Typically, offshore funds are not subject to regulation under the U.S. securities regulations as long as they are not sold to U.S. citizens or residents. Offshore funds were not liable for fraud under §10(b) of the Securities Exchange Act unless they met the standards for the "conduct or effects" test. The test focused on:

• Whether the wrongful conduct occurred in the United States; and


• Whether the wrongful conduct had a substantial effect in the United States or upon United States citizens.

The "conduct or effects" test was rejected in Morrison v. Nat'l Austl. Bank Ltd. in 2010. The court established a new transactional test that stated that §10(b) and Rule 10b-5 do not apply extraterritorially, but only apply to "transactions in securities listed on domestic exchanges and domestic transactions in other securities." The court stated that domestic transactions should focus on the purchase and sale of securities. The case did not specifically define the term "domestic transactions," however, because the parties to the case were foreign and the dispute occurred outside the United States.

One of the most significant provisions of the Jumpstart Our Business Startups (JOBS) Act is its elimination of the general solicitation ban currently contained in Rule 502 for Rule 506 offerings sold only to "accredited investors." As a result, hedge funds will be able to advertise to investors through the internet, mass mailings, and other media. Previously hedge funds have been banned from soliciting or advertising their private offerings to the general public. This prohibition has created confusion among hedge fund managers because of uncertainty about the meaning of "general solicitation."

The JOBS Act requires the Securities and Exchange Commission (SEC) to eliminate the ban on general solicitation and advertising as long as all purchasers are either "accredited investors" or "qualified institutional investors." An "accredited investor" includes an individual whose net worth is at least $1 million, excluding the value of his/her primary residence or who meets certain income criteria. We have previously discussed the definition of "accredited investor" in Financial Advisers Should Note More Restrictive Accredited Investor Definition. A "qualified institutional investor" includes companies that manage a minimum at $100 million in assets. Under the JOBS Act, the SEC must adopt rules to eliminate the ban on advertising for an offering by a private issuer within 90 days.

Virginia's previous private fund adviser exemption could be short-lived because it may be replaced by a new proposed rule. The previous rule was effective September 7, 2011 and the current proposed rule is expected to be effective on May 1, 2012. Interested persons may submit their comments on the proposed rule on or before April 12, 2012. This new rule is also currently being considered by California, Massachusetts and Rhode Island. We previously discussed the California proposed exemption rule in a blog, California Extends Comment Date on its Proposed Private Fund Exemption Rule.

Currently, the rule provides for an exemption for any adviser where the adviser advises only clients that are either a corporation, general partnership, limited partnership, limited liability company, trust or other organization that:

• Has assets of $5,000,000 or more and


• Receives investment advice based on the investment objectives of the entity instead of individual investment objectives, provided that the adviser was exempt from registration pursuant to §203(b)(3) of the Investment Advisers Act of 1940 and the adviser is subject to SEC rule 203 1(e).

The California Department of Corporations has extended the comment period for a proposed rule to amend Rule 260.204.9 of Title 10 of the California Code of Regulations, which exempts private advisers from registration under certain circumstances. The public comment period for this exemption was extended from February 20, 2012 to March 25, 2012. To date, there are no public hearings scheduled; however comments may be mailed to the Department of Corporations.

The amended proposed rule significantly changes the current rule in place. Currently, the rule provides for an exemption for any adviser that:

• Has had fewer than 15 clients in the preceding 12 months;


• Does not hold itself out to the public as an investment adviser;


• Does not act as an investment adviser to a registered company or a company that has elected to be a business development company; and


• Either has assets under management of $25 million or more or provides investment advice solely to one or more venture capital companies.

As a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act passed on July 21, 2010, there have been significant reforms applicable to non-US advisers conducting business in the United States, including new registration requirements under the Advisers Act (the "Act").

Non-U.S. advisers may need to register with the Securities and Exchange Commission (SEC) in order to conduct future business within the United States. A non-U.S. adviser is defined in the Advisers Act as an investment adviser that:

• Has no place of business in the United States;


• Has a total of less than 15 U.S. clients and investors in private funds;


• Has less than $25 million in assets under management associated with the U.S. clients and investors; and


• Does not hold itself out generally as a U.S. investment adviser.

The Securities and Exchange Commission ("SEC") announced earlier this month that it obtained an asset freeze against a Boston-area money manager and his investment advisory firm who allegedly mislead advisers in a quantitative hedge fund and diverted a portion of investor money into his personal bank account.

In its allegations, the SEC claimed that Andrey C. Hicks and Locust Offshore Management, LLC made false representations to "create an aura of legitimacy when selecting individuals to invest in a purported million dollar hedge fund." Hicks is alleged to have raised $1.7 million from several investors. According to the SEC's complaint, Hicks misrepresented that he had obtained an undergraduate and graduate degree at Harvard University and that he previously worked for Barclays Capital. He also misrepresented that the hedge fund held more than $1.2 billion in assets, according to the complaint.

U.S. District Court Judge Richard Sterns of the District Court for Massachusetts issued the restraining order and asset freeze.

On October 26, 2011, the Securities and Exchange Commission ("SEC") announced the adoption of Form PF, which stands for "Private Fund." Required by the Dodd Frank Wall Street Reform and Consumer Protection Act, the adoption of the form seeks to require reporting by larger hedge fund and venture capital private advisers in an effort to assess systemic risks.

The minimum amount of assets under management before the reporting requirement is triggered is $150 million, meaning that smaller private fund advisers are not required to file Form PF at all. Once this threshold is reached, however, there is a tiered reporting requirement base on the level of assets under management within different categories as established by the form. The exclusion for the smaller advisers is justified because their funds have a minimal impact on a broad based systemic risk analysis, according to a statement by SEC Chairman Mary Shapiro delivered in connection with the adoption of the form.

The Virginia State Corporation Commission (Securities and Retail Franchising Division) yesterday adopted a policy statement providing guidance to advisers to private funds in light of the June 22, 2011 adoption of final rules adopted by the Securities and Exchange Commission. Specifically, the Virginia statement recognizes and addresses the "regulatory gap" created by the SEC Rule 203-1(e), which grants an extension to March 30 2012 for private advisers formerly exempt from registration under Investment Adviser Act Section 203(b)(3), which was repealed by Dodd-Frank, to register with the SEC.

As a consequence of Dodd-Frank, Virginia's Rule 21 VAC 5-80-210A.7, which excludes from the definition of "investment advisers" certain advisers exempt under Section 203(b)(3) of the Investment Adviser Act, becomes a nullity on July 21, 2011. In the absence of the policy statement, the effect of this would be to require private advisers subject to Virginia registration requirements, and that have no other basis for exemption, to register in Virginia as investment advisers by July 22, 2011.

On June 22, 2011, the Securities and Exchange Commission (SEC) adopted new rules and rule amendments under the Investment Advisers Act of 1940 to implement provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, the rules, as adopted, provided transitional provisions for investment advisers required to switch from SEC to state registration because they fail to meet the new requirement of $100 million in assets under management, require advisers to hedge funds and other private funds to register with the SEC, require reporting by certain exempt investment advisers, and make substantial changes to the Form ADV.

The final rule relating to transition differed somewhat from the rule originally proposed by the SEC. The final rule requires that any "mid-sized" registrant with the SEC (defined as any firm with between $25 million and $100 million under management) that is registered as of July 21, 2011 (Dodd-Frank's effective date) must remain registered with the SEC through the transition. New applicants that meet the definition of mid-sized advisers and who seek to apply between January 1, 2011 and July 21, 2011 can apply either with the SEC or the state or states in which it must register.

Although the U S Securities and Exchanges Commission (SEC) has publicly stated that the July 21, 2011 deadline for "Mid-Sized Investment Advisers" to register with the States will likely be moved, as of yet there is no rule formally postponing the deadline. The same looming deadline applies to hedge funds required to register for the first time.

The switch delay is thought to have been driven primarily by Investment Advisor Registration Depository (IARD) programming delays and the logistical issue of collecting asset under management data from all firms in order to qualify them for the switch. Some advisers, out of caution, are registering dually with the SEC and the states so as to cover their bases; they plan on de-registering with the SEC at the appropriate time.

The deadline may be formally moved at the upcoming June 22 SEC meeting, whose agenda identifies consideration of adoptions of new rules and amendments to implement Dodd-Frank; considering Investment Adviser Act exemption rules for venture capital funds and advisers with assets under management of less than $150 million; and considering the proposed rule defining "family offices" that will be excluded from the definition of an investment adviser under the Investment Advisers Act.

Hedge funds will be impacted by the Dodd-Frank Act in numerous ways, some more well-known than others. Some of the better known examples of such impact are the repeal of the private adviser exemption, thus requiring registration for hedge fund managers that do not qualify for other exemptions. Among the exemptions added, of course, is the much-publicized exemption for private funds with less than $150 million in annual assets under management.

Other areas of impact on the hedge fund industry are not as widely discussed. As the SEC Commissioner Troy A. Paredes highlighted in his June 8, 2011 address at The George Washington University Law School, other aspects of Dodd-Frank have less direct, but no less significant, impact on the hedge fund industry.

For example, Dodd-Frank directs the SEC to adopt regulations or guidelines that prohibit incentive-based compensation arrangements that might "encourage inappropriate risks" by financial institutions. This would prohibit investment advisers with $1 billion or more under management from paying excessive compensation that could lead to material financial loss.

Registered Investment Advisers in Georgia can take advantage of a "de minimis" registration exemption, according to a new Implementation Order dated December 31, 2010. In that Order, the Georgia Securities Commissioner has exempted from registration any adviser with fewer than six clients within the preceding twelve months. Although the Georgia Securities Act of 1973 contained such an exemption, the more recently enacted Georgia Uniform Securities Act of 2008 did not, providing only an exemption to advisers that have no office in Georgia.

Under the National Securities Markets Improvements Act (NSMIA), Congress precluded states from requiring registration for investment advisers that have no place of business in that state and direct business communications to not more than five non-institutional clients in any single year. But the Georgia exemption goes further, exempting advisers that do have a place of business in the state so long as they have five or fewer clients of any type.

One of the main consequences of the exemption is that it exempts hedge fund advisers that only advise the fund. This result occurs because of a separate rule defining such a fund as as single "client."

The Order is effective "until further order of the Commissioner."