Delaware Adopts Private Fund Adviser Exemption

Delaware has adopted a rule exempting “private fund advisers” from the state’s unlawful conduct provision, including the provision requiring registration as an investment adviser. Under the new rule, a private fund adviser is exempt from Delaware Securities Act unlawful conduct provisions if: (1) neither the private fund adviser nor any advisory affiliates are subject to an event that would disqualify an issuer under federal Regulation D, Rule 506(d)(1); (2) the private fund adviser files with the Director through the IARD each report and amendment that an exempt reporting adviser is required to filed with the SEC under SEC Rule 204-4; and (3) the private fund adviser pays the investment adviser registration fee of $300.

A “private fund adviser” is defined as “an investment adviser who provides advice solely to one or more qualifying private funds, other than a private fund that qualifies for the section (3)(c)(1) investment company act exclusion.” A “qualifying private fund” is a private fund meeting the SEC rule 203(m)-1 “qualifying private fund” definition.

An SEC-registered private fund adviser is not eligible for the exemption and must, instead, file a notice with the Director.

The rule also provides that investment advisers who become ineligible for the private fund adviser exemption must comply with all registration or notice filing requirements, within 90 days of the date they become ineligible for the exemption.

Finally, the rule provides that a person is exempt from Delaware investment adviser representative registration if that person is employed by or associated with a Delaware-registration exempt investment adviser, and the person does not otherwise act as an investment adviser representative.

Delaware’s rule is similar to other states’ private fund exemption rules we have discussed previously on this blog, including California and Virginia.

Prospective advisers to private funds such as hedge funds, private equity or venture capital funds should carefully consider issues relating to their obligation under the Federal Investment Company Act, the Investment Advisers Act of 1940 and applicable state laws regulating investment advisers.

Parker MacIntyre provides legal and compliance services to investment advisers, broker dealers, registered representatives, hedge funds, and issuers of securities, among others. Our regulatory practice group assists financial service providers with complex issues that arise in the course of their business, including complying with federal and state laws and rules. Please visit our website for more information.