The world is changing for venture funds and similar funds in Washington State, and not necessarily for the better. It used to be the case that managers of venture or other private funds did not need to file anything with the SEC or state securities regulators (other than Forms D incident to their fundraisings). Dodd-Frank changed all that – but provided that investment advisers solely to venture capital or other small private funds may be exempt (based on Congress’ belief that these funds posed no systemic risk to the nationwide financial system).
There are now SEC regulations that define the new exemptions for the managers of venture funds (discussed in more detail here) and for the managers of private funds with less than $150M management (discussed in more detail here). Even if exempt, however, managers of venture funds and private funds with AUM of less than $150M now must publicly report certain high-level information, which becomes publicly available. For example, here is the exempt reporting adviser Form ADV for Union Square Ventures.
These rules settled out a few years ago. Right now, the bigger issue is with state regulators. State regulatory regimes need to be updated in order to conform to Dodd-Frank. The North American Securities Administrators Association (NASAA) created model rules for state regulators to follow, which adopted the same venture capital and private fund exemptions. Many states, including California, have now adopted the NASAA model rules.
In Washington State, the Securities Division (Division) of the Washington State Department of Financial Institutions (DFI) is in the process of updating its rules to conform to Dodd-Frank. Unfortunately for fund managers, DFI does not believe the SEC and NASAA Model Rules are enough regulation. Their proposed rules provide that, if you don’t fall within the definition of a “venture capital fund” (as defined in the federal rule), you will generally have to register as an investment advisor in Washington State unless you are managing funds comprised only of super accredited investors (think $5M instead of $1M for individuals) – known as “qualified purchasers”. This is going to create significant problems for funds that don’t fit the narrow confines of the “venture capital fund” definition (below). We are actively trying to get these proposed rules changed before they are adopted, urging conformity with the federal rules, but so far the DFI has not agreed to make this change.
Here is more information on the Washington State proposed rules, from the DFI website:
RULEMAKING: INVESTMENT ADVISER RULES
The Securities Division is soliciting comments on proposed amendments to the investment adviser rules set forth in Chapter 460-24A WAC.
The proposed amendments would update various provisions of the investment adviser rules, including the rules regarding financial reporting requirements, custody, books and records, and unethical practices. The proposed amendments would add new rule sections addressing proxy voting, advisory contracts, and compliance procedures and practices, and would create exemptions from registration for certain private fund advisers and venture capital fund advisers. Many of these changes would make Washington’s rules consistent with current federal law and NASAA model rules.
Please find a copy of the proposed rule making notice and the text of the proposed rules below.
PUBLIC HEARING – MAY 21, 2013 – 1 PM
A hearing will be held on the proposed rulemaking on May 21, 2013 at 1:00 pm at the Department of Financial Institutions office in Tumwater, Washington. See:Directions to DFI.
For more information on Kirkland Business Law, consider contacting a Kirkland Business Attorney.