By David Mainzer

September 2012

Effective on August 27, 2012, the California Department of Corporations (the “Department”) has amended Section 260.204.9 of Title 10 of the California Code of Regulations (the “New California Private Fund Exemption”) to address certain changes to the Investment Advisers Act of 1940 (the “Advisers Act”) required by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”).

Prior to the adoption of the Dodd-Frank Act, California provided an exemption from its investment adviser registration requirements for investment advisers that, among other things, were able to come within Section 203(b)(3) of the Advisers Act. However, Section 203(b)(3) of the Advisers Act was eliminated by the Dodd-Frank Act. In addition, the Dodd-Frank Act created a new registration exemption under the Advisers Act for advisers of private funds that, among other things, either have less than $150 million in assets under management or manage only venture capital funds (these investment advisers are referred to as “exempt reporting advisers”). The New California Private Fund Exemption makes the California rules more consistent with these changes to the Advisers Act.

Under the terms of the New California Private Fund Exemption, a “private fund adviser” is an investment adviser that provides investment advice only to “private funds” (i.e. 3(c)(1) funds, 3(c)(5) funds and 3(c)(7) funds). A private fund adviser is exempt from the requirement to register with the Department as an investment adviser if: (a) it is not subject to disqualification by the SEC and has not breached certain provisions of the California Corporate Securities Act of 1968; (b) it files Form ADV with the Department (the adviser may or may not be required to file Form ADV with the Securities and Exchange Commission under the Advisers Act); and (c) it pays the required fee (currently $125.00) each year.

In addition to the foregoing requirements applicable to all private fund advisers, private fund advisers that advise “retail buyer funds” (i.e. private funds other than 3(c)(7) funds and venture capital funds that meet the definition of “venture capital company” in the New California Private Fund Exemption) have additional obligations. Private fund advisers that advise one or more retail buyer funds are generally required to: (a) offer interests in the retail buyer funds they manage only to “accredited investors” (as defined in Regulation D under the Securities Act of 1933) and managers, directors, officers and employees of the private fund adviser; (b) deliver a private placement memorandum or similar document to each investor at or before the time they make their investment in a retail buyer fund; and (c) cause an annual audit of each retail buyer fund by a CPA firm registered and examined by the PCOAB. Also, private fund advisers that advise one or more retail buyer funds are prohibited from charging performance fees unless all of the investors in the applicable private fund are “qualified clients” (as defined in Rule 205-3(d) under the Advisers Act).

Private fund advisers that managed a retail buyer fund prior to August 27, 2012 may be able to take advantage of certain grandfathering provisions in the New California Private Fund Exemption.

Investment advisers that desire to make use of the New California Private Fund Exemption must file their Form ADV with the Department on or before October 26, 2012. We expect that this will include most private fund advisers with less than $150 million in assets under management that either (a) have a place of business in California or (b) have six or more clients that are California residents.

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