The Commonwealth of Massachusetts has made certain amendments to the exemptions for private fund registration.
In order to be exempt from registration, the private fund advisor must meet the following conditions:
- Neither the private fund advisor nor its advisory affiliates are subject to a disqualification as described in Rule 262 of SEC Regulations A. SEC Rule 262(a)-(c) specifies the circumstances that result in disqualifications from relying on Regulation A. These disqualifications include certain criminal convictions and being subject to certain kinds of injunctions and administrative orders. Any situation that may be a disqualifying event must be analyzed carefully. These circumstances do not include being subject to a cease and desist order of the SEC. For instance, a SEC cease and desist order may not result in a disqualification from relying on Regulation A. In addition, an issuance of a censure in an SEC administrative proceeding is not generally a disqualifying event;
- The private fund advisor files with the state each report and required amendment required under SEC Rule 204-4. Essentially under 204-4, exempt advisors are required to complete a version of Form ADV Part 1 that includes Item 1, 2, 3, 6, 7, 10 and 11 as well as Schedule A, B, C, and D. This will enable regulators to identify exempt advisors, their owners and their business models; and
- The private fund pays the $300 reporting fee to the Commonwealth of Massachusetts.
Some other requirements to note for investment advisors to private funds exempt under 3(c)(1) (which generally provides an exemption for funds that are beneficially owned by not more than 100 investors and do not make a public offering of its securities) are:
- Individuals invested in the fund must meet the definition of "qualified client" under Rule 205-3, after deducting the value of the primary residence from the person's net worth;
- At the time of purchase, the advisor must disclose: all services to be provided to owners, duties to be provided to owners, and material information affecting the rights or responsibilities of beneficial owners; and
- Each fund obtains an annual audited financial statement, which is distributed to each beneficial owner of the fund. The private fund advisor does not need an audit. The annual audit shall commence following your next fiscal year end.
Some other items to note:
- If a private fund advisor is registered with the SEC - it must notice file with Massachusetts Securities Division.
- Investment advisor representatives are exempt from registration if he or she is employed by or associated with an investment advisor that is exempt from registration - and does not otherwise act as an investment advisor representative.
- Advisors to private funds, in certain circumstances, may be grandfathered in and qualify for exemption if the current clients do not meet the definition of qualified clients.
If you have any questions or need assistance understanding how the new Massachusetts regulations apply to your advisory firm, please contact us.