Current through Register 2024 Notice Reg. No. 38, September 20, 2024
(a) Definitions.
For purposes of this section
260.204.9 (this "rule"), the
following definitions shall apply:
(1)
"Private fund adviser" means an investment adviser who provides advice solely
to one or more qualifying private fund(s).
(2) "Qualifying private fund" means an issuer
that qualifies for the exclusion from the definition of an investment company
under one or more of sections
3(c)(1),
3(c)(5), and
3(c)(7) of the
Investment Company Act of 1940, as amended (15 U.S.C.
80a-3(c)(1), (5) and
(7)).
(3) "Retail buyer fund" means a qualifying
private fund that is not a venture capital company and that qualifies for the
exclusion from the definition of an investment company under one or both of
sections 3(c)(1) and
3(c)(5) of the
Investment Company Act of 1940, as amended (15 U.S.C.
80a-3(c)(1) and
(5)).
(4) "Venture capital company" means an entity
that satisfies one or more of the conditions below:
(A) on at least one occasion during the
annual period commencing with the date of its initial capitalization, and on at
least one occasion during each annual period thereafter, at least fifty percent
(50%) of its assets (other than short-term investments pending long-term
commitment or distribution to investors), valued at cost, are venture capital
investments, as defined in subsection (a)(5) of this rule, or derivative
investments, as defined in subsection (a)(6) of this rule; or
(B) the entity is a "venture capital fund" as
defined in rule 203(l)-1 adopted by the Securities and
Exchange Commission under the Investment Advisers Act of 1940, as amended
(17 C.F.R.
275.203 (l)-(1));
or
(C) the entity is a "venture
capital operating company" as defined in rule 2510.3-101(d) adopted by the U.S.
Department of Labor under the Employee Retirement Income Security Act of 1974
(29 C.F.R. § 2510.3-101(d)).
(5) "Venture capital investment" means an
acquisition of securities in an operating company as to which the investment
adviser, the entity advised by the investment adviser, or an affiliated person
of either has or obtains management rights as defined in subsection (a)(7) of
this rule.
(6) "Derivative
investment" means an acquisition of securities by a venture capital company in
the ordinary course of its business in exchange for an existing venture capital
investment either (i) upon the exercise or conversion of the existing venture
capital investment or (ii) in connection with a public offering of securities
or the merger or reorganization of the operating company to which the existing
venture capital investment relates.
(7) "Management rights" means the right,
obtained contractually or through ownership of securities, either through one
person alone or in conjunction with one or more persons acting together or
through an affiliated person, to substantially participate in, to substantially
influence the conduct of, or to provide (or to offer to provide) significant
guidance and counsel concerning, the management, operations or business
objectives of the operating company in which the venture capital investment is
made.
(8) An "operating company"
means an entity that is primarily engaged, directly or through a majority owned
subsidiary or subsidiaries, in the production or sale (including any research
or development) of a product or service other than the management or investment
of capital, but shall not include an individual or sole
proprietorship.
(9) "Affiliated
person" means a person that controls, is controlled by, or is under common
control with the other specified person(s).
(10) "Control" means possessing, directly or
indirectly, the power to direct or cause the direction of management and
policies.
(11) "Advisory affiliate"
means an "advisory affiliate" as defined in the Glossary of Terms to Form ADV
(Uniform Application for Investment Adviser Registration (17 C.F.R. §
279.1).
(12) "Fund of funds" means a qualifying
private fund that invests a majority of its assets in one or more qualifying
private funds.
(b)
Exemption for private fund advisers. Subject to the additional requirements of
subsection (c) of this rule below, a private fund adviser shall be exempt from
the certificate requirement of Section
25230(a) of the
Code if the private fund adviser satisfies each of the following conditions:
(1) neither the private fund adviser nor any
of its advisory affiliates are subject to a disqualification as described in
Rule 262 of Regulation A adopted by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (17 C.F.R. §
230.262); or have done any of the acts,
satisfy any of the circumstances, or are subject to any order specified in
Section 25232(a) through
25232(h) of the
Code; and
(2) the private fund
adviser files with the Commissioner:
(A) each
report and amendment thereto that an investment adviser is required to file
with the Securities and Exchange Commission pursuant to Rule 204-4 ("Rule
204-4") adopted by the Securities and Exchange Commission under the Investment
Advisers Act of 1940, as amended (17 C.F.R. § 275.204); or
(B) if the private fund adviser is not
required to submit such filings to the Securities and Exchange Commission, the
private fund adviser prepares and files the reports and amendments referenced
in paragraph (2)(A) immediately above (on or before the date(s) such reports
would be required to be filed pursuant to Rule 204-4) directly with the
Commissioner.
(3) The
private fund adviser has paid the fee required by Section
25608(q) of the
Code for each calendar year in which it relies upon the exemption established
by this rule. If the private fund adviser has paid an initial fee pursuant to
this rule and it intends to rely on the exemption in a succeeding calendar
year, it must pay the renewal fee specified by Section
25608(q) before
January 1 of the succeeding year.
(c) Additional requirements for private fund
advisers to certain retail buyer funds. In order to qualify for the exemption
described in subsection (b) of this rule, a private fund adviser who advises at
least one retail buyer fund shall, except as otherwise provided in subsection
(h) of this rule, in addition to satisfying each of the conditions specified in
subsections (b)(1) through (b)(3) of this rule, comply with each of the
following requirements with respect to each retail buyer fund advised by the
private fund adviser:
(1) The private fund
adviser shall advise only retail buyer funds whose outstanding securities
(other than short-term paper) are beneficially owned entirely by:
(A) persons who, at the time the securities
were sold, either (i) met the definition of "accredited investor" in Rule
501(a) of Regulation D adopted by the Securities and Exchange Commission under
the Securities Act of 1933, as amended (17 C.F.R. §
230.501(a)), or (ii) were
managers, directors, officers, or employees of the private fund adviser;
or
(B) any person that obtains the
securities through a transfer not involving a sale of that
security.
(2)
(A) At or before the time of purchase of any
ownership interest in a retail buyer fund, the private fund adviser shall
prominently and in plain English disclose (in a private placement memorandum or
similar written document) to the purchaser of such ownership interest all
material facts regarding the following:
(i)
all services, if any, to be provided by the investment adviser to a beneficial
owner of the fund, and to the fund itself; and
(ii) all duties, if any, the investment
adviser owes to a beneficial owner of the fund, and to the fund
itself.
(B) Compliance
with subparagraph (2)(A) immediately above shall not relieve the private fund
adviser of any disclosure obligation under any other state or federal
law.
(3)
(A) The private fund adviser shall obtain, on
an annual basis, financial statements of each retail buyer fund advised by the
private fund adviser, audited by an independent certified public accountant
(CPA) that is registered with, and subject to regular examination by, the
Public Company Accounting Oversight Board (PCAOB), and shall deliver a copy of
such audited financial statements to each beneficial owner of the retail buyer
fund within 120 days after the end of each fiscal year (or within 180 days if
the retail buyer fund is a fund of funds);
(B) if a retail buyer fund begins operations
more than 180 days into a fiscal year, the investment adviser need not comply
with suparagraph (3)(A) immediately above for that initial fiscal year,
provided that the financial audit (conducted in accordance with the qualitative
requirements set forth in subparagraph (3)(A) immediately above) for the fiscal
year immediately succeeding this period is supplemented by, or includes, a
financial audit of the initial fiscal year.
(4) A private fund adviser may not enter
into, perform, renew or extend an investment advisory contract that provides
for compensation to the investment adviser on the basis of a share of the
capital gains upon, or the capital appreciation of, the funds, or any portion
of the funds of an investor that is not a "qualified client" as defined in Rule
205-3(d) (17 C.F.R.
275.205.-3(d)) adopted by the Securities and
Exchange Commission under the Investment Advisers Act of 1940, as amended
(15 USC
80b-1 et seq.).
(d) Federal covered investment advisers. If a
private fund adviser is registered with the Securities and Exchange Commission,
the adviser is not eligible for this exemption and shall comply with the state
notice filing requirements applicable to federal covered investment advisers in
Section 25230.1 of the Code.
(e) Investment adviser representatives. A
person is exempt from the requirements of Section
25230(b) of the
Code if he or she is employed by or associated with an investment adviser that
is exempt from registration in this state pursuant to this rule and does not
otherwise act as an investment adviser representative.
(f) Electronic filing. The report described
in subsection (b)(2) of this rule above shall be filed electronically through
the IARD (Investment Advisor Registration Depository). A report shall be deemed
filed when the report and the fee required by Section
25608(q) of the
Code are filed and accepted by the IARD on the state's behalf.
(g) Transition. An investment adviser who
becomes ineligible for the exemption provided by this rule shall comply with
all applicable laws and rules requiring registration or notice filing within
ninety (90) days after the date the investment adviser's eligibility for this
exemption ceases.
(h)
Grandfathering for investment advisers to retail buyer funds. An investment
adviser to a retail buyer fund that existed prior to the effective date of this
rule and that does not satisfy the conditions set forth in subsection (c)(1) or
(c)(4) of this rule, on the effective date, may nevertheless be eligible for
the exemption contained in subsection (b) of this rule if the following
conditions are satisfied:
(1) as of the
effective date of this rule, the retail buyer fund ceases to sell interests to
investors other than those described in subsection (c)(1)(A) of this
rule.
(2) the investment adviser
complies with subsection (c)(4) of this rule for every beneficial owner who
purchases an ownership interest from the retail buyer fund on or after the
effective date of this rule.
(3)
the investment adviser discloses in writing the information described in
subsection (c)(2) of this rule to every beneficial owner of the fund within 90
days after the effective date of this rule; and
(4) for every fiscal year ending after the
effective date of this rule, the investment adviser delivers audited financial
statements to each beneficial owner as required by subsection (c)(3) of this
rule.
(i) Temporary
Filing Extension. Any initial report required to be filed pursuant to
subsection (b)(2) of this rule shall be filed no later than 60 days from the
effective date of this rule.
1. New
section filed 7-3-97 as an emergency; operative 7-3-97 (Register 97, No. 27). A
Certificate of Compliance must be transmitted to OAL by 10-31-97 or emergency
language will be repealed by operation of law on the following
day.
2. New section, including new preface and amendment of section
and NOTE, refiled 10-17-97 as an emergency; operative 10-31-97 (Register 97,
No. 42). Expires by its own terms 1-1-98.
3. Expired by its own
terms on 1-1-98.
4. New section filed 3-27-2002; operative 3-27-2002
pursuant to Government Code section
11343.4
(Register 2002, No. 13).
5. Amendment of subsection (a) filed
7-7-2011 as an emergency; operative 7-21-2011 pursuant to Government Code
section
11343.4(b)
(Register 2011, No. 27). A Certificate of Compliance must be transmitted to OAL
by 1-17-2012 or emergency language will be repealed by operation of law on the
following day.
6. Amendment of subsection (a) refiled 1-11-2012 as
an emergency; operative 1-18-2012 pursuant to Government Code section
11346.1(d)
(Register 2012, No. 2). A Certificate of Compliance must be transmitted to OAL
by 4-16-2012 or emergency language will be repealed by operation of law on the
following day.
7. Amendment of subsection (a) refiled 4-10-2012 as
an emergency; operative 4-17-2012 (Register 2012, No. 15). A Certificate of
Compliance must be transmitted to OAL by 7-16-2012 or emergency language will
be repealed by operation of law on the following day.
8. Certificate
of Compliance as to 4-10-2012 order, including amendment of section heading and
section, transmitted to OAL 7-16-2012 and filed 8-27-2012 (Register 2012, No.
35).
Note: Authority cited: Sections
25204
and
25610,
Corporations Code. Reference: Section
25230,
Corporations Code.
