Utah Administrative Code
Topic - Commerce
Title R164 - Securities
Rule R164-4 - Licensing Requirements
Section R164-4-9 - Exemptions From Licensing Requirements for Investment Advisers Providing Advice to Certain Institutional Investors
Universal Citation: UT Admin Code R 164-4-9
Current through Bulletin 2024-06, March 15, 2024
(A) Authority and Purpose
(1) The Division enacts this rule under
authority granted by Sections
61-1-3
and
61-1-24.
(2) This rule provides exemptions from the
licensing requirements of the Act for investment advisers and investment
adviser representatives who meet specified criteria.
(B) Definitions
(1) "Act" means the Utah Uniform Securities
Act, Utah Code Ann. Section
61-1-1
et seq.
(2) "Control" means the
possession, direct or indirect, of the power to direct or cause the direction
of the management and policies of a person, whether through the ownership of
voting securities, by contract or otherwise.
(3)(a) "High net worth family entity" means a
corporation, limited partnership, limited liability company, or other entity,
with all of its owners, partners, or members belonging to a single family who
are all related by blood, adoption or marriage; with a combined net worth of
not less than $10 million; and with ownership by an individual family member
being direct or indirect pursuant to a trust or other similar arrangement where
the investment is made by or on behalf of, or for the benefit of, the
individual.
(3)(b) An individual
does not constitute a "high net worth family entity" for purposes of this rule
regardless of the net worth of the individual.
(4) "Private fund" means an entity that:
(4)(a) would be subject to regulation under
the federal Investment Company Act of 1940 but for the exceptions from the
definition of "investment company" provided for:
(4)(a)(i) a fund that has no more than 100
beneficial owners and which is not making and does not presently propose to
make a public offering of its securities, or
(4)(a)(ii) a fund that is owned exclusively
by qualified purchasers, as defined in subsection (5) below, and which is not
making and does not presently propose to make a public offering of its
securities; and
(4)(b)
offers interests in the entity based on the investment advisory skills, ability
or expertise of the investment adviser.
(5) "Qualified purchaser" has the same
meaning as defined in the Investment Company Act of 1940 Sec.
2(a)(51).
(C) Exemption for Investment Advice to Certain Institutional Investors
(1) For purposes of Subsection
61-1-3(3)(b)(ii),
an investment adviser or investment adviser representative is exempt from the
licensing requirements of the Act if the investment adviser or investment
adviser representative renders investment advisory services only to the
following institutional investors:
(1)(a) a
non-individual "accredited investor" (as that term is defined in Rule
501(a)(1)-(3), (7), and any entity in which all of the equity owners are
persons defined in Rule 501(a)(1)-(3) and (7), promulgated by the Securities
and Exchange Commission (SEC) under the Securities Act of 1933 (1933 Act), as
amended;
(1)(b) a "qualified
institutional buyer" (as that term is defined in Rule 144A(a)(1) promulgated by
the SEC under the 1933 Act, as amended; or
(1)(c) a corporation, partnership, trust,
estate, or other entity (excluding individuals) having net worth of not less
than $10 million, or a wholly-owned subsidiary of such entity.
(2) The exemption from investment
adviser and investment adviser representative licensing provided by this
Subsection (C) is not available if the institutional investor is in fact acting
only as agent for another purchaser that is not an institutional investor
listed in Subsection
61-1-3(3)(b)
or Subsection (C)(1) of this rule. The exemption from licensure is available
only if the institutional investor is acting for its own account or as a bona
fide trustee of a trust organized and existing other than for the purpose of
acquiring the investment advisory services for which the investment adviser or
investment adviser representative is claiming the exemption.
(D) Exemption for Investment Advice to Certain Private Funds
(1) For
purposes of Subsection
61-1-3(3)(b)(ii),
an investment adviser or investment adviser representative is exempt from the
licensing requirements of the Act if the investment adviser or investment
adviser representative renders investment advisory services only to a private
fund that regularly makes equity investments in companies, if:
(1)(a) the private fund does not grant
investors the right or power to redeem their interests in the fund within two
years of purchase;
(1)(b) at the
time of investment, at least 80% of the fair market value of the investments
made by the private fund possess all of the following characteristics:
(1)(b)(i) the private fund, either alone or
with other similarly situated private funds, has control of the target
company;
(1)(b)(ii) the private
fund, either alone or with other similarly situated private funds, has access
to material business, financial and other corporate records of the target
company without being required to resort to statutory stockholder or other
equity owner records access provisions;
(1)(b)(iii) the private fund, either alone or
with other similarly situated private funds, has the right to elect one or more
directors to the target company's board of directors or equivalent governing
management body, either at the outset or on the occurrence or non-occurrence of
specified events; and
(1)(b)(iv) at
the time of the investment, the securities representing the private fund's
equity stake or into which such securities may be converted have not been
listed on an exchange and are of a highly illiquid nature such that no
significant secondary market exists for the securities; and
(1)(c) at the time of investment,
at least 80% of the fair market value of the investments made by the private
fund possess at least two of the following four characteristics:
(1)(c)(i) the private fund's interest in the
target company includes a common, preferred, convertible or other direct or
indirect equity stake;
(1)(c)(ii)
the private fund, either alone or with other similarly situated private funds,
has the right, at the target company's expense, to have its equity interest in
the target registered for sale in a future public offering or otherwise
redeemed upon the occurrence of given event or contingency or to otherwise
obtain liquidity for the private fund's investment;
(1)(c)(iii) the private fund, either alone or
with other similarly situated private funds, has:
(1)(c)(iii)(A) co-sale rights that allow the
private fund to sell its equity in the target company on the same terms as
holders of a majority of the equity interests of such target;
(1)(c)(iii)(B) liquidation preferences with
priority to holders of common equity; or
(1)(c)(iii)(C) redemption rights to require
the target company to repurchase or redeem the private fund's equity interest
at a price constituting a preference to that of the common equity holders;
and
(1)(c)(iv) the
private fund, either alone or with other similarly situated private funds, has:
(1)(c)(iv)(A) anti-dilution rights materially
limiting the power of the target company to issue new equity securities on
terms that dilute the equity interest of the private fund without adjusting the
investment rights of the private equity fund;
(1)(c)(iv)(B) rights of first offer or
participation enabling the private fund to acquire its pro rata share of any
newly issued equity securities;
(1)(c)(iv)(C) rights to materially preclude
the target company from issuing equity without first obtaining consent of the
private fund either as an equity holder or through the private fund's
designee(s) on the target company's board of directors or equivalent governing
management body; or
(1)(c)(iv)(D)
other rights superior to the rights of holders of common equity relating to
cause or block an event or transaction that would provide full or partial
liquidity to the private fund.
(E) Exemptions for Investment Advice to Certain High Net Worth Family Entities
(1) For purposes of Subsection
61-1-3(3)(b)(ii),
an investment adviser or investment adviser representative is exempt from the
licensing requirements of the Act if the investment adviser or investment
adviser representative:
(1)(a) renders
investment advisory services to a high net worth family entity or related
family entities, and
(1)(b) does
not render investment advisory services to any other entities or individuals,
other than those described in Subsections (C) and (D) above.
(F) Determination of Net Worth
(1) For purposes of determining the
net worth of an institutional investor or high net worth family entity under
this rule, an investment adviser or investment adviser representative may rely
upon the entity's most recent annual balance sheet or other financial statement
which shall have been audited by an independent accountant or which shall have
been verified by a principal of the entity.
(G) Prohibition on Advertising and Touting
(1) The exemptions from the licensing
requirements of the Act provided by this rule are not applicable if the
investment adviser or investment adviser representative advertises its services
or holds itself out to the public as a provider of investment advice,
including:
(1)(a) advertising, touting, or
providing testimonials of the performance, experience or expertise of the
investment adviser or investment adviser representative;
(1)(b) making general solicitations for
investment; or
(1)(c) paying a fee
to any person for referrals or solicitations unless that person is a licensed
investment adviser representative, issuer agent or broker-dealer agent in the
jurisdiction in which such activities occur.
(H) Advisory Services to Entity versus Owners of the Entity
(1) For purposes of this rule
only, an investment adviser or investment adviser representative that is
providing investment advisory services to a corporation, general partnership,
limited partnership, limited liability company, trust or other legal entity,
other than a private fund, is not providing investment advisory services to a
shareholder, general partner, member, other security holder, beneficiary or
other beneficial owner of the legal entity unless the investment adviser
provides investment advisory services to such owner separate and apart from the
investment advisory services provided to the legal entity.
(I) No Licensing Exemption for Advisory Services to Natural Persons
(1) There is no
licensing exemption under this rule for an investment adviser or investment
adviser representative providing investment advisory services to a natural
person.
(2) Except as provided in
Subsections (D) and (E), there is no licensing exemption under this rule for an
investment adviser or investment adviser representative providing investment
advisory services to a private fund, such as a hedge fund, that is composed
partially or entirely of natural persons.
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