On October 19, 2020, the Idaho Department of Finance (the “Department”) issued an order (the “Order”) (available here) providing an exemption from Idaho’s investment adviser registration requirements for advisers who provide investment advice solely to qualifying private funds, as defined in Rule 203(m)-1 under the Investment Advisers Act of 1940, as amended (the “Advisers Act”). The Order is in large part an adoption of the North American Securities Administrators Association (NASAA) model rule (available here).
Prior to the issuance of the Order, Idaho was one of only a handful of states not providing private fund advisers some form of exemptive relief from state investment adviser registration requirements under the Idaho Uniform Securities Act (2004).
The Order provides welcome clarity on the Department’s position regarding private fund advisers’ registration requirements and will likely promote substantial growth in Idaho’s private fund market.
The Order’s General Requirements
Pursuant to the Order, a private fund adviser must meet two general requirements in order to claim exemption from Idaho’s investment adviser registration requirements. The Order’s general requirements are as follows:
- The adviser (including any advisory affiliates) must not be subject to any “bad actor” disqualification under Rule 506(d)(1) of Regulation D; and
- The adviser must file with the Department each report required to be filed by an exempt reporting adviser with the U.S. Securities and Exchange Commission (“SEC”) pursuant to Rule 204-4 under the Advisers Act. Rule 204-4 requires exempt reporting advisers to complete and periodically update the relevant items required on Form ADV Part 1A, including the following items: Item 1 (Identifying Information), Items 2.B and 2.C (SEC and State Reporting by Exempt Reporting Advisers), Item 3 (Form of Organization), Item 6 (Other Business Activities), Item 7 (Financial Industry Affiliation and Private Fund Reporting), Item 10 (Control Persons), Item 11 (Disclosure Information; e.g., disciplinary history), and those sections of Schedules A, B, C, and D that correspond to the foregoing items. Advisers would not be required to complete a Form ADV Part 2A, 2B, or 3.
The Order’s Additional Requirements for Advisers to Section 3(c)(1) Funds
The Order also sets forth additional requirements for advisers to one or more private funds that (i) rely on Section 3(c)(1) of the Investment Company Act of 1940, as amended, in order to be excluded from the definition of an “investment company,” and (ii) are not venture capital funds, as such term is defined in Rule 203(l)-1 under the Advisers Act (so-called “3(c)(1) funds”). In addition to the Order’s general requirements set forth above, advisers to 3(c)(1) funds must also adhere to the following requirements:
- Each investor in each 3(c)(1) fund must meet the standard of a “qualified client” pursuant to Rule 205-3 under the Advisers Act;
- The adviser must disclose in writing, at the time of any investor’s purchase of an interest in the 3(c)(1) fund, the following: (i) all services, if any, to be provided to individual beneficial owners of the fund; (ii) all duties, if any, the adviser owes to the beneficial owners of the fund; and (iii) any other material information affecting the rights or responsibilities of the beneficial owners of the fund; and
- The adviser must obtain, on an annual basis, audited financial statements of each 3(c)(1) fund and deliver a copy of such statements to each beneficial owner of such fund.
As discussed above, the Order is a welcome development for the private fund industry in Idaho. With the registration requirements clarified and the burden of registration lifted for certain private fund advisers, Idaho should be a much more desirable market for professionals specializing in venture capital and private equity.