Rhode Island has substantially adopted its proposed private fund adviser exemption, which we previously discussed in a posting dated April 10, 2012. The new rule became effective on May 17, 2012. To qualify for the exemption, the adviser must advise only private funds as defined under SEC Rule 203(m)-1. Furthermore, if it advises non venture capital 3(c)(1) funds, for each such fund:

• The fund's beneficial owners must meet the definition of a "qualified client" as defined in SEC Rule 205-3 after deducting the value of the primary residence;


• The private fund adviser has to disclose the following information in writing to each beneficial owner: (1) all service, if any, to be provided to beneficial owners, (2) all duties owed to beneficial owners, and (3) any other material information affecting the rights or responsibilities of the beneficial owners; and


• The adviser, on an annual basis, must obtain audited financial statements of each fund and provide a copy to the beneficial owner.

Numerous states have recently adopted or proposed rules that exempt hedge funds, or "private funds" from the registration requirement of those states' investment adviser laws. We have previously blogged about a number of state rules including those in Virginia, California, Maine, Massachusetts, Wisconsin, Colorado and Rhode Island. The majority of the rules are similar to one another; however, there are a few key differences. Attached is a table detailing the similarities and differences among the seven different states.

Colorado is the ninth state to adopt a private fund adviser exemption by rule. The exemption became effective on March 30, 2012. The other states that have created similar rules are California, Indiana, Maine, Massachusetts, Michigan, Rhode Island, Virginia, and Wisconsin, most of which we have already blogged about.

The Colorado rule exempts investment advisers who manage one or more "venture capital funds," as defined by Rule 203(l)-1 under the Investment Advisers Act of 1940 ("Advisers Act"), and who comply with the SEC Rule 204-4 reporting requirements. Investment advisers that are relying on this exemption will not be required to file the SEC Rule 204-4 reports with the Colorado Securities Commissioner. The rule also incorporates by reference the "grandfather" provision in Rule 203(l)-1(b) under the Advisers Act. Similar to the rules adopted in other states, it also exempts investment adviser representatives who are employed by or associated with an investment adviser that is already exempt under a private fund exemption. Finally, any investment adviser who is subject to disqualification under the "bad boy" provisions in Rule 262 of SEC Regulation A will not be entitled to the exemption.