Managing a feeder fund or fund of funds involves more than complying with the securities laws governing your investment offering. Most sponsors pay considerable attention to Regulation D, their offering documents, and the Investment Company Act. However, the requirements applicable to the company managing those investments often receive much less attention.
Your fund may qualify under Section 3(c)(1) of the Investment Company Act, but the management company must separately determine whether it qualifies for an exemption from investment adviser registration. Depending on its activities and where it operates, the company may be subject to federal investment adviser laws, state requirements, or both.
One of the more complicated parts of that analysis is determining which exemptions apply and whether Form ADV filings are necessary. Those requirements aren’t uniform across the country, and a manager who qualifies for an exemption from registration may still have reporting obligations.
Why Investment Adviser Exemptions Vary by State
Federal law establishes the general framework for investment adviser regulation, but many smaller investment advisers are regulated primarily at the state level. This includes managers operating feeder funds and funds of funds that invest in other real estate syndications, private funds, and investment offerings.
Some states have adopted exemptions modeled on recommendations from the North American Securities Administrators Association, commonly known as NASAA. Others have created different exemptions or modified the conditions to address particular types of private funds.
The differences aren’t limited to whether an exemption exists. States may impose requirements involving investor qualifications, annual audited financial statements, custody of investor assets, disclosures, and Form ADV reporting.
A management company may satisfy the requirements for an exemption in one state but fail to qualify under the rules of another. For existing fund managers, understanding those differences is particularly important because the investment and ownership structure may already be established.
Where Your Management Company Operates Matters
Many private fund sponsors establish their entities in Delaware, Nevada or Wyoming because of its corporate laws and familiarity among investors. However, organizing an LLC in one of these states doesn’t necessarily mean those state’s investment adviser law governs the company’s activities.
Investment adviser regulation places considerable importance on where the advisory business actually operates. The principal office, additional places of business, and locations where investment management activities occur can all affect the analysis.
Fund managers working with partners in multiple states may need to evaluate more than one jurisdiction. The activities performed by each manager, their authority over investment decisions, and the locations where those activities take place should all be considered.
This is why selecting a state for LLC formation isn’t an investment adviser compliance strategy. A proper evaluation looks at the management company’s actual operations and determines which federal and state registration or reporting requirements apply.
Texas and California Have Different Requirements
Texas and California both recognize exemptions for certain private fund advisers, but their requirements aren’t identical. Those differences illustrate why fund managers shouldn’t assume that another sponsor’s exemption will necessarily work for their own management company.
Texas provides a private fund adviser exemption under Section 139.23 of its securities regulations. The exemption requires qualifying managers to submit Form ADV reports and recognizes different categories of private funds, including certain real estate, private equity, and venture capital funds.
Some Section 3(c)(1) funds that don’t meet those categories face additional conditions involving qualified clients and custody-related requirements. A feeder fund investing in another company’s membership interests shouldn’t automatically assume it qualifies as a real estate fund simply because the underlying investment involves real property.
California provides an exemption under Rule 260.204.9, which expressly addresses certain funds of funds. Its requirements include Form ADV reporting and additional conditions for qualifying retail buyer funds, including investor eligibility, disclosures, and annual audited financial statements.
California also imposes restrictions involving performance-based compensation attributable to investors who aren’t qualified clients. These requirements can become particularly important when a feeder fund manager receives a carried interest or other profit-based compensation.
Neither state necessarily requires every qualifying private fund adviser to complete full registration. However, managers must satisfy the substantive conditions of their exemptions, and those conditions can differ significantly.
What About Investors Living in Other States?
Feeder fund managers frequently raise capital from investors throughout the country. Their investor relationships often extend beyond the state where the management company maintains its principal office, raising questions about whether additional investment adviser registrations are necessary.
For many investment adviser purposes, the feeder fund itself is treated as the advisory client. Individual investors who purchase interests in the fund generally aren’t automatically considered separate advisory clients merely because they contributed capital.
Federal law also limits certain state registration requirements for advisers without a place of business in a state and with fewer than six resident advisory clients during the preceding twelve months. Those protections can be relevant when evaluating management operations across state lines.
Having investors in several states therefore doesn’t automatically require investment adviser registration in every investor’s home state. Nevertheless, the manager’s business locations, advisory activities, and applicable state requirements still need to be considered.
The states where you’ve made Regulation D notice filings also don’t necessarily determine your investment adviser obligations. Securities offering compliance and investment adviser registration are separate legal matters.
When Is SEC Exempt Reporting Adviser Status Important?
One of the most important distinctions for private fund managers is the difference between qualifying for an exemption from SEC registration and qualifying for an exemption under state law.
Section 203(m) of the Investment Advisers Act provides an exemption from SEC registration for qualifying U.S. advisers that advise solely private funds and manage less than $150 million in private fund assets. Advisers eligible to rely on that exemption within the SEC regulatory framework generally must submit Form ADV reports as exempt reporting advisers, commonly called ERAs.
An SEC exempt reporting adviser isn’t a fully registered investment adviser. However, the reporting obligation provides the SEC with information about the manager’s business, ownership, advisory activities, assets under management, and private funds.
The SEC explains that an adviser must otherwise be required to register with the SEC to rely on an SEC exempt reporting adviser exemption. Smaller managers that ordinarily fall under state regulation may instead need to rely on an applicable state exemption and complete state Form ADV reporting.
For managers operating multiple feeder funds, the SEC analysis can become more relevant as their combined regulatory assets under management grow. The amount is generally determined at the adviser level rather than treating each feeder fund as an entirely separate advisory business, with the applicable calculation rules governing which assets must be included.
The $150 million threshold also isn’t a target that must be reached before SEC exempt reporting becomes relevant. An adviser that otherwise falls within the SEC registration framework may qualify to rely on Section 203(m) while managing considerably less than $150 million.
The appropriate filing therefore depends on the manager’s regulatory status, not simply the size of an individual feeder fund.
How SEC Form ADV Reporting Works
When a manager qualifies as an SEC exempt reporting adviser under Section 203(m), Rule 204-4 requires it to submit specified information through Form ADV. These reports are filed electronically using the Investment Adviser Registration Depository, commonly called IARD.
SEC exempt reporting advisers generally complete a limited portion of Form ADV Part 1A and applicable schedules rather than the full registration application required of registered investment advisers. The filing identifies the applicable exemption and provides information about the advisory business.
Reporting is also an ongoing responsibility. Exempt reporting advisers generally must submit annual updating amendments within 90 days after the end of their fiscal year and make other required updates when information changes.
Growth can affect a manager’s eligibility for an exemption. Under the private fund adviser exemption, assets are calculated annually, and managers reaching $150 million or more may need to transition to SEC registration if another exemption isn’t available.
The federal rules provide a limited registration transition period for certain compliant exempt reporting advisers. However, managers shouldn’t wait until they exceed the threshold before evaluating the impact of growth on their regulatory obligations.
When Is State Form ADV Reporting Required Instead?
Managers who aren’t eligible to report to the SEC may still have Form ADV obligations under state law. This distinction is particularly relevant for smaller feeder fund managers whose advisory businesses are primarily regulated by their home states.
Texas provides a useful illustration. Its private fund adviser exemption requires qualifying managers to submit Form ADV reports, and the Texas State Securities Board specifically recognizes that certain advisers with less than $25 million in assets under management may report at the state level without filing as SEC exempt reporting advisers.
California also requires qualifying managers relying on its private fund adviser exemption to make applicable Form ADV reports, even when the manager isn’t required to file those reports with the SEC.
A state-level exempt reporting adviser filing is therefore not interchangeable with an SEC exempt reporting adviser filing. Although both may use Form ADV and IARD, the legal authority for the exemption and the filing requirements can differ.
Filing Form ADV also doesn’t automatically establish that the manager qualifies for an exemption. Investor qualifications, fund structure, financial reporting, and other conditions must be evaluated independently.
Reviewing Existing Fund Management Operations
Investment adviser compliance isn’t limited to newly formed funds. Existing managers may have operated feeder funds for several years without separately evaluating whether their management companies qualify for exemptions or should have made Form ADV filings.
That doesn’t automatically mean they’ve violated the law, but the absence of regulatory correspondence doesn’t establish compliance either. An exemption may apply without registration, although reporting or other conditions may still be required.
A proper review should examine the management company’s investment activities, compensation arrangements, assets under management, fund structures, and business locations. It should also determine which exemptions are available and whether previous regulatory filings were required.
For managers operating several feeder funds, this analysis should consider the broader advisory business rather than reviewing each investment vehicle in isolation. Identifying these obligations before launching additional funds can help avoid carrying unresolved compliance issues into future offerings.
Investment Adviser Compliance Evaluations and Form ADV Preparation
At Crowdfunding Lawyers, we provide investment adviser compliance evaluations for existing feeder fund and fund-of-funds managers. Our service includes reviewing management operations, compensation arrangements, fund structures, relevant jurisdictions, and available federal and state investment adviser exemptions.
We determine whether registration or exempt reporting is required, which exemptions may apply, and what additional conditions must be satisfied. For managers already operating funds, we can also evaluate whether prior reporting obligations were overlooked and identify appropriate next steps.
Our firm also provides Form ADV preparation and filing services, including SEC exempt reporting adviser filings and applicable state Form ADV reports. We assist managers in determining the appropriate filing framework, preparing the required information, and addressing ongoing reporting obligations.
If you’re managing a feeder fund or fund of funds, it’s worth confirming that your management company has satisfied its investment adviser requirements. Your fund’s Regulation D and Investment Company Act exemptions don’t necessarily resolve the separate regulatory obligations applicable to the company managing it.
Schedule an Investment Adviser Compliance Consultation with Crowdfunding Lawyers
Attorney Advertisement. This article is provided for general educational purposes and does not constitute legal advice. Investment adviser registration, exemptions, and reporting obligations depend on applicable federal and state laws and the circumstances of each management company.