Final Rule: Exemptions for Advisers to Venture Capital Funds, …

1 SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 275 Release No. IA-3222; File No. S7-37-10 RIN 3235-AK81 Exemptions for Advisers to Venture Capital Funds, private Fund Advisers With Less Than $150 Million in Assets Under Management, and foreign private Advisers AGENCY: Securities and Exchange Commission. ACTION: Final rule. SUMMARY: The Securities and Exchange Commission (the Commission ) is adopting rules to implement new Exemptions from the registration requirements of the Investment Advisers Act of 1940 for Advisers to certain privately offered investment funds; these Exemptions were enacted as part of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act ).

2 As required by Title IV of the Dodd-Frank Act the private Fund Investment Advisers Registration Act of 2010 the new rules define Venture Capital fund and provide an exemption from registration for Advisers with less than $150 million in private fund assets under management in the United States. The new rules also clarify the meaning of certain terms included in a new exemption from registration for foreign private Advisers . DATES: Effective Date: July 21, 2011. FOR FURTHER INFORMATION CONTACT: Brian McLaughlin Johnson, Tram N. Nguyen or David A. Vaughan, at (202) 551-6787 or Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549.

3 SUPPLEMENTARY INFORMATION: The Commission is adopting rules 203(l)-1, 203(m)-1 and 202(a)(30)-1 (17 CFR (l)-1, (m)-1 and (a)(30)-1) under the - 2 - Investment Advisers Act of 1940 (15 80b) (the Advisers Act ).1 Table of Contents I. BACKGROUND .. 2 II. DISCUSSION .. 9 A. Definition of Venture Capital Fund .. 9 1. Qualifying Investments .. 19 2. Short-Term Holdings .. 32 3. Qualifying Portfolio Company .. 34 4. Management Involvement .. 52 5. Limitation on Leverage .. 55 6. No Redemption Rights .. 61 7. Represents Itself as Pursuing a Venture Capital Strategy .. 65 8. Is a private Fund .. 68 9. Application to Advisers .. 68 10. Grandfathering Provision.

4 72 B. Exemption for Investment Advisers Solely to private Funds With Less Than $150 Million in Assets Under Management .. 75 1. Advises Solely private Funds .. 76 2. private Fund 81 3. Assets Managed in the United States .. 93 4. United States Person .. 99 C. foreign private 102 1. Clients .. 104 2. private Fund Investor .. 106 3. In the United States .. 115 4. Place of Business .. 120 5. Assets Under Management .. 122 D. Subadvisory Relationships and Advisory Affiliates .. 124 III. CERTAIN ADMINISTRATIVE LAW MATTERS .. 128 IV. PAPERWORK REDUCTION ANALYSIS .. 129 V. COST-BENEFIT ANALYSIS .. 130 VI. REGULATORY FLEXIBILITY CERTIFICATION .. 197 VII. STATUTORY AUTHORITY.

5 199 TEXT OF RULES I. BACKGROUND On July 21, 2010, President Obama signed into law the Dodd-Frank Act,2 which, among 1 Unless otherwise noted, all references to rules under the Advisers Act will be to Title 17, Part 275 of the Code of Federal Regulations (17 CFR 275). 2 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, 124 Stat. 1376 (2010). - 3 - other things, repeals section 203(b)(3) of the Advisers Section 203(b)(3) exempted any investment adviser from registration if the investment adviser (i) had fewer than 15 clients in the preceding 12 months, (ii) did not hold itself out to the public as an investment adviser and (iii) did not act as an investment adviser to a registered investment company or a company that has elected to be a business development company (the private adviser exemption ).

6 4 Advisers specifically exempt under section 203(b) are not subject to reporting or recordkeeping provisions under the Advisers Act, and are not subject to examination by our The primary purpose of Congress in repealing section 203(b)(3) was to require Advisers to private funds to register under the Advisers private funds include hedge funds, private equity funds and other types of pooled investment vehicles that are excluded from the definition of investment company under the Investment Company Act of 19407 ( Investment Company 3 In this Release, when we refer to the Advisers Act, we refer to the Advisers Act as in effect on July 21, 2011.)

7 4 15 80b-3(b)(3) as in effect before July 21, 2011. 5 Under section 204(a) of the Advisers Act, the Commission has the authority to require an investment adviser to maintain records and provide reports, as well as the authority to examine such adviser s records, unless the adviser is specifically exempted from the requirement to register pursuant to section 203(b) of the Advisers Act. Investment Advisers that are exempt from registration in reliance on other sections of the Advisers Act (such as sections 203(l) or 203(m) which we discuss below) are not specifically exempted from the requirement to register pursuant to section 203(b), and thus the Commission has authority under section 204(a) of the Advisers Act to require those Advisers to maintain records and provide reports and has authority to examine such Advisers records.

8 6 See S. Rep. No. 111-176, at 71-3 (2010) ( S. Rep. No. 111-176 ); H. Rep. No. 111-517, at 866 (2010) ( H. Rep. No. 111-517 ). H. Rep. No. 111-517 contains the conference report accompanying the version of 4173 that was debated in conference. While the Senate voted to exempt private equity fund Advisers in addition to Venture Capital fund Advisers from the requirement to register under the Advisers Act, the Dodd-Frank Act exempts only Venture Capital fund Advisers . Compare Restoring American Financial Stability Act of 2010, S. 3217, 111th Cong. 408 (2010) (as passed by the Senate) with The Wall Street Reform and Consumer Protection Act of 2009, 4173, 111th Cong.

9 (2009) (as passed by the House) ( 4173 ) and Dodd-Frank Act (2010), supra note 2. 7 15 80a. - 4 - Act ) by reason of section 3(c)(1) or 3(c)(7) of such Section 3(c)(1) is available to a fund that does not publicly offer the securities it issues9 and has 100 or fewer beneficial owners of its outstanding A fund relying on section 3(c)(7) cannot publicly offer the securities it issues11 and generally must limit the owners of its outstanding securities to qualified purchasers. 12 Each private fund advised by an adviser has typically qualified as a single client for purposes of the private adviser As a result, investment Advisers could advise up to 14 private funds, regardless of the total number of investors investing in the funds or the amount 8 Section 202(a)(29) of the Advisers Act defines the term private fund as an issuer that would be an investment company, as defined in section 3 of the Investment Company Act of 1940 (15 80a-3), but for section 3(c)(1) or 3(c)(7) of that Act.

10 9 Interests in a private fund may be offered pursuant to an exemption from registration under the Securities Act of 1933 (15 77) ( Securities Act ). Notwithstanding these Exemptions , the persons who market interests in a private fund may be subject to the registration requirements of section 15(a) under the Securities Exchange Act of 1934 ( Exchange Act ) (15 78o(a)). The Exchange Act generally defines a broker as any person engaged in the business of effecting transactions in securities for the account of others. Section 3(a)(4)(A) of the Exchange Act (15 78c(a)(4)(A)). See also Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934, Exchange Act Release No.