Colorado to Enact Private Fund Exemption to Investment Adviser Registration

Bryan Cave Leighton Paisner
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Colorado is catching up with many other states that have adopted state-level investment adviser registration exemptions for certain private fund advisers.

Under new rules Colorado’s Division of Securities adopted on May 19, 2017, Colorado-based investment advisers who advise certain private investment funds and are not eligible to register as investment advisers with the U.S. Securities and Exchange Commission can be exempt from registering as investment advisers in Colorado. The effective date of the new rules has yet to be announced.

The new rules exempt Colorado-based private fund advisers from registering as investment advisers with the State of Colorado if:

  • The adviser solely advises “qualifying private funds”;
  • The adviser and its advisory affiliates have not been subject to a “bad actor” disqualifying event under Rule 506(d) of Regulation D; and
  • If any of the adviser’s qualifying private funds are exempt from registration as an investment company under Section 3(c)(1) (a “3(c)(1) Fund”) of the Investment Company Act of 1940 (the “Investment Company Act”), then:
    • all investors in the investment adviser’s 3(c)(1) Funds must be “qualified clients”;
    • the investment adviser must make certain written disclosures to each investor at the time of such investor’s investment in the 3(c)(1) Fund; and,
    • the investment adviser must deliver annual audited financials to the 3(c)(1) Fund’s investors.

However, 3(c)(1) Funds that meet the definition of a “venture capital fund” under Rule 203(l) of the Investment Advisers Act of 1940 (the “Advisers Act”) are not subject to the requirements under (3) above.

A “qualifying private fund” is any private fund that (1) is not registered as an investment company under the Investment Company Act, (2) has not elected to be treated as a business development company, and (3) is treated as a private fund by the adviser with respect to the Advisers Act (i.e., the adviser reports the fund on its Form ADV). Many private equity and hedge funds are exempt from registration under Section 3(c)(1) or 3(c)(7) of the Investment Company Act and, as a result, would be a “qualifying private fund” under the new rules.

The exemption is also available to existing 3(c)(1) Funds that have beneficial owners who are not qualified clients if, going forward, the fund admits only investors who are qualified clients, makes certain written disclosures to each investor and delivers audited financials to all investors.

If a Colorado-based investment adviser advises any client that is not a qualifying private fund, such as a managed account, the adviser is not entitled to rely upon the new exemption.

A private fund adviser who qualifies for the new exemption must complete and file certain portions Part 1 of Form ADV with the Colorado Division of Securities, as well as pay all applicable fees.

The new exemption brings Colorado in line with many other states who offer similar exemptions to registration for investment advisers who solely advise private funds. Please contact your Bryan Cave attorney to learn more about the new rules and to discuss whether your advisory business qualifies.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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