commission, 100 F As required by Title IV of the Dodd- Street, NE., Washington, DC 20549– which exempts any investment adviser Frank Act—the Private Fund Investment 8549. from registration if the investment adviser (i) Has had fewer than 15 clients Advisers Registration Act of 2010, the SUPPLEMENTARY INFORMATION: The new rules would define ‘‘venture capital in the preceding 12 months, (ii) does not Commission is requesting public hold itself out to the public as an fund’’ and provide for an exemption for comment on proposed rules 203(l)–1, advisers with less than $150 million in investment adviser and (iii) does not act 203(m)–1 and 202(a)(30)–1 (17 CFR as an investment adviser to a registered private fund assets under management 275.203(l)–1, 275.203(m)–1 and in the United States. The new rules investment company or a company that 275.202(a)(30)–1) under the Investment has elected to be a business would also clarify the meaning of Advisers Act of 1940 (15 U.S.C. 80b) certain terms included in a new development company (the ‘‘private (‘‘Advisers Act’’).1 5 exemption for foreign private advisers. adviser exemption’’). Advisers specifically exempt under section 203(b) DATES: Comments should be received on Table of Contents are not subject to reporting or or before January 24, 2011. I. Background recordkeeping provisions under the ADDRESSES: Comments may be II. Discussion Advisers Act, and are not subject to submitted by any of the following A. Definition of Venture Capital Fund examination by our staff.6 methods: 1. Qualifying Portfolio Companies The primary purpose of Congress in Electronic Comments 2. Management Involvement repealing section 203(b)(3) was to 3. Limitation on Leverage • Use the Commission’s Internet require advisers to ‘‘private funds’’ to 4. No Redemption Rights 7 comment form (http://www.sec.gov/ 5. Represents Itself as a Venture Capital register under the Advisers Act. Private rules/proposed.shtml); or Fund 2 • Send an e-mail to rule- 6. Is a Private Fund Dodd-Frank Wall Street Reform and Consumer 7. Other Factors Protection Act, Public Law 111–203, 124 Stat. 1376 [email protected]. Please include File (2010). 8. Application to Non-U.S. Advisers Number S7–37–10 on the subject line; 3 In this Release, when we refer to the ‘‘Advisers or 9. Grandfathering Provision Act,’’ we refer to the Advisers Act as in effect on • Use the Federal eRulemaking Portal B. Exemption for Investment Advisers July 21, 2011. Solely to Private Funds With Less Than 4 (http://www.regulations.gov). Follow the Section 419 of the Dodd-Frank Act. $150 million in Assets Under 5 15 U.S.C. 80b-3(b)(3) as in effect before July 21, instructions for submitting comments. Management 2011. Paper Comments 6 See section 204(a) of the Advisers Act. See also 1 • Unless otherwise noted, all references to rules infra note 30. Send paper comments in triplicate under the Advisers Act will be to title 17, part 275 7 See S. Rep. No. 111–176, at 71–3 (2010) (‘‘S. to Elizabeth M. Murphy, Secretary, of the Code of Federal Regulations (17 CFR 275). Rep. No. 111–176’’); H. Rep. No. 111–517, at 866 VerDate Mar<15>2010 19:18 Dec 09, 2010 Jkt 223001 PO 00000 Frm 00140 Fmt 4701 Sfmt 4702 E:\FR\FM\10DEP2.SGM 10DEP2 srobinson on DSKHWCL6B1PROD with PROPOSALS2 EP10DE10.143</MATH> Federal Register / Vol. 75, No. 237 / Friday, December 10, 2010 / Proposed Rules 77191 funds include hedge funds, private number of investors investing in the private funds advised; 22 and (iii) non- equity funds and other types of pooled funds, without the need to register with U.S. advisers with less than $25 million investment vehicles that are excluded us.15 This has permitted the growth of in aggregate assets under management from the definition of ‘‘investment unregistered investment advisers with from U.S. clients and private fund company’’ under the Investment large amounts of assets under investors and fewer than 15 such clients Company Act of 1940 8 (‘‘Investment management and significant numbers of and investors.23 Company Act’’) by reason of sections investors but without the Commission 3(c)(1) or 3(c)(7) of such Act.9 Section oversight that registration under the II. Discussion 3(c)(1) is available to a fund that does Advisers Act provides.16 Concern about Today we are proposing three rules not publicly offer the securities it this lack of Commission oversight led us that would implement these issues 10 and has 100 or fewer beneficial to adopt a rule in 2004 extending exemptions.24 In a separate companion owners of its outstanding securities.11 A registration to hedge fund advisers,17 release (the ‘‘Implementing Release’’),25 fund relying on section 3(c)(7) cannot which was vacated by a federal court in we are proposing rules to implement publicly offer the securities it issues 12 2006.18 In Title IV of the Dodd-Frank other amendments made to the Advisers and generally must limit the owners of Act (‘‘Title IV’’), Congress has now Act by the Dodd-Frank Act, some of its outstanding securities to ‘‘qualified generally extended Advisers Act which also concern certain advisers that purchasers.’’ 13 registration to advisers to hedge funds qualify for the exemptions discussed in Each of these types of private funds and many other private funds by this Release.26 advised by an adviser typically qualifies eliminating the current private adviser New section 203(l) of the Advisers as a single client for purposes of the exemption.19 Act provides that an investment adviser private adviser exemption.14 As a result, In addition to removing the broad that solely advises venture capital funds investment advisers could form up to 14 exemption provided by section is exempt from registration under the private funds, regardless of the total 203(b)(3), Congress created three Advisers Act and directs the exemptions from registration under the Commission to define ‘‘venture capital (2010) (‘‘H. Rep. No. 111–517’’). H. Rep. No. 111– Advisers Act.20 These new exemptions fund’’ within one year of enactment.27 517 contains the conference report accompanying apply to: (i) Advisers solely to venture We are proposing new rule 203(l)-1 to the version of H.R. 4173 that was debated in conference, infra note 39. capital funds, without regard to the provide such a definition, which we 8 15 U.S.C. 80a. number of such funds advised by the discuss below in Section II.A of this 21 9 Section 202(a)(29) of the Advisers Act defines adviser or the size of such funds; (ii) Release. the term ‘‘private fund’’ as ‘‘an issuer that would be advisers solely to private funds with New section 203(m) of the Advisers an investment company, as defined in section 3 of less than $150 million in assets under Act directs the Commission to provide the Investment Company Act of 1940 (15 U.S.C.
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